Alternative Investment Fund – Igaa
Categories
Alternative Investment Fund
  • Alternative Investment Fund

Meaning of AIF

Alternative Investment Fund or AIF is a privately pooled investment vehicle that invests in alternative asset classes such as private equity, venture capital, hedge funds, real estate, commodities, and derivatives. Generally, HNIs (High net worth individuals) and institutions invest in the AIFs as the investment amount is substantially higher. AIFs are regulated by the SEBI (Securities and Exchange Board of India). As per the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF can be set up as a trust, a company, a limited liability partnership, or a corporate body. However, many of the AIFs that have been registered with SEBI are in the form of trusts.

Benefits of AIF

AIFs can be an attractive option for some investors seeking diversification and potentially higher returns outside traditional asset classes like stocks and bonds. Here are some reasons why investors might consider investing in AIFs:

Potential for Higher Returns: AIFs may offer higher returns than traditional investments due to their exposure to a broader range of assets and investment strategies. However, this higher return also comes with higher risk.

Portfolio Diversification: By giving investors access to alternative asset classes, including hedge funds, real estate, and private equity, AIFs help them diversify their portfolios.

Low Volatility: AIFs are unrelated to the stock market and, hence, are less volatile than other investments like equity or mutual funds investments.

Who can Invest
The following are the criteria for investing in AIF: 
  1. Indian Residents, NRIs (Non-Resident of India), and foreign nationals are eligible to invest in these funds.
  2. Joint investors can also invest in They can be spouse, parents, or children of investors.
  3. The minimum investment amount for investors is Rs1 crore for investors. For directors, employees, and fund managers, this limit is Rs 25 lakh.
  4. Most AIFs come with a minimum lock-in period of three years.
Types of AIF

Category I AIF: This category of AIF invests in start-ups, early-stage ventures, social ventures, SMEs, or infrastructure or other sectors considered socially or economically beneficial by the government or regulators fall into this category. It may be further classified into: 

  • Venture capital funds (Including Angel Funds):This fund specifically invests in start-up or early-stage ventures that have high growth potential.
  • SME Funds: This fund invests in small and medium enterprises with a good track record in profitability and growth.
  • Social Venture Funds: This fund invests in companies that aim to make a positive impact on society or the environment, such as sustainability, clean energy, etc. It has also generated favourable returns in the past.
  • Infrastructure funds:This fund invests in infrastructure projects such as railways, bridges, airports, etc.

Category 2 AIF: These are the AIFs that do not fall under categories I and III. They do not use leverage or debts other than to cover their day-to-day operational expenses. Some of the funds included in the Category II are as follows: 

  • Private Equity Funds: It makes equity investments in unlisted companies and helps them to raise capital. As unlisted companies face problems in raising capital through debt or equity, private equity funds allow them to raise capital easily.
  • Debt Funds: This fund invests in the debt securities of the unlisted companies via debt instruments such as bonds, debentures, and other fixed-income instruments.
  • Fund of Funds: This fund invests in multiple AIFs. It doesn’t directly buy stocks or bonds. Instead, it invests in a portfolio of other investment funds.

Category 3 AIF: These AIFs use complex trading strategies in their investment. It may use leverage or debt for investment in listed or unlisted derivatives. Some of the funds included in Category III are:

  • Private Investment in Public Equity Fund (PIPE): This fund invests in the equity of companies that are listed on the stock exchange. This often happens when the value of the company’s shares has dropped, and the company is looking to raise capital. Hence, in this case, AIFs receive the equity at a discounted price.
  • Hedge fund: Hedge fund uses various investment strategies like short selling, arbitrage, futures, derivatives, and margin trading to generate maximum returns for the investor.
Requirement for Valuation of AIF

The current regulatory framework on valuation of investment portfolio of AIFs prescribed under the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) is as follows:

  • Regulation 23(1) – The AIF shall provide to its investors, a description of its valuation procedure and of the methodology for valuing assets.
  • Regulation 23(2) Category I and Category II AIFs shall undertake valuation of their investments, at least once in every 6 months, by an independent valuer, provided that such period may be enhanced to one year on approval of at least 75% of the investors by value of their investment in the AIF.
  • Regulation 23(3) – Category III AIFs shall ensure that calculation of the net asset value (NAV) is independent from the fund management function of the AIF and such NAV shall be disclosed to the investors at intervals not longer than a quarter for close ended Funds and at intervals not longer than a month for open ended funds.
  • Regulation 27(1)(b) – The manager or sponsor is required to maintain records describing valuation policies and practices.

 

Requirement for Valuer of AIF

SEBI has proposed the following criteria while appointing an independent valuer:

  • Valuer is registered with Insolvency and Bankruptcy Board of India (IBBI).
  • Valuer has membership of a professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession such as Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Institute of Cost Accountants of India, etc. or a CFA charter from the CFA institute.
  • Valuer has at least 3 years’ experience in valuation of unlisted securities.
  • Valuer is not an associate of the manager / sponsor / trustee of the AIF.