The alternatives space is growing rapidly, across the globe, in many key advanced economies. This surge presents great opportunities for domestic investors to participate in and benefit from. To highlight the kind of potential in the global alternatives space, Umang Papneja, MD and CEO of Julius Baer India interacted with Vikas Sachdeva, Managing Director, and Madanagopal Ramu, Head-Equities and Fund manager, both from Sundaram Alternates.

What’s hot in alternatives

Mr. Sachdeva started off by asking about the most recommended themes in alternatives globally that were also sought-after by investors.

Mr Papneja, first, sought to emphasize the key aspect about RoE (return on equity), which he felt was the key guiding philosophy in investing in companies. He added that only India and the US delivered double-digit RoE and had markets that gave healthy returns over the past many decades. These two markets stand out in terms of size as well as the number of companies, he noted.

For Indian clients, Mr Papneja said the recommendation was Indian companies and for diversification, US companies were suggested for investments.

On international investors, he said they were more open to new thought processes. The US was still a high-allocation area for these investors. Though investments in India are also suggested, they may not be overweight or heavy weight here.

Mr. Ramu wanted to understand how the investor base in alternatives was evolving from being dominated by institutions to now other structures coming in to improve the overall base.

Mr. Papneja said from the time SEBI came out with AIF regulations in 2012 and early 2013 to now, the industry had grown to over Rs 8 lakh crore in commitment. He noted that HNIs would be more than institutions currently in the AIF space. For perspective, mutual funds with a much longer regulatory history of over 3 decades had an AUM of Rs 40 lakh crore. He said the inroads made by AIFs were significant and healthy. He observed that the ratio of mutual funds AUM to AIFs commitment was 20% and it was similar in most global markets. Mr. Papneja was of the opinion that the growth in AIFs would be in sync with the rise in mutual funds, rather than experiencing exponential growth.

On the query about attractive strategies in the alternatives space currently, Mr. Papneja opined that the long-only strategy wasn’t an alternative investment class. Since it is not possible for any private individual to take a mutual fund license, a category 3 AIF license became a better choice for managing long-only strategies, he observed.

He said private credit, long-short, private equity, and real estate are the most attractive strategies to play in the alternatives space right now.

Diversification in investment

Mr. Sachdeva then raised a question on real estate as an attractive investment currently and also about the diversification between traditional and alternative investments.

Mr. Papneja said that based on the split of mutual funds and alternative AUMs, the investor allocation may also be similar, though it may not always be the case. He went on to add that new-age entrepreneurs who exited their businesses probably preferred AIFs.

Going on to the real estate, he said NCDs (non-convertible debentures) and stakes in realty companies may present some opportunities. Another option was to take a stake in the real estate project itself. Another avenue was for yields via rentals from commercial or warehousing. All these can be done via AIFs. Doing it via a fund will mean lower operational and maintenance hassles for investors.

Mr. Sachdeva then pointed out a study that stated that the share of AIFs in HNIs wallet of investments was just 5% but was expected to go up to 15% in the next five years.

The shine of gold

Turning the conversation to the shiny yellow metal, Mr. Sachdeva then wanted to understand how the fortunes of gold were going to play out, given that prices were at all-time highs.

Mr. Papneja noted that gold is generally meant to give a little more or equal to inflation rates as returns over the years. It is to preserve the value of investments. The Russia-Ukraine war has changed the perception towards gold, as sanctions from many Western economies and the move to reduce single-currency reserve dependence may not help the US dollar as the dominant currency of world trade. There has been substantial central bank buying in gold over the past 12-18 months. If the situation continues, gold may continue to give more than inflation as returns.

Restoring momentum in the private equity market

Mr. Ramu then chipped in with a query on when the global downturn in the private equity market would end, given all the talk about a funding winter amid high-interest rates.

Mr. Papneja noted that valuations were correcting, especially on the technology side of start-ups over the past year or so. As multiples reduce, the buying zone may emerge again, he noted and added that things were heading in that direction. Many interesting opportunities have cropped up due to this fall in valuations, he observed. He said when funds are raised from private equity firms, they are deployed over 3-4 years and not in one shot. Many drawdowns were still pending, he noted.

Moving on, Mr. Sachdeva then asked about ESG investing, touching on the controversy surrounding the very topic as gave rise to divisive perceptions, and seeking to know whether India, at this stage of development, must even be considering it.

Mr Papneja said in India ESG itself is quite nascent with mutual funds having Rs. 12,500 crore in assets under the theme. He noted the environmental part of ESG alone was a concern for investors in India. Some AIFs also have ESG strategies, he noted.

To a query on the rupee-dollar movement, Mr. Papneja noted that India’s large IT industry, falling crude prices, and rising exports could mean that the country could record a current account surplus in 3-4 years. So, the steady 3-4% depreciation of the currency against the dollar may not no longer happen.

The Webinar Panel discussed all the above-mentioned points and more. Watch the entire session with the appended link below - 

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