Table of Contents
Chapter 8: Alternative Investment Fund Structuring
At its conceptual core, an Alternative Investment Fund is a collective pooling vehicle. Individual capital allocators combine their financial commitments into a centralized legal vehicle to achieve scale, access off-market institutional transactions, diversify risk across dozens of private enterprises, and secure active managerial expertise.
Permitted Legal Forms of an AIF in India
Under Regulation 3 of the SEBI AIF Regulations, an AIF can be constituted in one of three legal forms:
- Contributory Irrevocable Trust (under the Indian Trusts Act, 1882) — Utilized by over 90% of Indian AIFs.
- Limited Liability Partnership (LLP) (under the Limited Liability Partnership Act, 2008).
- Company / Body Corporate (under the Companies Act, 2013).
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| COMPARATIVE ANALYSIS OF AIF LEGAL FORMS |
+--------------------------+------------------------------+--------------------+---------------------+
| STRUCTURAL ATTRIBUTE | DETERMINATE TRUST | LLP | COMPANY |
+--------------------------+------------------------------+--------------------+---------------------+
| Industry Dominance | **Dominant (>90% of AIFs)** | Moderate (~8%) | Rare (<2%) |
+--------------------------+------------------------------+--------------------+---------------------+
| Governing Statute | Indian Trusts Act, 1882 | LLP Act, 2008 | Companies Act, 2013 |
+--------------------------+------------------------------+--------------------+---------------------+
| Capital Reduction & | Highly seamless; redemptions | Complex; requires | Punitive; strict |
| Distribution Flexibility | and distributions via units. | capital reduction. | NCLT court orders. |
+--------------------------+------------------------------+--------------------+---------------------+
| Multi-Class Issuance | Maximum contractual freedom | Limited partner | Rigid statutory |
| | under Indenture of Trust. | classes in MCA. | voting classes. |
+--------------------------+------------------------------+--------------------+---------------------+
| Tax Pass-Through Clarity | Clear statutory status under | Ambiguous pass- | Double taxation |
| (Cat I & II) | Section 115UB of IT Act. | through treatment. | entity-level risk. |
+--------------------------+------------------------------+--------------------+---------------------+
Leveraged Buyout (LBO) Structuring in AIFs
In buyout transactions, private equity managers acquire controlling or 100% equity stakes in operating enterprises:
- Acquisition SPV: The AIF creates a special purpose vehicle (SPV) to pool equity capital.
- Structural Debt Leverage: Where permitted by offshore laws or domestic NBFC channels, senior acquisition debt is raised at the SPV level, secured by the cash flows of the acquired business.
- De-leveraging Engine: Post-acquisition, the target company's operating cash flows are directed toward aggressive debt paydown, expanding equity value for AIF unitholders upon exit.
The constitutional governance of an AIF balances managerial autonomy with fiduciary oversight.
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| AIF CONSTITUTIONAL GOVERNANCE MAP |
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| |
| [ SETTLOR ] ---- Settles Trust Property via Indenture of Trust ----> [ INDENTURE OF TRUST ] |
| | |
| v |
| [ TRUSTEE ] <--- Holds Legal Title; Fiduciary Oversight ------------ [ THE AIF TRUST ] |
| | ^ |
| | Executes Investment Management Agreement (IMA) | |
| v | |
| [ INVESTMENT MANAGER ] <-- Sourcing, Diligence, Value Creation, Exits -----------+ |
| | |
| +-- Governed / Advised by ----------------------------------+ |
| | | |
| v v |
| [ INVESTMENT COMMITTEE (IC) ] [ LP ADVISORY COMMITTEE (LPAC) ] |
| • Approves all investments & divestments • Resolves conflicts of interest |
| • Evaluates valuation models • Approves key-person waivers |
| |
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Key Fiduciary and Advisory Bodies
- The Corporate Trustee: Regulated by SEBI, the Trustee owes an undivided fiduciary duty of loyalty to unit-holders. The Trustee executes definitive deal contracts, verifies adherence to the PPM, and monitors single-investee concentration caps.
- The Investment Committee (IC): Established by the Manager, the IC includes senior managing partners, operating partners, and independent industry specialists. All investments and divestments require documented IC approval.
- The Limited Partner Advisory Committee (LPAC): Composed of representatives of major institutional investors (LPs). The LPAC does not make commercial investment decisions; its mandate is to resolve potential conflicts of interest, approve Key-Person event waivers, and evaluate proposed PPM amendments.
To aggregate domestic and international institutional capital facing distinct regulatory and tax regimes, AIF sponsors deploy multi-tier fund structures.
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| MASTER-FEEDER AIF STRUCTURE |
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| |
| +-------------------------+ +--------------------------+ |
| | DOMESTIC INVESTORS | | OFFSHORE INVESTORS | |
| | (Indian HNIs & Instis) | | (Foreign Instis & NRIs) | |
| +------------+------------+ +------------+-------------+ |
| | | |
| | Contributes INR | Contributes USD |
| v v |
| +-------------------------+ +--------------------------+ |
| | DOMESTIC AIF (INDIA) | | OFFSHORE FEEDER FUND | |
| | (Registered with SEBI) | | (Mauritius, Singapore, | |
| +------------+------------+ | or GIFT City IFSC) | |
| | +------------+-------------+ |
| | | |
| | | Subscribes to units |
| | v |
| | <=================================================+ |
| | (Pools 100% of capital at Domestic Master AIF Level) |
| v |
| +--------------------------------------------------------------------+ |
| | DOMESTIC INVESTEE COMPANIES | |
| +--------------------------------------------------------------------+ |
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Common Structural Blueprints
- Master-Feeder Structure: International investors invest in USD into an Offshore Feeder Fund (often in GIFT City IFSC, Mauritius, or Singapore), which in turn subscribes to units of the Indian Master AIF. This pools all capital onto a single balance sheet while preserving international governance standards for offshore LPs.
- Parallel Fund Structure: The Manager runs two parallel legal funds—one domestic and one offshore—that co-invest side-by-side in identical portfolio companies in strict pro-rata proportion to their capital commitments.
- Co-Investment Vehicles (CIV): Specialized vehicles created alongside the main AIF to allow anchor LPs to co-invest directly in large transactions exceeding the fund's 25% single-company concentration cap, typically on reduced fee and carry terms.