India's affluent investors are increasingly diversifying their portfolios beyond conventional assets like equities, debt, and gold, with alternative investments gaining significant traction. This trend is observed among existing high-net-worth individuals (HNIs) and family offices, as well as new entrants into the HNI segment, according to Shekhar Daga, Head–Private Capital at ICICI Prudential AMC.
As India's middle class ascends into upper-middle-class and subsequently HNI status, their investment strategies evolve to encompass a broader range of asset classes. Over the past four years, HNIs have notably increased their allocation to alternative investments.
Understanding Alternative Investments
The universe of alternative investments broadly encompasses Alternative Investment Funds (AIFs) and Portfolio Management Services (PMS). Through AIFs, investors can gain exposure to diverse areas including listed equities, real estate, and private capital – a category that includes private equity and private credit.
- Private credit: Involves direct lending to companies through funds, bypassing traditional banks.
- Private equity: Focuses on investing in unlisted companies, often for growth or strategic restructuring.
It's crucial to recognize that private capital is not a uniform asset class. Private credit alone spans several sub-categories such as performing credit, real estate credit, special-situation credit, distressed credit, and venture debt, each presenting distinct risk-return profiles. Investors must delve into the underlying strategy rather than relying solely on the broad 'alternatives' label.
Structural Demand Fuels Growth
The alternatives industry is projected to grow at approximately 25% annually over the next decade. This robust outlook is partly attributed to the strengthened balance sheets of corporate India and improved borrower discipline, bolstered by the implementation of the Insolvency and Bankruptcy Code in 2016.
The private credit market, in particular, has attracted considerable global investor interest. A structural demand for private credit exists because traditional banks and Non-Banking Financial Companies (NBFCs) face regulatory restrictions that prevent them from financing certain transactions. While conventional lenders can fund working capital and capital expenditure, they are often limited in areas like equity share acquisitions or specific land purchases. This regulatory gap creates a significant need for more flexible capital sources, fostering growth in performing credit.
Opportunities in Real Estate and Credit
Opportunities abound across the alternatives spectrum, catering to varying investor risk appetites and return expectations. In real estate, yield-generating commercial properties and premium residential developments are particularly attractive.
Grade A office assets are benefiting from strong demand, supporting office yields. Similarly, Mumbai’s premium residential redevelopment market has drawn substantial domestic and international capital, driven by robust end-user demand, limited new land availability, and rising buyer aspirations.
Performing credit also remains a vital avenue, providing structured, senior, and asset-backed financing for corporate growth, acquisitions, and strategic initiatives.
Navigating Exit Risk and Due Diligence
A critical consideration for investors in alternative assets is exit risk, which is often underestimated. Unlike mutual funds, private investments typically lack a deep secondary market, meaning they cannot be easily redeemed. Investors are advised to prioritize principal protection, thoroughly examine underwriting guardrails and margin of safety, and assess the manager’s track record across various business cycles. Understanding the collateral backing investments before committing capital is also paramount.
For a diversified investor, a potential portfolio allocation could include 40% listed equity, 40% listed debt, and 20% private capital, though this should always be tailored to individual circumstances and risk tolerance.