5 Common AIF Related FAQ's Answered
Here are five commonly asked AIF related FAQ's, answered
As HNI's seek out innovative ways to generate alpha from their investments, AIF's (Alternative Investment Funds) are on an uptrend. SEBI data goes on to show that the total commitments raised by AIF's have grown from Rs. 50,442 crore to Rs. 70,267 crore in the second half of 2016 - a blistering growth rate of 40 per cent. Total investments made have kept up too - having grown from Rs. 20,667 crore to Rs. 28.486 crore in the same period. Here are five commonly asked AIF related FAQ's, answered.
What is an AIF?
Like Mutual Funds, AIF's are pooled investment vehicles. AIF's invest in early stage infrastructure projects, real estate projects, and other private equity investments. They are the Indian equivalent of private equity funds and hedge funds. As on date, SEBI has registered more than 200 AIF's. In 2015, AIF's were opened for NRI's and select overseas investors.
What are the various categories of AIF's?
There are three categories of AIF - namely, Category 1, Category 2, and Category 2. Category 1 AIF's are those that have a positive spillover on the economy, and could therefore be eligible for periodic concessions from SEBI and the government. Category 2 AID's comprise of plain vanilla private equity and debt funds, such as early stage growth capital funds and structured credit funds. They do not qualify for any concessions from the government - it's worth noting that this is in fact, the most popular category of AIF's as on date. Category 3 AIF's are the Indian equivalent of "hedge funds", and they can go long or short and flit across asset classes to try and generate short term returns.
What kind of clients are AIF's aimed at?
AIF's are aimed at savvy, high net worth investors who understand the risks associated with such investments. Probably keeping this in mind, SEBI has fixed the minimum ticket size for an AIF investment at Rs. 1 crore, in effect keeping retail investors at bay. SEBI also stipulates that an AIF cannot have any more than 1,000 investors at one time, further underscoring the fact that the product is not a retail-base oriented one. Ideally, only clients who have already built a solid, core portfolio comprising of stocks, bonds and mutual funds should consider an AIF.
Are AIF's risky?
Indeed, they are. AIF's are riskier than their more traditional counterparts. Their securities are more illiquid, and their payoffs can potentially be huge - or end up as write offs. Since category 3 AIF's take directional bets on asset classes, that straps on another layer of risk onto the portfolio. Additionally, AIF's do not follow the traditional investment/ redemption structure, and there's always a fair amount of opacity with respect to what's really going on within their portfolios. An AIF investment will consist of a commitment made by the client, followed by multiple drawdowns during which this committed amount will be collected. Even flow back of funds is atypical - usually, moneys will be paid back to investors in various tranches, as and when the fund makes successful exits. Many investors who have invested into AIF's without a proper understanding of how their mechanism works, have ended up significantly consternated.
What kind of returns can one expect from an AIF?
This is highly contentious, as a proper record of accomplishment for AIF performance is yet to be established. AIF's really came into play after SEBI passed its regulations in 2012, and so there's not much of a precedent to draw upon - unlike say, Mutual Funds. Only the next 3-5 years will tell us what kind of returns we can expect from AIF's, and whether they're worth the risks. Ideally, given their higher risk, AIF's will need to generate at least 5-10% higher annualized returns compared to more traditional investment avenues to make for a worthwhile investment. For now, it's the gutsy early adopters and risk takers who will help establish industry benchmarks over the next 5 - 10 years.