The report highlights that SEBI-registered AIFs represent an AUM size of USD 130 billion out of USD 400 billion alternatives pie, with significant room for growth.
Projections suggest the Indian alternatives market, driven by AIFs, will expand by more than 5x to USD 2 trillion within the next decade, driven by nearly 3x rise in High Net Worth Individuals (HNI) population, and HNI wealth. This growth aligns with India’s rising wealth management penetration and the increasing appetite of rich individuals. Importantly, the report projected the share of managed wealth invested in AIFs to go up from 7-8% in FY24 to 15-16% by FY34, and total HNI AUM invested in AIFs can zoom from USD 20 billion to USD 190 billion in the same period.
The Securities and Exchange Board of India (SEBI) has played a crucial role in shaping this market. Since the introduction of AIF regulations in 2012, a robust framework has ensured investor confidence. These regulations mandate periodic reporting, transparency in valuations, and the protection of investor interests. Recent milestones include performance benchmarking introduced in 2020 and the standardisation of valuation approaches in 2023. Such regulatory advancements have made AIFs a preferred investment vehicle among both domestic and global investors.
AIFs outperform traditional avenues
The Avendus report underscores the strong performance of AIFs compared to traditional mutual funds. Over recent years, AIFs have consistently delivered superior Internal Rates of Return (IRRs), outperforming public market equivalents (PMEs). As of March 2023, 75% of AIFs generated positive alpha, showcasing their ability to create value in a competitive investment landscape. Importantly, unlisted markets have grown, as deployment time has reduced, indicated by the increase in investments raised for Category I and II AIFs in the past five years ended March 2023.
This performance stems from the diversification and innovation inherent in AIF structures. For instance, private equity and venture capital funds within AIFs target high-growth companies, while private credit funds offer stability with recurring cash flows. Real asset investments, another component of AIFs, leverage physical properties to provide steady income and a hedge against inflation.
AIFs: A Key Player in Economic Development
Beyond individual investors, AIFs are playing a critical role in funding India’s broader economic agenda. They are instrumental in financing large-scale infrastructure, real estate, and private credit projects, aligning with the nation’s development goals. The Avendus report notes that sectors like real assets and private credit within AIFs are rapidly gaining traction, offering stable returns and diversification benefits.
Technological advancements in the financial sector have simplified access to AIFs. Fintech platforms offer transparency, ease of transactions, and real-time
updates, making AIFs more attractive to investors. The adoption of digital tools has increased efficiency in fund management and investor relations, further propelling market growth.
The report said the traditional AMC model pales in profitability vis-à-vis AIFs. Hence, even well-established AMCs are pivoting their strategy by allocating more of their portfolio towards AIFs, it added. Global Alternatives trade at a significant premium to AMCs due to higher alpha, growth potential & sticky asset base. Indian listed AMCs and wealth managers trade at a premium due to scarcity of assets while offering high growth potential. Alternatives in India will command premium due to scarcity, high growth potential and high yields, the report said.
