OFIs ready to drive HNIs to private market investment opportunities

The ability to broaden the risk-return mix across asset classes has made alternative investment funds (AIFs) a viable proposition for family offices and high-income investors (HNIs). In fact, there is a visible appetite among investors for diversifying portfolios beyond traditional equity and debt classes and enhancing returns. This optimism is driving investments in the AIF space and turning them into an alternative investment asset class.

According to Sebi (Securities Exchange Board of India) data on AIF activities up to 31 December 2021, total AIF assets increased to 6.09 trillion in Q3 FY22 from 5.35 trillion in Q2 FY22. Year over year, this is a growth of 38% compared to the AIF’s total assets in the third quarter of FY21, which amounted to 4.41 trillion.

Investors’ propensity to explore beyond traditional investing has also bolstered OFI’s growth prospects. According to the PMS Bazaar report, the total assets of AIF structures will likely exceed 50 trillion in the next 10 years. AIFs have indeed emerged as an effective investment instrument for wealth creation thanks to standardization and the availability of detailed information on AIF structures.

Since AIFs are uncorrelated to the stock market, they help investors smooth out volatility. With robust diversification and inflation hedging, the rate of return prospects of AIFs are superior to those of traditional investment avenues.

Due to the uncertainty and volatility in domestic equity markets, family offices and HNI investors are expanding their investments in avenues that offer better returns on their low yielding fixed income portfolios. AIFs can generate additional alpha through strategic asset allocation in credit AIFs through a smart investment strategy.

The AIF pathway provides “skin in the game” for sponsors by connecting the interests of sponsors, investors and fund managers. in a portfolio of companies through timely intervention, the benefits of diversification, risk mitigation and opportunistic return maximization accrue to the pool.

The reason AIFs build traction among HNI investors is that these investments are guided by a team of seasoned bankers with the skills required for origination, subject matter experts and an experienced investment committee equipped to underwriting manageable risk, thus guaranteeing excellent returns. AIFs can be an exceptional investment option for generating consistent and relatively higher returns with relative convenience and security.

Of all the categories of AIF, Category II AIFs generate the most interest from investors. According to the cumulative net figures at the end of December 31, 2021, published by Sebi, the total assets of category II amounted to 4.95 trillion, representing 81% of the total assets of 6.09 trillion. Category II AIF investments saw a 40% year-over-year increase in Q3 FY22 compared to Q3 FY21 of 3.52 trillion.

Category II AIFs comprising real estate funds, private equity funds (private equity funds) and distressed asset funds reduce the risk profile by offering a diversified investment portfolio. Therefore, these AIFs are considered a defensive investment option and an effective hedging mechanism.

On the other hand, credit AIFs offer ease of investment through the pooling of capital, which can defer the high costs of set-up, underwriting, due diligence, legal documentation and administration of funds. In addition to being insulated from equity market volatility, credit AIF investments are typically secured with 1.25 to 3.5x asset coverage in addition to other equity guarantees. Credit AIFs can offer a return of around 14 to 15%.

Awareness of AIFs is gradually increasing among family offices and HNIs in India, ultimately bolstering the prospect of discovering this volatility hedging investment avenue. According to the private market monitoring report published by trica, there are more than 140 formalized family offices in India. The growing acceptance of AIFs will prove to be a key driver for HNI and UHNI capital allocation in private market investment opportunities.

Nirmal Gangwal is Managing Partner at Brescon & Allied Partners LLP.

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