Commitments from alternative investment funds (AIFs) have inched up to Rs 8.44 trillion in the quarter ended June, registering quarter-on-quarter growth of a mere 1.3 per cent, regulatory data shows.

Global headwinds, including rising interest rates and inflationary pressures, have made it difficult for funds to garner commitments, said market watchers.

Also read: SEBI introduces direct plan in alternative investment funds

“Investors are now cautious of the sectors they invest in, and commitments in sector agnostic funds may be tougher than sector-focussed funds, especially AI and deep-tech-focussed investments, which seem to be finding it easier to get commitments,” said Vaneesa Agrawal, founder, Thinking Legal, a boutique law firm.

The performance of funds is not as strong due to the funding winter, which could be a factor that’s deterring limited partners from making commitments, added Agrawal. 

Also read: SEBI moots standardisation for valuing AIF portfolio assets

“Instead of deploying the money in one or two months because of FOMO (fear of missing out), investors are evaluating the deal over 3-4 month periods, as they want to back better companies,” said Shashank Randev, Co-founder, 100X.VC.

Randev, however, was quick to point out that a lot of dry powder is present in India and good companies building scalable businesses will never be in short supply of capital. “Whenever investors do decide to invest, they will deploy significant capital,” he said.

The slowdown in fundraise appears to be commensurate with the slowdown in the start-up funding space, said Yashesh Ashar, partner, Ilume Advisory.

Also read:Easing it for AIFs, VCs 

The private equity-venture capital firms made investments worth $10.5 billion in Indian companies in the June quarter, a 28 per cent fall over the previous year. VC investments saw a sharp decline of 59 per cent to $449 million. The fundraise activity is down to $1.68 billion in Q2 of 2023, from $3.7 billion the year ago.

“All these point towards extension of the funding winter for start-ups in India and, consequently, decrease in fund-raise activity, among the funds,” Ashar said. 

Assets of the AIF industry stood at Rs 6.94 trillion at the end of June last year, implying a 22 per cent growth in the past year. The industry has grown 4.7 times in the past five years, from assets of Rs 1.8 trillion.

AIFs have a minimum ticket size of Rs 1 crore and aim to offer investors access to sophisticated strategies across different asset classes.

Given the rich valuations in the listed space, investors are looking at alternatives such as structured credit, venture capital, private equity funds, real estate funds and long-short strategies in category III, all of which may have little correlation with long equities, said experts.

The assets of category II funds form 80 per cent of the total AIF industry. Funds that do not fall in Category I and III, and which do not undertake leverage or borrowing other than to meet the day-to-day operational requirements, are classified as category II. These include real estate funds, private equity funds and funds of distressed assets.

Related Topics