ALT NEWS August 30, 2016
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Fourth Edition
Alt smart is India’s first and only exclusive web portal for information on “Alternative investment funds” (AIFs) In the last edition we gave an introduction about Category 2. – Real estate funds. Now, we will brief you on the various kinds of funds available. Types of AIF They are classified in 3 categories Category 1: They are funds which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors OR areas which the Government or regulators consider as socially or economically desirable. Category 2: They are funds like private equity and venture capital funds, debt funds, and Real estate funds etc. which do not fall in Category 1 and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements. Category 3: They are popularly known as “Hedge funds” they employ diverse or complex trading strategies and may employ leverage/borrowing. They invest in listed/unlisted securities which may be stocks, bonds, foreign currencies, interest rate products as well as any listed/unlisted derivatives. Tax benefits Funds in both categories 1 and 2 enjoy a “pass-through” status which means that all income received from investment in such funds is added to the investor’s income for the purpose of taxation. Investment duration Category 1 and 2 funds generally have a time frame varying from 1 year and even up to 10 years. They are closed ended and are not listed on any exchange. Hence liquidity for investors is zero. They have to remain invested for the entire duration of the fund. Category 3 funds can be either open-ended OR closed-ended and can vary from 1 year to 10 years. Usually many funds in this category are open ended and investors can enter/exit the fund at regular intervals. Minimum investment This is INR 1 crore in all the 3 categories. Further additional investment can be of smaller value.
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Number of Investors The maximum number of investors in a single AIF scheme cannot exceed 1000. Individual investors who invest in AIFs usually have a minimum net worth of INR 20 crores (net worth = total assets minus total liabilities) and an investment surplus of minimum INR 5 crores In this edition, let us learn about Category 1 funds. One of the popular types of fund available under this category is “Infrastructure Funds” These funds invest in infrastructure assets, concessions and contracts which exhibit some or all of the following characteristics:
Underlying concessions, assets or contracts driving inflation adjusted cash flows to shareholders;
Predictable and sustained revenues with value appreciation over the long term;
Predictable maintenance and capital expenditure requirements;
Regulated essential services;
Reasonable entry barriers;
Monopolistic characteristics; and
Lower exposure to technology risk.
These funds can invest in projects in the following sectors which form the infrastructure of the economy: Roads Ports Bridges Dams Airports Power generation Railways Cement Steel Coal
Oil and gas
And many more... These funds have a long-term investment horizon and hence their investment strategy targets assets that have visibility of strong, predictable cash flows in the form of regular dividend distribution, low volatility of returns and potential for capital growth.
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They employ experts who have the required professional qualifications and the experience required in evaluating infrastructure projects. Experts in the field of economics, engineering, accounting, legal, risk, financial structuring are appointed by these funds to critically evaluate infrastructure projects and short list those which meet the prescribed investment criteria. These funds also have their own internal team of researchers, analysts and fund managers to manage funds. They offer investors options of secured debt paper/ equity and usually offer a target IRR (Internal rate of return) of between 16 to even up to 21 per cent per annum. This IRR is not guaranteed as funds cannot give guaranteed returns, but these are best case estimates from the fund house. These returns are “gross” and are at the “fund level”. Investors get “Net returns” which is after deducting “Fund management fees and other charges” These “Net returns” are “Taxable” in the hands of the investors and can range from 13 to 18 per cent per annum. Post tax these returns can be lower, based on the tax slab (usually all investors are in the highest i.e.: 30% tax slab) Investment tenure of these funds may vary between 5 years to12 years Liquidity in such funds is zero and investors have to remain invested for the full tenure to get the full benefits and they cannot exit before the completion of the fund tenure. Investors invest in these funds due to three main reasons: Diversification: These schemes present a special opportunity to diversify their portfolios from the traditional asset classes of equity and debt linked products. Hedge funds are known to follow advanced strategy based tools and techniques and have the potential for very high returns as well as high risk. Potential for high returns: Most schemes inform investors upfront in the scheme prospectus and scheme presentations that they are targeting high returns. These are target returns and not guaranteed by them. Reduced risk: These schemes have risk management processes in place and an experienced fund management team to manage and reduce portfolio risk (details are usually given in the scheme presentation and prospectus)
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Knowledge Centre Content A special section has been created for you to read and update yourself fully on this very promising asset class. Please click the link http://www.altsmart.in/knowledgecenter/faq1.aspx News and Updates A special section has been created for you to read the latest news and updates covering the alternatives industry in India. Please click the link http://www.altsmart.in/newsmanager/news.aspx Funds listed on ALTSMART You can read details of the various open funds currently available for investment by registering on the site. We look forward to your feedback and suggestions on info@altsmart.in Sincerely, Prashant Mehta Senior Vice President Visit us at www.altsmart.in India’s only information website on Alternative Investment Funds