Alternative Investment funds (AIFs) have seen a 30 per cent surge in commitments and funds raised in the 12-month period ended September 2024, as per most recent data from SEBI. With India’s growing High Networth Individual (HNI) pool tapping alternative investments, the commitments crossed ₹12 lakh crore and funds raised (drawdown in tranches) amounted to ₹5 lakh crore.

The period between September 2023 and September 2024 recorded a 27 per cent growth in investments made by AIFs with net investments at almost ₹4.5 lakh crore with over two-thirds (64 per cent) of this driven by Category II comprising private equity and debt funds. Real estate sector dominated investments with the highest share of 16.8 per cent, followed by information technology (IT) and financial services industry.

AIFs are essentially pooled investment vehicles that collect funds from private investors to invest in categories of alternative assets such as venture capital, PE, real estate, hedge funds and managed futures among others.

Key drivers

As per a recent report on AIFs by Avendus, India’s growing role in Asia-Pacific PE-VC activity and pick-up in private credit are among key drivers of AIFs in India.

“The increased allocation of domestic capital to AIFs, specifically from HNIs and insurance firms, has been a key highlight for the sector this year,” Gopal Srinivasan, chairman and MD of PE firm TVS Capital Funds, said. While regulatory actions around due diligence of AIFs do help weed out issues, certain hyper regulations have cut out bank funding for this sector, he added. In December 2023, the Reserve Bank of India (RBI) issued a diktat restricting banks and financial institutions from investing in AIFs that have an exposure to the bank’s borrowers.

Industry trackers note that despite a 30 per cent year-on-year growth in September, a series of regulatory actions in recent years has, in fact, slowed down AIF capital formation in H1 of FY25.

“There has been a sustained reduction in the overall capital formation in AIFs since December, when we saw RBI effectively ban NBFCs and banks from investing into AIFs that had exposure to their lenders,” Siddarth Pai, founding partner, 3one4 Capital, and Co-Chair, Regulatory Affairs Committee, IVCA, said. “With the new RBI governor coming in and IRDAI looking at reforms, there is hope for stability and clarity on how AIFs can operate in India. If this is resolved, it will help take AUMs from about $112 billion today to around $500 billion by 2030,” he added.

Raghunath T, Head of Credit, Vivriti Asset Management, said that a majority of the incremental funds have been raised in the Category II and Category III AIFs, and growth in Cat II has been contributed by the Private Credit segment with debt investments contributing to 40% of the segment. “These AIFs have seen increased acceptance from domestic investors driven by tax parity with debt mutual funds and improving visibility on return outperformance,” he added.