Increased awareness has been a catalyst in the growth of the AIF industry
India’s investment landscape has experienced a profound transformation over the past few years, which has propelled holistic economic growth. Investors today are more aware and financially savvy than ever before and are looking to go beyond traditional investment instruments. The relatively low-interest rates in traditional investment products and high asset allocation to mass-market offerings like mutual funds have prompted investors, particularly HNIs, to seek alternative avenues for deploying their capital. According to “The Wealth Report 2023” by Knight Frank, India is set to see a 58% rise in ultra HNIs over the next five years. With the withdrawal of indexation benefits in debt mutual funds, HNIs are increasingly exploring AIFs to diversify and take advantage of the credit offerings made by such funds.
However, it’s not just the economic landscape that’s evolving, the composition of investors has also changed, with younger investors entering the markets. These new investors bring with them an increased appetite for risk and a strong inclination toward purpose-driven investing, focusing on areas like agriculture, infrastructure, social venture, climate funding, etc. The rising popularity of impact investing and ESG oriented investments by AIFs proves the same.
The AIF industry in India is no longer the preserve of individual investors. It has attracted significant interest and participation from various domestic and global financial institutions, pension funds, sovereign wealth funds, endowment funds, bank treasuries, and family offices. The rising demand and acceptance of investing in AIFs in India can be attributed to some key factors that have driven this growth. As per SEBI data, in the year 2022-23, the amount of commitments raised by AIFs has grown 30% YoY from ₹ 6.41 Tn to ₹ 8.33 Tn.
Favorable Regulatory Policies
A significant driver behind the growth of India’s AIF industry is the supportive regulatory environment. SEBI’s major regulatory overhaul in 2022 and 2023 has significantly enhanced transparency within AIF fund structures, due diligence practices, and reporting norms. New regulatory norms regarding performance benchmarking and standardizing portfolio valuation of AIFs have helped improve transparency even further. The adoption of KYC and heightened scrutiny in terms of screening and risk profiling have fostered investor trust. Also, the introduction of mandatory and time-bound fund-level disclosures has played a crucial role in ensuring investor protection and an enriched customer experience.
Enhanced Awareness
Increased awareness has been a catalyst in the growth of the AIF industry. Increased media exposure and collaboration among industry bodies and ecosystem players such as IVCA and Equalifi have led to the emergence of industry forums, knowledge sessions, and research that have collectively empowered investors with knowledge.
This awareness extends to less opaque segments like unlisted equity and unlisted debt markets, the startup ecosystem, private equity, venture capital dynamics, and real estate products. Investors now have access to a wealth of information, allowing them to navigate these previously intricate segments with confidence.
Leveraging Foreign Capital Inflow
India, in the past few years, has seen a greater influx of foreign capital, especially with the establishment of GIFT City and the growing number of Fund Management Entities (FMEs) registered with the International Financial Services Centre Authority. These developments have paved the way for foreign capital to engage with a wide array of Indian investment opportunities, both listed and unlisted. The introduction of master-feeder fund structures has proven instrumental in facilitating the inflow of foreign capital through the AIF route. Government-to-government institutional AIFs are another avenue that has contributed significantly to the growth of foreign institutional investors who have not only diversified the investor base but also brought valuable international expertise and capital, driving economic growth.
Adoption of Technology
The industry’s evolution is significantly driven by technology. Many asset managers, in collaboration with fund administrators, are leading digital advancement. For instance, the introduction of state-of-the-art digital onboarding platforms caters to all investor types, from resident individuals to foreign nationals. Moreover, the emergence of a unique distributor empanelment portal for AIF, PMS, and MF, both for individuals and non-individuals, has streamlined processes.
A seamless commission management platform for distributors, advanced Limited Partners (LP) & General Partners (GPs) portals with superior UI/UX, and integrated portals for various stakeholders are revolutionizing operations. Additionally, the fund administration ecosystem has introduced cutting-edge solutions like multicurrency fund accounting platforms, custom API structures for smooth data transfers, and valuable use case designs for account aggregator solutions. The fund administration ecosystem has been pivotal in championing these tech-enabled products, leveraging advanced technologies to make AIF investments in India more accessible and efficient.
As these driving forces continue to shape the AIF industry in India, it stands poised for sustained growth, offering investors an expanded array of opportunities and a transparent, efficient, and tech-driven investment landscape. The confluence of these factors, alongside India’s rapid economic growth, will continue to drive the growth of AIFs in India, supporting India’s rise as an economic superpower.
(This article is authored by Senthil G, Chief Business Development Officer, KFin Technologies)
