Despite rate hikes and inflation fears, AIF funding stays strong

In the quarter ended 30 June, AIFs raised commitments worth ₹53,162 crore, higher than commitments worth ₹35,967 crore in the year earlier and ₹32,267 crore in the preceding March quarter, Securities and Exchange Board of India data showed.

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FY22 was the best year on record for AIFs, receiving commitments of ₹1.9 trillion from investors, more than double the previous year’s ₹81,228 crore. AIFs had seen commitments worth ₹87,840 crore in 2019-20.

AIFs are classified into three categories, with category I comprising angel funds, social impact funds, small and mid-size enterprise (SME) funds and infrastructure funds. Category 2 includes private equity, venture capital and debt funds, while category 3 funds typically invest in public markets such as hedge funds.

The biggest chunk of commitments in the June quarter was received by category 2 AIFs, which garnered ₹42,730 crore, followed by categories 3 and 1, receiving commitments worth ₹5,685 crore and ₹4,746 crore, respectively.

To be sure, the figures are for commitments tied up by fund managers and not the actual money raised since AIFs have staggered capital drawdown plans and do not need the committed capital upfront.

According to industry experts, while investor sentiment did take a beating in May and June, when stock markets were battered because of the Russian invasion, fundraising momentum has picked up again, with investors seeing the current valuation environment as an attractive opportunity.

“The market witnessed a bit of a freeze in terms of investor sentiment in May and June, especially on the tech side, as people postponed their decisions by a month or two. However, since July, we have seen a revival of spirits with funds believing that this is a good time to raise capital when valuations are more reasonable, and clients are also looking to back good fund managers who will have the dry powder to be able to invest over the course of next 18-24 months at more reasonable valuations than in the past,” said Nitin Singh, managing director and chief executive officer, Avendus Wealth Management.

Singh added that the market is seeing a pickup in appetite for blind pool private equity and venture capital funds and, to some extent, in opportunity funds where the portfolios are already known, and fund life is shorter.

Apart from equity funds, investors have also shown a strong interest in fixed-income AIFs.

“Significant money has also flown into fixed income funds in the past two to three months. Investors are keen on looking beyond traditional fixed income products, trying to make their portfolios interest rate immune. We have seen that a lot of money has flown into venture debt. Money is also flowing into commodity yield, income opportunities, infrastructure funds, stressed assets, performing credit,” said Singh of Avendus.

Industry experts believe that the demand for alternative products will continue to rise as investors seek access to high-growth private companies and look to diversify their portfolios.

“The amount of capital invested by private equity in India over the last 10 years is higher than the money invested by FPIs. Private equity gives customers access to opportunities they otherwise cannot, and it also gives them truly uncorrelated returns. Investors have also realized that they need two things: access and diversification. And this is driving the adoption of the alternative asset class. We see that this trend will only accelerate,” said Anshu Kapoor, president and head of investment management at Edelweiss Wealth.

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