OVERVIEW OF ALTERNATIVE INVESTMENT FUNDS (AIFs)

Overview of Alternative Investment Funds (AIFs) (Part 1)

• Introduction to Alternative Investments: Alternative investments are defined as investments other than traditional investments, such as stocks and bonds. They cater to sophisticated investors, including institutional investors and High Net Worth Individuals (HNIs), who have a higher risk-taking capability.
• Evolution and Growth of AIFs in India: The evolution of alternative investments in India began with venture capital financing in the 1980s. SEBI broadened the scope of venture capital in 1996, and the industry has grown since then, with the introduction of new regulations and types of funds.
• SEBI Requirements on AIFs: SEBI defines an Alternative Investment Fund (AIF) as a privately pooled investment vehicle. The regulations prescribe conditions for investment in AIFs, including a minimum corpus of Rs. 20 crores, a minimum investment of Rs. 1 crore, and a limit of 1000 investors.
• Categories of AIFs: AIFs are divided into three categories:
  • Category I AIF: Invests in start-up or early-stage ventures, social ventures, SMEs, infrastructure, or other sectors considered socially or economically desirable.
  • Category II AIF: Does not fall in Category I and III, and does not undertake leverage or borrowing other than to meet day-to-day operational requirements.
  • Category III AIF: Employs diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives.
• Types of AIFs: AIFs can be of different types based on their investment strategy and types of assets under management, including:
  • Venture Capital Fund (VCF): Invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings.
  • Private Equity Fund: Invests in private companies, often with the goal of taking the company public or selling it for a profit.
  • Hedge Fund: Employs diverse or complex trading strategies to generate returns, often using leverage and derivatives.
• Key Concepts:
  • Accredited Investor: An investor who meets certain eligibility criteria, such as annual income or net worth, and is allowed to invest in AIFs with a lower minimum investment requirement.
  • Listing of AIF: Units of close-ended AIFs may be listed on a stock exchange, subject to certain conditions.
  • Investment Conditions: AIFs are subject to certain investment conditions, including restrictions on investing in associates and requirements for disclosure to investors.

Overview of Alternative Investment Funds (AIFs) (Part 2)

• Definition: AIFs are funds that invest in alternative assets such as venture capital, private equity, hedge funds, and more.
• Details: AIFs are categorized into three main categories: Category I, Category II, and Category III, each with its own set of regulations and investment objectives.

Types of AIFs

• Angel Fund: A sub-category of Venture Capital Fund that raises funds from angel investors and invests in early-stage companies.
• Private Equity (PE) Fund: An AIF that invests primarily in equity or equity-linked instruments of investee companies, focusing on later-stage financing.
• Debt Fund: An AIF that invests primarily in debt or debt securities of listed or unlisted investee companies, often providing financing for companies with high senior debt.
• Infrastructure Fund: An AIF that invests primarily in unlisted securities or partnership interests of investee companies engaged in infrastructure projects.
• SME Fund: An AIF that invests primarily in unlisted securities of Small and Medium Enterprises (SMEs) or securities of SMEs listed on a SME exchange.
• Hedge Fund: An AIF that employs diverse or complex trading strategies and invests in securities with diverse risks or complex products.
• Social Impact Fund: An AIF that invests primarily in securities or units of social ventures or social enterprises that promote social welfare.
• Special Situations Fund: An AIF that invests in special situation assets and may act as a resolution applicant under the Insolvency and Bankruptcy Code.

Role of Alternative Investments in Portfolio Management

• Portfolio Diversification: Alternative investments can provide diversification benefits to a portfolio, reducing reliance on traditional assets.
• Return Enhancement: Alternative investments can offer higher returns than traditional assets, especially in times of economic volatility.
• Risk Management: Alternative investments can help manage risk by providing a hedge against market downturns or inflation.

Key Concepts

• Angel Investor: An individual or body corporate that invests in an angel fund and satisfies certain conditions, such as net tangible assets or experience as a serial entrepreneur.
• Venture Capital Fund: A fund that invests in early-stage companies with high growth potential.
• Private Equity: An investment in a company that is not publicly traded, often with the goal of taking the company public or selling it for a profit.
• Hedge Fund Strategy: A investment strategy that involves using complex trading techniques to manage risk and generate returns.