There may be some signs of fatigue in new launches of sophisticated funds for wealthy investors.
There were 79 new alternative investment funds (AIFs) between March and July 2019. This has dropped 45.6 per cent to 43 in the same period in 2020, shows regulatory data. The lockdown to control the spread of the Covid-19 pandemic began in March. The date of validity of the registration has been considered for slotting funds by month for the analysis.
The hit on sentiment because of Covid-19 is said to be playing a role in deterring launches according to experts.
Tushar Sachade, Partner - Tax and Regulatory Services at tax consultancy firm PricewaterhouseCoopers said that uncertainty because of the Covid-19 pandemic affects the registration of new funds, since people are more reluctant to make new investments.
“New fundraising will be challenging at this time," he said.
Alternative investment funds fall under three categories. The first invests in early-stage companies like technology start-ups. They can also make infrastructure investments or put money into social ventures or small and medium enterprises (SMEs). Funds for distressed assets or real estate funds are among those to be found in the second category. The third category of funds can use leverage to invest in listed or unlisted securities. Hedge funds which use complex trading strategies to make money in the stock market would come under the third category of funds.
Many fund managers operate under the portfolio management service (PMS) structure which has a lower minimum investment requirement than AIFs. Portfolio managers with growing assets often prefer to eventually register themselves under this third category. This switch may have been accelerated after the Securities and Exchange Board of India (Sebi) raised the minimum investment through regulations notified in January, according to those watching developments.
A partner at another consultancy said that a lot of portfolio managers had converted into AIFs acting in anticipation of an increase in minimum investment amount. The regulator eventually doubled it to 50 lakh rupees in regulations notified in January 2020. The gap was earlier wider between portfolio management service (PMS) providers and AIFs, but less so after the new regulations. This rush to change to an AIF model after the minimum investment was raised resulted in many new applications. These may since have slowed down, according to him, which could have contributed to a dip in overall new funds compared to earlier.
The AIF industry had invested Rs 1.4 trillion as of the end of 2019, shows regulatory data. It had raised Rs 1.7 trillion out of a total commitment from investors of Rs 3.5 trillion. The second category of AIFs had the largest commitment, worth Rs 2.6 trillion.
A source also suggested that processing itself may have slowed down in light of reduced manpower because of Covid-19. An email sent to the regulator on the matter on Wednesday did not receive a reply.