LGT Wealth India

The biggest market, the US, has had the same query year in 2022. This is the only year when the S&P500 and US Treasuries have negative returns –possibly the worst year for a conventionally balanced 60:40 portfolio since 1974. 

How to invest strategically in alternative funds in India?

ETMarkets, 13th January 2023, Rajesh Cheruvu

In today’s investment environment, earning a modest yield of 15% per annum on the overall portfolio has become complex with volatile public markets, especially as public equity and debt capital markets are showing a positive correlation.

Moreover, one-off events that cause significant drawdowns on the portfolio have increased, thereby making ‘volatility – the new normal’ in our portfolios.

With a need for market-independent products which have lower correlation and volatility, investors make some allocation to alternative assets.

Depending on investors’ profile and risk appetite, the allocation to alternative assets can vary between 10 and 33% in the overall portfolio.

Earlier, alternative investment strategies were used by large institutional investors to hedge their portfolios with allocations to real estate and private equity primarily. However, with the emergence of pooling vehicles like Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InvITs), the investor base for alternative assets have become broader.

Traditional alternative assets include commercial real estate, private equity, hedge funds, and gold. Essentially, these assets are illiquid, with the investment horizon stretching from 3 to 10 years.

Some pooling structures like REITs & InvITs, which provide co-ownership in real estate and infrastructure portfolios of assets, are publicly listed and provide liquidity.

Similarly, Exchange Traded Funds (ETFs) invest in niche areas, which are also publicly listed. These publicly listed alternative assets provide daily liquidity to investors and are very popular.

Developed markets like the US, Singapore, UK, etc. have many options for liquid alternatives, but India has minimal options. In India, investors are increasingly interested in exploring private markets for venture equity, venture debt, structured credit, private equity, and real-estate investments, either through direct investments or AIFs.

Private markets give investors access to new business models, disruptive technology, and niche sectors challenging some traditional businesses.

Some of these exciting ideas/ themes are unavailable in publicly listed markets and have shown significant growth and rising market share on the back of formalisation of the economy.

Indian investors want to participate in the growth journey of some of these promising ventures, which are challenging/aiding traditional business models/sectors and are growing faster than India’s economic growth.

One of the growing realisations among investors is changing the behaviour of today’s customer, who has partially moved to online purchases apart from offline spending. This leads to faster growth of new-age businesses, and investors are trying to access such exciting ideas.

Unlike traditional private equity, the venture equity space has seen more exits in the last 10 years of vintage and hence is seeing more interest from investors.

Sophisticated & large investors have clearly articulated private market investment strategies wherein the idea is to build a position in emerging sectors and niche areas by investing in venture equity and private equity AIF funds and then doubling down on some of the high-conviction ideas through direct deal investments.

These investments are spread across multiple tranches/series where the idea is to keep investing in winners.