Alternate Investment Funds (AIFs) that invested in private markets have in the last decade (2013-23) generated a 13.5 per cent alpha over the public market index (S&P BSE Sensex TRI), a new report by CRISIL Market Intelligence and Oister Global showed.

This substantial performance, despite downturn in returns, has not been generated by just few funds — distribution of alpha recorded by funds in the benchmark over their public market equivalent reveals that more than 75 per cent of the AIFs have generated positive alpha, the report said.

In investment terminology, “generating alpha” refers to the ability of an investment manager or strategy to outperform the market or a benchmark index. 

Alpha represents the excess returns achieved beyond what would be expected from the market’s movement or the inherent risk of the investment. Essentially, it’s a measure of how much value an investment manager adds through skill or strategy beyond the general market performance.

This CRISIL-Oister Global report has analysed deals across the PE-VC markets in India over the past decade, and the performance of AIFs across equity categories. It highlighted that AIFs are clearly gaining traction as private equity and venture capital step up their India play. AIFs have become an integral part of domestic PE-VC market and a source of capital to start-ups.

Picking up pace

The segment has picked up pace in the past five years with two-thirds of the 1,096 AIFs registered as on March 31, 2023, having been registered during this period. Moreover, about 58 per cent of the AIFs have been registered as Category II AIFs as of March 31, 2023.

Total commitments of AIFs have seen an astronomical 580x rise in the past ten years — from ₹ 1,437 crore in 2013 to ₹8,33,774 crore in March 2023.

AIFs are expected to remain one of the fastest-growing managed product categories over the next few years as more and more high-net-worth individuals (HNIs) and ultra-HNIs seek differentiated products that give them an option to generate better positive alpha on their investments.

Rohit Bhayana, Co-CEO and Founder, Oister Global, said, “In fiscal 2022, India was a beacon of hope amid the global capital market slowdown. Despite the so-called funding winter, annual PE and VC investments in the country soared to an all-time high”.

The resilience of the domestic entrepreneurial ecosystem and significant strategic exits show the extent of opportunity. These have defined India as an enduring destination for transformative investments, Bhayana added.

Jiju Vidyadharan, Senior Director, CRISIL Market Intelligence & Analytics said “The AIF industry is still evolving so, apart from performance, it is equally important to focus on the quality of investment and the risk control processes, standardisation of valuation practices and the overall governance architecture when leveraging the abundant opportunities available for investment”.

Sharp focus on improving transparency will be one of the important enablers of the industry’s growth, he said. “India’s strong economic situation, burgeoning entrepreneurship, expanding consumer base, rapid digital adoption, supportive regulatory environment and government initiatives will provide the foundation for growth”, Vidyadharan said.

The report includes performance comparison of aggregate AIF benchmarks including Category I and II equity funds that invest purely in unlisted securities belonging to vintage years fiscal 2013 to 2022, with corresponding public market equivalent (PME) values (using the S&P BSE Sensex TRI).

The Total Return Index (TRI) not only takes into account the price movements of the stocks in the index but also includes dividends and other distributions received from those stocks.

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