Interplay of Corporate Competitors and the Alternative Investment Fund Market

[By Pritika Negi and Delphina Shinglai]

The authors are students at the Gujarat National Law University.

Alternative Investment Funds (hereinafter AIFs) have shifted the traditional market functioning from indirect to direct, active to passive, and from public to private[i]. The availability and accessibility of alternative investment assets make it a viable option attracting investors. Significant development in securities markets has aided in the explosive growth of private markets. More capital has been raised in these private markets than in public markets each year for over a decade.[ii] Furthermore, the growing demand of investors beyond traditional equity and asset class has created a market offering excess to cater to a plethora of interests.

The new economy supported by the inflow of cash has established a market with corporate competitors targeting higher returns. AIF helps the economy grow by making investments in failing businesses, start-ups, and leveraged buy-outs. Corporate competitors in the AIF market persist when the general market downsizes bringing in the profits of passive AIFs commodities at a time when commodities in the general market soar high.

Corporate Competition in the AIFs Market

India has huge AIF management platforms; One such management platform is Avendus Capital, which, in itself, takes ownership of thirty percent of the market share.[iii] It was achieved by focusing on private equity strategy, alternate strategies and aims at long-term strategy.[iv]The diversification of investment portfolios has been key to AIFs gaining prominence.[v]

With different strategies and ideas for portfolio management, another key player in the Indian AIF Market is BlackSoil Capital. The platform in this private market has the responsibility of managing alternative credit platforms for government-regulated bodies, namely, RBI registered NBFC and SBI registered AIFs. These platforms along with some others were able to stand at length with corporate players in the general market because of their policies, transparency, and accountability.

Such transparency must not be provided to just the investors under section 9 of SEBI (Alternative Investment Funds) Regulations, 2012, but also to SEBI in order to receive a certificate under section 7 of SEBI (Alternative Investment Funds) Regulations, 2012. Hence, owing to their management skill which goes in hand with laws regulating AIF, today these platforms are listed as the new evolving capitals. This competition arising from different methods of corporate governance helps prevent monopolizing and destabilizing of the market.

A key for corporate competitors to survive is knowledge of risk management, product expertise, consistency in investment performance, and availability of tailor-made solutions. The lack of risk-taking by corporate competitors has left a large number of AIFs out of the options to invest. For instance, out of the availability of over 700 AIFs in the market, investors find only a few margins of 30-40 AIFs[vi]. The potential of the margined AIFs to prosper when some corporate entity invests in it becomes undervalued. This valuation of undervalued alternative assets brings corporate competitors a high margin along with high risk and high profit-making opportunities.

Moreover, with digital assets (explorative trends that are not explicitly considered as a standard asset class in AIFs) gaining popularity in the current market, the scope for competition has widened. Further, cryptocurrencies have also entered the trend, gaining prominence in the new investment market. Cryptocurrency showed the top performing asset class of 2020-21. Investors can invest in cryptocurrency themselves without the need of a third-party intermediary or by investing in companies that benefit from Blockchain and crypto asset uptake. The world market is exploring the realm of digital currency assets. A 2021 BIS survey of several central banks found that 86% were actively researching the potential for Central Bank Digital Currency (CDBC), 60% were experimenting with the technology and 14% were deploying pilot projects.[vii] India will join a few other countries after the launch of the official CBDC. The RBI is exploring the impact to implement the CBDC; conversely, it would require a distinct legal framework to regulate the same.

Today, through web-based stock stimulators, an investor can practice trade strategies by investing the free $100,000 in the AIF market provided through the stimulator, lessening the undertaken risk probability. Hence, it could be understood that not just the competition is rising, but also new strategies are being developed to ensure risk minimization. Such online trial platforms are a great start for competitors who are till date planning to invest in this market and get their game strong.

Protection from Unfair Competition

AIF platforms are private and due to volatility are highly liquid and risk-averse. Further, these are unregulated funds therefore in cases of poor portfolio management services, the probability of loss increases. To top it up with, the 2022 amendment to the AIF Regulations, 2012 now gives haven to investment committee members from any viable obligation regarding their investment decisions;[viii] Inflicting the majority burden of loss on investors and making the competition risk-free for the corporate firms acting in the capacity of agent. Irrespective of the risk involved, the competition is simply increasing. A study by Mckinsey & Company concluded that a presumed decline in hedge funds would not just have a direct impact on investment but also on the competition. [ix]

In order to safeguard social morale in this economic tussle, even though highly unregulated, SEBI has mandated norms to protect the basic rights of investors through SEBI (Alternative Investment Funds) Regulations, 2012[x] and SEBI Complaint Redress System. Also, even though SEBI can at no point intervene in the AIF market, nonetheless, under section 35 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 SEBI can intervene in cases of default. Further, the establishment of the Indian Association of Alternative Investment Funds (IAAIF) ensured the promotion and protection of the AIF industry and its investors.

Abiding by these regulations is a statutory duty; otherwise, consequences will have to be faced as was witnessed in the “Adjudicating order in respect of HBJ Capital Services Pvt. Ltd.[xi] where non-compliance was leveled by order of repayment of investor fees in addition to the promised fees. In case of failure, the corporate veil was to be lifted. These minor strides for the protection of innocent investors are truly necessary and appreciated unless government bodies try to take full control of the AIF market by drastic interventions.

