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Alternative funds – a pulse check on recent trends

We put together a few datapoints to show the current state of affairs in the alternatives space. Key takeaways: (1) AIF commitments have grown to reach ~Rs11 tn, of which Rs6 tn is unutilized, (2) investor participation is broadening (50+ cities with Rs1 bn each in commitments) with rising share of younger investors, (3) distribution is shifting toward more direct and advisory-driven, and (4) large wealth platforms (360One) and service providers (CAMS/Kfin) could emerge as beneficiaries over the medium term.

AIF fund raising remains strong; unutilized commitments reach Rs6 tn

Alternative assets have kept pace with growth in mutual fund AUM. Compared to MF AUM of ~Rs50 tn, alternative vehicles have grown meaningfully as well with PMS assets (ex EPFO) of ~Rs6 tn and AIF investments of ~Rs4 tn. With AIF commitments of ~Rs11 tn, there is nearly ~Rs6 tn of unutilized commitments, indicating large dry powder available to be deployed. This is not unique to India, as global data over the past two decades also shows strong growth in AUM across asset classes along with rise in unutilized commitments.

Increasing participation from smaller cities; shift toward younger investors

As per analysis by CAMS/Equalifi, investments in AIFs have major participation from institutions, contributing nearly 55-60% of commitments followed by individuals (35-45% share) and NRI/foreign (5-10%). Individuals have greater allocation toward Cat-III (similar to public equities) whereas institutions allocate higher share towards Cat-II (relatively more illiquid). In terms of reach, over 72 cities have investments in excess of Rs500 mn each, while 50 cities have raised over Rs1 bn each, indicating adoption beyond the metros. The share of younger investors (<35 years) has also nearly doubled in past few years.

Distribution: Advisory likely becoming a preferred engagement model

The share of direct channel in AIF fund raising (for sample covered by the above report) has grown to 42% in FY2023 from 27% in FY2019. Greater share of direct is likely driven by participation of institutions in fund raising as well as preference for advisory models as against commission-based. Among the commission-driven channels, wealth managers have the highest share at 35-50% of funds raised, followed by banks (~8-13%) and national distributors (5-10%). The share of direct distribution varies a lot across fund categories – Cat-I has highest share (67% in FY2023), followed by Cat-II (~50%) and Cat-III (~20%).

Fund performance: A mixed bag

Returns for AIFs (Cat-I&II) declined in FY2023, especially for post-Covid fund vintages, from a high seen in FY2022. From a size standpoint, the more relevant vintages of post-2018 have exhibited healthy IRRs of ~22-30%. However, a key feature of private market returns has been wide dispersion in returns compared to public markets. Among the large discretionary PMS funds, we see large degree of out/underperformance but on aggregate are seeing outflows for the year so far.

Beneficiaries: Service providers, wealth and asset managers

The alternates opportunity can be broken up across asset managers (management + performance fees), wealth managers (advisory/commission fees) and service providers (onboarding, fund accounting, etc.). In our view, the opportunity in asset management will likely be a lot more fragmented, whereas wealth managers (access to HNI capital) and intermediaries (regulatory know-how, lower cost) could be more direct beneficiaries. Within our coverage, 360ONE (~10-12% AIF market share), CAMS and KFIN are relatively better-placed to benefit.

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