Alternative Investment Funds (AIFs) have become part of portfolios of most high net worth individuals (HNI) and family offices. As per Securities and Exchange Board of India (Sebi), the total amount raised by AIFs was ₹8.3 trillion, as of 31 March. Even though it is a relatively new asset class, the low entry barriers have resulted in the proliferation of funds of all hues. So how should you be thinking about investing in these and evaluating performance of these funds. Let’s start with asset allocation first.
In India, AIFs that are sold, are somewhat different due to certain market peculiarities. Many of these funds essentially give investors the exposure to traditional asset classes such as public equities, high-rated bonds or real estate investment trusts. Notice that all three will be part of your public equity or bond portfolio and are accessible through mutual funds (MFs), portfolio management services and exchange traded funds. These avenues are far more cost-efficient to access traditional asset classes as opposed to AIFs. Thus, it would be prudent to consider AIFs for those assets/strategies which are hard to access as an investor or require specialized knowledge or skills and an established track record.
Some asset classes and strategies that lend well to AIFs are:
1. Real estate: It is highly illiquid in nature, and requires scale and navigation skills (for an industry known for sharp practices). Within real estate, specialized sub-categories like shopping centres, offices, data centre, high-yield debt, etc., require special investment and management skills.
2. Stressed assets strategies: They are another example which is a legal and regulatory quagmire requiring turnaround capabilities, litigation strategies and a large scale to operate effectively.
3. Private equity: Again, highly illiquid. It requires an ability to understand businesses, underwrite sound management quality and support the company in various aspects is key.
In India, most AIFs are concentrated in private equity or real estate debt strategies. With the debt MF tax concession being levelled with other forms of debt investments, going forward, there will be more AIFs with credit strategies.
So, what should you consider before investing in an AIF?
First, look through the investment strategy. Do you already have exposure to the proposed strategy through your existing equity and debt portfolios? Avoid strategies overlapping with your traditional holdings as you are looking to allocate to ‘alternative assets”.
If it goes through the first filter, then dig deeper. Track record and experience are critical. Generally, these assets require specialized skills and the talent therefore resides in key persons within the investment management teams. Look for team consistency and cohesion. Look also for teams’ commercial alignment with the performance outcome of the fund. This is critical as these products tend to have long lock-ins and you want the management team to be there to achieve targeted outcomes. Then, there are other factors like the vintage of funds and matters relating to related party transactions, etc., all of which needs to be checked out. This is the reason why market regulator Sebi has rightfully put in a minimum requirement of ₹1 crore commitment amount which may be raised further.
There are several AIFs in the market which have been one-trick ponies precisely due to the aforementioned issues. Now, the illiquidity of the investments in previous such funds has come home to roost as the funds reach the end of their life. Investors are unhappy because they were not prepared for it.
While some of the distributors of AIFs do some diligence, there is much to be learnt by the ecosystem as it evolves. Although investors must do as much research as possible, it may be better to rely upon the advice of a qualified investment advisor, who has a deep understanding of these products and also has rich data to evaluate performance. Sebi has also mandated performance records to be disclosed, but it is at a nascent stage of refinement and hence the requirement for a deep dive by knowledgeable persons is necessary.
In summary, please look through the investment strategy and establish if you are getting access to truly alternative assets and is not something that is already there in your portfolio and is not easily doable by yourself. Rely upon a qualified adviser and ask the right questions and ask the advisor, too, if they have asked these questions. After all, you have to pay for specialized advice for avoiding long-term misery! Remember, it’s called alternative assets for a reason and must be part of your portfolio, as per your risk appetite.
Nidhi Chawla is fund manager at Kotak Investment Advisors.
Updated: 27 Jul 2023, 10:30 PM IST