Future of Corporate Competition in the New Investment Market

Owing to the changing scenarios, both at the national and international level, people are becoming more secure and the competition has become restricted and safer because the sword of market downsizing/crash always swings upon the head of investors and corporate competitors. Thus, a competitor is leveraged in the corporate competition when he/she keeps environmental, social, and governance considerations in mind while planning his/her strategy. Business valuation must be looked at along with aiming at sustainable growth and capital appreciation. The focus should not be on buying bad business for short-term pop of 50-100%, instead, it should be on buying the right business with some underpriced in short term and acquiring significant yields in long term.

With considerable inflows and native ventures, the Indian AIF market values $43 billion[xii] and still counts for more owing to the fact that the AIF market has quite recently begun to extend in Indian Market. The current PMS Bazaar report has brought into notice that the AUM of AIFs is expected to grow six times in the next ten years and might reach INR 30 lakh crore.[xiii] It is this corporate competition that brings high pace growth, further resulting in high revenue and thus, high inflows and stabilized economy. A developing country like India cannot claim to be self-reliant and requires inflow to improve on economic grounds. AIFs are progressing into the digital realm and are not limited to the traditional asset class. India launched its first Digital IAF in the year 2021 through ASK Investment Managers. India’s initiative to issue the CBDC depicts the likelihood of AIF’s future in a digitalized and technology-driven market.

AIF today is the third-largest economy in Asia and as per a survey conducted by the Emerging Markets Private Equity Association; India is emerging as amongst the top three AIF markets.[xiv]All these advancements depict the scope for AIF in India and how fair corporate competition can broaden the market. However, the need is for a regulatory body with actual powers to prevent or at least minimize the market bubble burst whilst not compromising on the market competitiveness.

[i] Catherine Cote, ‘The Future Of The Alternative Investment Fund’ Harvard Business School Online (Aug 31, 2021) https://online.hbs.edu/blog/post/alternative-investment-industry accessed on 20 February 2022

[ii] Michael J. Mauboussin, Dan Callahan, ‘Public to Private Equity in the United States: A Long-Term LookMorgan Stanley, Investment Management (Aug. 4, 2020). <https://www.morganstanley.com/im/publication/insights/articles/articles_publictoprivateequityintheusalongtermlook_us.pdf> accessed 23 Feb 2022

[iii] Rajesh Bhayani, ‘GIFT City gains traction: Avendus fourth firm to get nod for setting up AIF’  Business Standards (Mumbai 4 September 2021) <https://www.business-standard.com/article/markets/gift-city-gains-traction-avendus-fourth-firm-to-get-nod-for-setting-up-aif-121090400054_1.html> accessed 18 February 2022

[iv]Asset Management, (Avendus) <https://www.avendus.com/india/asset-management> accessed 15 Feb 2022

[v] Narayanan V, ‘As HNIs chase high returns, assets in alternative investment funds top ₹5-lakh cr’ Business Line (Chennai, 14 December 2021) <https://www.thehindubusinessline.com/data-stories/data-focus/as-hnis-chase-high-returns-assets-in-alternative-investment-funds-top-5-lakh-cr/article37955482.ece> accessed 24 February 2022

[vi] Id.

[vii] ‘BIS Innovation Hub Work on Central Bank Digital Currency (CBDC)’ BIS <https://www.bis.org/about/bisih/topics/cbdc.htm> accessed 25 February 2022

[viii] ‘SEBI’s new AIF regulations’ (14 September 2021) KS legal <https://www.kslegal.co.in/sebis-new-aif-regulations/> accessed 21 Feb 2022

[ix] Charles Roxburgh, Susan Lund, Matt Lippet, Olivia L. White, Yue Zhao ‘The New Power Brokers: How oil, Asia, hedge funds and private equity are faring in the financial crisis’ McKinsey Global Institute 2009

[x] SEBI (Alternative Investment Funds) Regulations, 2012, s. 34.

[xi]Adjudication Order in respect of HBJ Capital Services Private Limited and its Directors, HBJ Capital Services Private Limited [7 Feb 2020]

[xii]‘ Prequin Insight: Alternative Assets in India’ (November 2017) Preqin<https://docs.preqin.com/reports/Preqin-Insight-Alternative-Assets-in-India-November-2017.pdf> accessed 24 February 2022

[xiii] Narayanan V, ‘As HNIs chase high returns, assets in alternative investment funds top ₹5-lakh cr’ Business Line (Chennai, 14 December 2021) <https://www.thehindubusinessline.com/data-stories/data-focus/as-hnis-chase-high-returns-assets-in-alternative-investment-funds-top-5-lakh-cr/article37955482.ece> accessed 24 February 2021

[xiv] Swaraj Singh Dhanjal, ‘Investors committed ₹1.17 trillion in alternative investment funds in FY19’ LiveMint (Mumbai, 15 May 2019) <https://www.livemint.com/market/stock-market-news/investors-committed-1-17-trillion-in-alternative-investment-funds-in-fy19-1557937382176.html> accessed 23 February 2022

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