Alternative investment funds (AIFs) investing in the units of other AIFs are an emerging trend among schemes for the wealthy.
At least three major financial service providers have either launched or are in the process of launching such schemes. An AIF is a scheme for the rich with a minimum investment of one crore rupees. Those launching AIFs to invest in other AIFs include the IIFL group, Waterfield Advisors and the ASK group, according to company and industry sources.
Easier diversification, lower administrative burdens and a preference for institutional investors among fund managers are among the key drivers for the trend, they said.
Waterfield Advisors’ fund-of-funds which has opened for investments is looking at allocating capital across both venture capital and private equity funds. It is looking to raise around Rs 750 crore.
A lot of corporate investors would like exposure to the space but may not have dedicated resources to identify investment opportunities across various funds, said Rohan Paranjpey, director and head of alternative investments at Waterfield Advisors. Investment through fund-of-fund AIFs provides access to such institutional investors too, as well as some family offices. It is expected that they would continue to take exposure through such vehicles in the future as well, according to Paranjpey.
“For a lot of LPs (limited partners)...it’s not a one-time investment,” he said.
"We are looking at a fund-of-fund which concentrates on early stage and technology investments," said Somnath Mukherjee, managing partner and chief investment officer, ASK Wealth Advisors.
The trend is part of the socialisation of the AIF space, according to ASK's Mukherjee. He pointed out that AIF investments are often locked in for years and each needs a minimum investment of one crore rupees. Investing even in a handful of AIFs can turn a large proportion of wealth inaccessible for someone with an investible surplus of Rs 5-10 crore. A fund-of-fund would provide similar advantages even with a smaller amount and provides exposure to the various categories of funds which are now available.
"Today’s HNI investors are often start-up founders or senior professionals rather than just a member of a wealthy family," said Kunal Bedia, fund manager, IIFL Asset Management. "This means that they may not necessarily have the same resources as traditional wealthy families for handling administrative issues or the investment ticket-size that families who own large businesses typically enjoy." The fund-of-fund helps such individuals take exposure to multiple funds without the attendant paperwork or large corpus, according to him.
"It gives them the benefit of diversification, due diligence, minimizes documentation and reduces fund manager risk," he said.
IIFL Asset Management’s fund-of-fund looks to take exposure in late-stage investments. It had run its first fund-of-fund AIF in late 2015. It invested in multiple venture capital funds. The IIFL group manages around Rs 1,000 crore across these two funds.
Fund managers at a lot of underlying AIFs too prefer to deal with a few large institutional investors rather than multiple small investors, say industry experts.
The Securities and Exchange Board of India recently eased regulations for such funds. It made it easier for them to also invest in the underlying companies in addition to the units of other AIFs.
“The Board approved the proposal to amend SEBI (Alternative Investment Funds) Regulations, 2012 to...allow AIFs, including Fund of AIFs, to simultaneously invest in units of other AIFs and directly in securities of investee companies subject to certain conditions;” said the minutes of the March 25 board meeting in which the regulator took this decision.
The fee structure is said to vary among funds. One section is following the ‘two and twenty’ model. This means that the charges are two per cent of assets as fees on an ongoing basis and twenty per cent of any profits made. This is split with the AIF whose units in which the fund-of-fund invests. Another model is the charging of an additional amount over and above the charges of the underlying AIFs. Fees also vary depending on the size of the investment, industry experts said.