India's Alternative Investment Funds (AIFs) have experienced remarkable growth, with total commitments reaching ₹13,00,000 crore (US$ 149.25 billion) as of December 2024, reflecting a 5% quarter-on-quarter (QoQ) increase, according to the Securities and Exchange Board of India (SEBI). This milestone underscores the growing interest of High-Net-Worth Individuals (HNIs) and institutional investors in diversifying their portfolios.

Growth in AIF Commitments and Investments

In the year 2024, AIFs raised a total of ₹5,27,000 crore (US$ 60.51 billion) in investments, while the total investments crossed ₹5,00,000 crore (US$ 57.41 billion). This growth was particularly driven by HNIs seeking diversification across various asset classes and sectors.

A standout achievement was the rise of Category II AIFs, which includes funds focused on real estate, private equity, and distressed assets. For the first time, Category II AIFs crossed ₹10,00,000 crore (US$ 114.81 billion) in total commitments, marking a significant milestone in the evolution of alternative investments in India.

Private Credit and IT Investment Surge

Among the various categories, the private credit segment showed rapid expansion, now accounting for 15% of total AIF commitments, amounting to ₹1,95,000 crore (US$ 22.39 billion). This marked a substantial rise from 6% five years ago, highlighting the increasing demand for structured credit solutions. Vivriti Asset Management raised a substantial ₹4,800 crore (US$ 551.09 million) for private credit strategies, further underscoring this growing trend.

Investments in Information Technology (IT) and Information Technology-Enabled Services (ITeS) also saw a rise, reaching ₹30,300 crore (US$ 3.48 billion). Meanwhile, investments in financial services grew to ₹26,800 crore (US$ 3.08 billion), reinforcing the significance of these sectors within the broader AIF landscape.

Real Estate and Angel Funds

Despite the overall growth in AIF commitments, real estate investments experienced a slight dip, falling from ₹75,000 crore to ₹73,900 crore (US$ 8.61 billion to US$ 8.48 billion). However, the angel fund segment, categorized under Category I AIFs, recorded a substantial commitment of ₹8,700 crore (US$ 998.85 million), reflecting the ongoing interest in early-stage investments.

Regulatory Developments and Investor Base Expansion

In response to the evolving AIF market, SEBI is considering expanding the investor base by allowing Accredited Investors (AIs) to be classified as Qualified Institutional Buyers (QIBs). This move could broaden the scope of participation in AIFs and increase market liquidity, providing additional opportunities for institutional and high-net-worth investors.

Unlisted Assets and Bridging the Lending Gap

A significant trend in the AIF market is the growing focus on unlisted assets, which account for approximately 65% of total AIF investments. With traditional lenders scaling back on mid-market corporate lending, AIFs, particularly those in the private credit space, are stepping in to bridge the financing gap. These funds are not only offering higher risk-adjusted returns but also providing steady income streams to investors seeking alternatives to volatile public market assets.

Outlook for HNIs and Institutional Investors

As market volatility persists, it is expected that HNIs and institutional investors will continue to increase their allocations to AIFs. These funds, offering diversification, attractive returns, and access to high-growth sectors, are emerging as a key pillar of India’s financial ecosystem. The growth in private credit and IT investments, combined with regulatory developments and expanding investor base, suggests a promising future for AIFs in India.

Conclusion

The ₹13,00,000 crore (US$ 149.25 billion) commitment in AIFs by the end of 2024 marks a pivotal moment for India’s alternative investment landscape. With the expansion of private credit, IT investments, and a surge in angel funds, AIFs are clearly becoming an essential tool for portfolio diversification in a volatile economic environment. As India continues to evolve as an investment hub, AIFs will play an increasingly crucial role in shaping the country's financial future.

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