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Master-class
Structuring an Alternative Investment Fund
Session 2: An Alternative View on Alternatives
Nalin Moniz, CIO – Alternate Equity, Edelweiss Global Asset Management
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An Alternative View on Alternatives!
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The Growth in all categories has been explosive
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A deeper look suggests that Category III is growing fastest
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Fund Sizes have increased in Category II & III, but not I
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Prominent Players: Category I
Infrastructure (7,524cr) Infrastructure (7,524 cr) Venture Capital (17,696cr)
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Prominent Players: Category II
Structured Credit
Real Estate Private Equity
Pre-IPO / IPO
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Prominent Players: Category III
Long-Short: Debt Risk
Long-Only Boutique Long-Short: Equity Risk
Long-Only Platform
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I’m managing proprietary funds, should I get into asset management?
Item Explanation Prop AIF
AUM (Rs Cr) 192 192
Fund Return Assumed 15% 15%
Cost of Funds 3:1 Debt:Equity. 15% cost of equity, 7% cost of debt 9%
NIM 6%
Fee Net of distributor commissions: 0.25% mgmt + 1% perf 1.25%
Revenue (Rs Cr) 11.52 2.4
Equity Capital (Rs Cr) 3:1 Debt:Equity for Prop. 10cr sponsor for AIF 48 10
Return on Equity 24% 24%
Scalability of strategy & desire to build a client business are the primary considerations to get into asset management
Strategy should not be opportunistic, not be overly reliant on leverage or on concentration.
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If you are a long-only fund manager: PMS
• PMS allows you to have concentration. AIF holdings are capped at 10%.
• PMS allows you to customize fees and terms with clients.
• Minimum ticket size of Rs 25 lakh allows clients to test the waters.
• Raising 20cr @ 1cr is much harder than you think.
• Well established market.
Common concerns & solutions
• Account opening and accounting is a hassle. Solution: Get a good custodian.
• Clients will front run my top-secret holdings. 1 out of 100 may, but most everyone doesn’t care.
• Auditable track record. Solution: Happy clients are your biggest evangelists.
If you are a hedge fund manager: AIF
• AIF gives you leverage of 2x
• Trading & operational efficiency of managing a single pool of funds.
• Tax blockage for clients.
Should I go for PMS vs Category III AIF?
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• Be clear about whether you are a fixed income or an equity alternative.
• If you are a fixed income alternative, be clear about what your target post-tax, post-fee return will be.
• In fixed income alternatives, capital preservation is important.
• Be prepared for a thorough vetting of your style and strategies. Common questions:
— Quant vs Fundamental
— Macro vs Micro
— Fixed income management and policies on credit and duration.
— Risk management frameworks and stop-losses.
— Range of strategies
— Range of gross and net exposure along with averages
— Use of options.
• Liquidity is important, as is fair fee structures (no-catch up, high water marking, appropriate hurdle rate).
• Most important is comfort with the fund manager. Be prepared to travel and do LOTS of meetings.
What do investors seek in long-short funds?
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Item Must Have Ideal Criticality (1-5: 5 is max)
Trustee Independent and reputed trustee company 1
Lawyer Get PPM drafted and vetted by an experienced lawyer. Same for fund structure
Get a white shoe law firm 4
Custodian & Fund Accountant
Custodian should have strong capital markets pedigree. Ask for AIF specific fund accounting software and expertise. Keep both common.
5
Brokers Brokerage rates and turnover should be watched very carefully
Trade through a panel of external brokers
3
Auditor An auditor who is well versed on trust taxation and AIFs Big 4 3
Registrar Not really required. A good custodian can handle. 1
Important hygiene factors
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New Fund Ideas / Themes
• Infrastructure is a massive opportunity
• Global venture capital firms will come to India
Category I Category II Category III
• High yield credit will move from mutual funds to AIF: better suitability.
• High yield credit will move from NBFCs to AIF: better capital efficiency.
• Crossover funds: Private Equity / PIPE can gain traction.
• Capital solution funds: Private Equity / Structured credit.
• Tax reform in the 2019 budget can throw the floodgates open.
• Huge demand for long-short funds and innovation in the category.
• Commodities is a new asset class.
• GIFT city can throw up interesting opportunities.