THE DECAD FOR CAT II & ALTERNATES AIF FOR INDIA

The Financial Distribution and Asset Management Industry is changing stupendously and we will witness more changes in the next 5 years. It is high time to identify the key spaces where the growths are going to catch our attention, We find that many new products and Industries will grow exponentially and new AMC under the new product innovation category will explore the Indian capital markets. SEBI is also under discussion under the same category as per the last communication hence we are here to witness a new capital market economy. Moreover, the real players for these products are the growing sophistication among the investors who will be investing in these products.

 The Indian alternate market is all set for stupendous growth, particularly the CAT 1 and 2 Alternative Investment Funds. It is found that the Indian financial market is yet to bloom from what we witness now. Many new opportunities are yet to be discovered in India for investors. Over the next 5 to 10 years we will new breed of risk-driven investors coming up mostly in HNI and UHNI space and retail. The startup ecosystem married with Indian GDP growth will get huge demand for many existing products that are yet to burst out.

The Indian financial market has already taken a huge change where the Mutual Fund Industry is heading towards Rs 50lakh cr whereas the SIP AUM witnessed 9.31 lakh crore. The industry witnessed 125% growth in CY-23. For example, the Industry data shows that 37.16 lakh new investors joined the MF industry from April 2023 to November 2023, around 38% higher than the new investor addition during the corresponding period of FY 2022-23.

On the other hand, Alternates PMS and AIF grew significantly. The PMS industry stands hovering around reaching up to Rs 15 lakh crore. The Alternative investment fund space has 3 categories where the category I and II are the largest. As per the SEBI data, we have 1096 Registered AIFs and around 58% of the same is under CAT 2 as of 31st March 2023. If we look at the pace of AIFs getting registered we find that in FY-22 around 157 and 235 in FY-23 got registered. 53% of 1096 AIFs were registered in the last 4 years.

CAT II AIFs grew from Rs.1053 billion in 2018 to Rs 6939 billion in FY-23 which is itself 6.5 times. 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. Cat II segment AIF will attract more inflows as the segment is married with Make in India & PLI primarily. AI and Robotics will play a huge role in the transformation of Make in India hence quality funds will chase these products. Innovation in offering is just about to hit to roads post the election of 2024. Sector-focussed funds, especially AI and deep-tech-focussed investments AIF will attract easy money in coming years.

 If we look at the return perspective of the AIF that invested in private markets in the last decade (2013-23) generated a 13.5% alpha over the public market index (S&P BSE Sensex TRI). The evolution of the unlisted space will attract more inflows for the Alternative investment space, particularly CAT I & II. As more IPOs will hit the market and more rich valuations of the capital market are reaped married with the 5 trillion GDP growth of India we will witness huge returns from these CAT II AIF segments. This will attract more investors and investments in this category. Even the Pre IPO opportunities are also huge which adds alpha opportunities for CAT II AIFs.

 The CAT I and CAT II space of AIF will be significant as the Indian economy needs a huge inflow of funds and investment for infrastructure to make in India's manufacturing space. The VC and Private equity market will influence many startups and make these companies become Midcaps and Large caps in the next 5 years hence we will find the opportunity for AIF space. 

Family offices have become active while looking towards CAT 1 and 2 we will find huge inflows coming from retirement funds, and insurance fund companies to invest in AIF which will lead to significant growth for the Industry.

 The most interesting thing is that AIF's commitment to GDP stands at 3% as of 31st March 2023 which will become 6% by and before 2027.  The prime reason behind such a spike will be large houses will invest in these categories and also the GIFT city AIF segment will attract many NRI and FIIs inflows into these products.  

 If the Indian GDP is going to grow to 5 lakhs cr and aspires to grow 10 lakh corer even within the next 10 years from now we will witness huge inflows coming from VC and Private Equity followed by overseas institutional money coming into Indian infrastructure we will find new innovate CAT 1 and 2 funds in the AIF space. 

 If we look into the investment as % of funds raised in CAT I and II rose from 71% as of March 2013 to 91% as of March 2023 which is over and above the average of 80% in the past 10 years. Category II AIFs, including venture capital, private equity, real estate funds, and private credit, have experienced exponential growth, fuelled by heightened interest from HNIs and UHNIs.

 On the PMS front, we find that Data from the Securities and Exchange Board of India (SEBI) shows that the total assets under management (AUM) of the PMS industry have nearly trebled in the last seven years—rising from Rs 10.45 lakh crore in March 2016 to nearly Rs 28 crore in March 2023 and might end up March 2024 around 30 lakh cr. 15 years before the industry was hovering around Rs 2 lakh cr.Technology, financial education and digital media have played a significant in developing the knowledge for investors for investing in the financial market.