This can be attributed to several key factors, which include:

Increased investor awareness and affinity for alternative investments: There has been a noticeable increase in investor awareness and a growing appetite for alternative investments. Assets like private equity, venture capital, and hedge funds offer the potential for higher returns compared to traditional asset classes like stocks and bonds, albeit with greater risk. As investors become more sophisticated and open to taking on increased risk, they are increasingly turning to alternative investments to diversify their portfolios and seek higher returns.

Robust growth of the Indian economy: India’s economy stands as one of the fastest-growing major economies worldwide. This remarkable growth is spawning fresh investment opportunities that alternative investment funds are keen to explore and leverage.

Support from the regulatory environment: The Securities and Exchange Board of India (SEBI) has played a pivotal role in fostering the alternative investment industry’s growth. In 2012, SEBI implemented the AIF regulations, consolidating various alternative investment funds under a unified regulatory framework, thus providing a conducive environment for their development.

In the preceding five years (from June FY19 to June FY24), the industry has experienced a remarkable Compound Annual Growth Rate (CAGR) of 26%, resulting in impressive assets under management (AUM) of ₹13.74 lakh crore as of June FY24. This growth rate surpasses the mutual fund industry’s performance, which registered a CAGR of 13% and managed an AUM of ₹46.63 lakh crore as of August 2023, highlighting the industry’s growth at more than twice the rate.

Increasing income levels in India have expanded the accessibility of alternative investments to a broader spectrum of investors, encompassing high-net-worth individuals (HNIs) and ultra-high-net-worth individuals (UHNIs). Furthermore, the widespread dissemination of information regarding alternative investments, combined with the allure of diversification and enhanced returns, has contributed significantly to the industry’s expansion.

Below is a more comprehensive breakdown of each of the factors:

Increasing income levels: As the Indian economy has surged, so have the incomes of its residents, resulting in an expanding pool of wealth seeking investment opportunities beyond conventional assets like stocks and bonds. Alternative investments such as private equity, venture capital, and hedge funds offer the prospect of superior returns, albeit accompanied by increased risk. High-Net-Worth Individuals and Ultra-High-Net-Worth Individuals typically represent more sophisticated investors ready to embrace greater risk to attain enhanced returns.

Information proliferation: Historically, information pertaining to alternative investments remained confined and accessible primarily to institutional investors. However, recent years have witnessed a proliferation of alternative investment information, primarily owing to the Internet and social media. This dissemination of knowledge has made alternative investments more attainable for individual investors, including HNIs and UHNIs.

Attraction of diversification and enhanced returns: Alternative investments extend investors the opportunity to diversify their portfolios and achieve superior returns in comparison to traditional asset classes. This results from the characteristic of alternative investments being typically uncorrelated or less correlated to traditional assets, which means they can perform well even when conventional asset classes are underperforming. Furthermore, alternative investments hold the potential to generate superior long-term returns compared to traditional asset classes.

The growth of the alternative investment industry in India signifies a positive development for the Indian economy, as it is poised to attract increased foreign investment, generate new employment opportunities, and bolster the growth of Indian enterprises.

Pallavarajan R, Founder & Director, PMS Bazaar, said, “India’s rising affluence is driving HNIs to alternative investments (PMSs and AIFs), which offer lucrative opportunities, customized solutions, and transparent structures. AUM in these products has grown more than three times in five years, twice as fast as mutual funds. If the same pace of investments continues, in a favourable market, we anticipate the PMS and AIF industry to grow to ₹43.64 lakh crore by 2028. We believe that alternative products are becoming an essential part of the investment portfolios of India’s wealthy.”

India’s International Financial Services Centre (IFSC) situated in Gift City is steadily establishing itself as a prominent player in the realm of alternative investments. Gift City, a worldwide financial hub, presents numerous benefits to Alternative Investment Funds and other investors, including:

Supportive regulatory landscape: Gift City boasts a regulatory environment that favours AIFs. AIFs operating within Gift City enjoy exemptions from specific Indian taxes and regulations, rendering them more enticing to global investors.

Global connectivity: Gift City enjoys robust connectivity with various international financial centres, simplifying the process for AIFs to source and allocate capital on a global scale.

Gateway to Indian markets: Gift City serves as a gateway, affording AIFs access to the flourishing Indian markets, recognized as one of the world’s swiftest-growing major economies.

Consequently, these advantages have prompted numerous AIFs, both from within India and internationally, to establish their operations in Gift City. The burgeoning presence of AIFs in Gift City plays a pivotal role in luring increased foreign investments into India and actively contributes to the maturation of the Indian alternative investment sector.

Vikaas M Sachdeva, MD & CEO, Sundaram Alternates, added, “Gift City stands as a testament to India’s commitment to becoming a global financial powerhouse. Its strategic initiatives have not only attracted international investors but have also provided domestic investors with unprecedented opportunities. As Gift City thrives, so does India’s position in the world of alternative investments.”

The AIFs have emerged as pioneers in India’s investment arena, showcasing a remarkable CAGR of 36% in the past five years. Among these, Category II AIFs, encompassing venture capital, private equity, real estate funds, and private credit, have enjoyed exponential expansion, largely propelled by the heightened enthusiasm of HNIs and UHNIs.

Even in the face of regulatory adjustments, such as an elevation in the minimum investment threshold, the PMS sector has demonstrated resilience, showcasing a formidable CAGR of 16%. By July 2023, the PMS industry’s AUM had reached ₹5.29 lakh crore (exclusive of EPFO/PF/Advisory data).

The upsurge of the alternative investment industry in India stands as a favourable development for the Indian economy. It serves as a magnet for increased foreign investment, fosters the creation of fresh employment opportunities, and bolsters the growth of Indian enterprises.

Sunil Rohokale, MD & CEO, ASK Group, said, “India is at the cusp of a new credit cycle fuelled by private sector investment on the back of strong earnings growth within India Inc. This is further supported by robust economic activity across all major sectors driven by strong economic growth, government infrastructure spending as well as policy support, and a favourable demographic outlook. The opportunity for alternates is untapped and is at a very nascent stage, with the potential to grow beyond USD 300 billion. Investors will favour reputed, well-established, and institutionalised players with a good track record to be a part of their growth journey.”

Looking forward, the PMS and AIFs sector is anticipated to sustain its rapid expansion in the forthcoming years. Moreover, recent alterations in tax regulations concerning debt mutual funds (including the removal of the Long-Term Capital Gains indexation benefit) and insurance (entailing taxation of maturity proceeds for life insurance policies with premiums exceeding ₹5 lakh) are likely to be pivotal in driving the growth of the alternative assets industry. Additionally, with HNI investors increasingly recognizing the potential of alternative investments in terms of diversifying across asset classes and wealth accumulation, the demand for such financial products is projected to surge.

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Updated: 02 Nov 2023, 11:51 AM IST