Alternative investments like private equity, hedge funds, venture capital, managed futures etc are becoming popular in India. With volatile equity markets and low interest rates, HNIs and institutional investors are looking at alternative assets for better returns. This article looks at the major alternative investment avenues in India, the current scenario and future outlook.
Private equity and venture capital gaining traction
Private equity and venture capital are the most popular alternative investments in India currently. Many global and domestic PE/VC funds are active in India now. They provide growth capital to companies and startups in exchange for equity stake. Popular sectors are technology, healthcare, consumer goods & services, infrastructure etc. As per IVCA, PE/VC investments in India touched record $48 billion in 2019. Government initiatives like Fund of Funds, tax breaks etc are supporting the PE/VC ecosystem. India is now the 3rd biggest PE destination in Asia.
REITs transforming real estate investment landscape
Real Estate Investment Trusts (REITs) have opened up a new avenue for retail investors to participate in income-generating real estate assets. REITs are companies that own and operate commercial real estate projects and distribute 90% of income as dividends. India approved REITs in 2014 and the first REIT listed in 2019. Since then, around ₹35,000 crore has been raised through REITs and InvITs. REITs offer stable yields of 6-8% along with liquidity and transparency. More REIT launches expected in commercial real estate, data centers, warehouses etc.
Increasing appetite for hedge funds and PMS
High Networth Individuals (HNIs) and family offices in India are increasing allocations to hedge funds and Portfolio Management Services (PMS) for diversification and higher risk-adjusted returns. Domestic hedge fund AUM crossed $6 billion in 2019 per Eurekahedge. Global hedge funds like Millennium, Marshall Wace, Citadel etc have set up India offices. PMS is a discretionary portfolio service offered by SEBI registered investment managers. PMS provides exposure to diverse strategies like long-short, arbitrage, PIPE deals, pre-IPO etc. The minimum investment is ₹50 lakh in hedge funds and ₹25 lakh in PMS.
Insurance linked investments see policyholder interest
Insurance linked investments are innovative products that provide exposure to insurance risks like natural catastrophes, mortality events etc. ILI allow investors to invest in special purpose vehicles that provide reinsurance to insurance companies. Popular ILIs are cat bonds, mortality bonds, sidecars, collateralized reinsurance etc. These offer high returns uncorrelated to equity markets. In India, ILIs are offered to high net worth policyholders by life insurers as an add-on. With increasing risk awareness, insurance linked investments could see wider adoption.
Alternative investments are benefiting from policy support, growing risk appetite and need for diversification in India. As the market evolves, better regulations, transparency and awareness can accelerate development. Retail investors may gain exposure through funds investing in such strategies.