India's Alternate Industry Set for Explosive Growth: 350% Rise in High-Income Households Expected by 2031
Private equity, hedge funds, and real estate have experienced a boom lately; A study by Morgan Stanley shows that adding 20% alternates to portfolios reduces volatility by 26% and increases returns by 15%.
Alternate IndustryPrivate EquityHedge FundsReal EstateAifMutual FundsDirect EquityUnlisted EquityInsuranceCashHnisUltra HnisWealth PreservationProduct InnovationRegulatory EnvironmentDistribution NetworkReal EstateSep 24, 2024
Globally, smart money has moved from actively managed funds to passively managed funds to private equity and now to private credit. Private equity, hedge funds, and real estate have experienced a boom lately. A study by Morgan Stanley over 30 years shows that adding 20% alternates to portfolios reduces their volatility by 26% and increases returns by 15%.
The global alternates industry is expected to grow to $24.5 trillion by 2028 from $15 trillion in 2022. Private credit is one of the fastest-growing segments in alternates, along with venture capital. As a country's per capita GDP crosses $2000, its population's consumption enters a super cycle, and their investment habits start changing, as is the case with India.
By 2031, there will be 360 million households with more than $2200 per capita GDP. There is expected to be a 350% rise in the number of households with over $35,000 income in India from 2021 to 2031. Indian investors are moving away from traditional products towards more nuanced products.
While investor participation is expected to rise by 38% in direct equity and 17% in mutual funds from FY20 to 2025, it is expected to grow by 136% in unlisted equity. It will, on the other hand, decrease by 7% in insurance and 26% in cash. This shows that investors are willing to invest for longer in riskier asset classes.
HNIs and Ultra HNIs are focusing primarily on wealth preservation and its growth. Growing wealth, product innovation, awareness of financial products, regulatory environment, strong and robust distribution network, rise in number of AIF products and manufacturers, and rise in demand from investors have been the biggest enablers of the AIF industry.
The Indian AIF industry has grown 10X in the last decade and is worth Rs. 11.3 lakh crore. Cat II AIFs include private credit funds that grew the most during this period at 37%. Drivers for new AIF scheme launches are niche sophisticated strategies and boutique fund managers.
60% of mutual fund AMCs already have alternate strategies. Venture capital makes up for about 20% of AIF strategies in India, while long only accounts for 19%. Indian AIFs offer benefits of superior risk-adjusted returns, un-correlated market exposure, access to fund manager, access to India growth story, access to public and private markets, and diversification among various asset classes.
Across industries, the first spurt of growth comes from institutions. 56% inflows in AIFs are coming through institutions. Non-individual participation in AIFs is at 44% and is growing at a rapid rate. Institutions prefer Cat II funds while individuals are migrating more towards Cat III.
AIFs are also growing in smaller cities across India.
Advisors and alternates are crucial in this growth story. 4 out of 5 investors seek distributors before investing in a Cat III fund, while 50% of investors go through distributors to invest in Cat II AIFs. Private equity is mostly being purchased through direct mode, while private credit is increasingly being purchased through distributors.
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Frequently Asked Questions
What is the expected growth of the global alternates industry by 2028?
The global alternates industry is expected to grow to $24.5 trillion by 2028 from $15 trillion in 2022.
What is the expected rise in the number of households with over $35,000 income in India from 2021 to 2031?
There is expected to be a 350% rise in the number of households with over $35,000 income in India from 2021 to 2031.
What is the growth rate of the Indian AIF industry in the last decade?
The Indian AIF industry has grown 10X in the last decade and is worth Rs. 11.3 lakh crore.
What is the preferred investment route for institutions in AIFs?
Institutions prefer Cat II funds.
What should distributors focus on to work with Indian investors?
Distributors should focus on product knowledge, give more options based on investor's risk profile, and have digital presence.
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