India's rapidly expanding family office segment is increasingly gravitating to alternative investment funds (AIFs), a trend that is set to grow even further in the next few years.

“AIFs in India have seen significant growth in recent years,” said Jiju Vidhyadharan, senior director - funds and fixed income, CRISIL Market Intelligence & Analytics.

“Overall commitments received by the AIFs have grown at more than 32 % compounded annual growth rate between June 2019 and June 2024.”

CRISIL Market Intelligence

Historically, a majority of investments in AIFs have come from foreign investors, Vidhyadharan told AsianInvestor.

“However, since the last few years, domestic investors including family offices have shown increased interest.”

“India has the third largest start-up ecosystem in the world. Being a pooled investment by nature, AIFs can be an ideal way to get exposure to a bouquet of start-ups at the same time thus diversifying the risks,” Vidhyadharan added.

Commitments in AIFs totalled Rs 11.78 trillion ($140 billion) at the end of June, according to local regulator Securities and Exchange Board of India.

AIFs in India are classified into three categories, and cover everything from private debt, private equity, hedge funds, social impact, real estate and venture capital funds.

Family offices are a relatively recent entrant in the AIF space given that they are themselves a recent phenomenon in India.

Family offices in India are expected to post 14% CAGR growth in assets over the next three years as they transition from wealth preservation to a growth-focused mindset, according to a report by Sundaram Alternates.

The explosion in family offices is also changing attitudes towards investing.

The report notes that Indian family offices are increasingly embracing alternative investments and are expected to increase allocation to alternatives by five percentage points to 18% in the next three years.

This aligns with a global trend, where family offices allocate more than 50% of assets to alternatives.

“The families used to manage the money themselves, with the help of a few wealth managers,” Sahil Kapoor, president, 360 ONE Wealth, told AsianInvestor.

Now they are realising the need to have at least one person in-house to oversee all these investments, he said, adding that there is also a desire to move away from traditional investing and invest in alternatives.

“Obviously, the allocations are much lower than traditional portfolios but they’re growing sharply.”

Allocations are growing also because now there are more offerings that appeal to family offices.Jaipur Investment

India's family offices are making big strides in alts investing.

Image credit: Shutterstock

“Family office allocation to alternatives used to be very small because the supply of high quality products was not there,” according to Anshu Kapoor, president and head of Nuvama Asset Management, an alternatives-focused asset manager.

“Very large family offices tend to make allocations directly and have the ability to do due diligence and access direct deals.”

“The next layer of family offices and HNWI investors are [the ones] entering the space via funds,” said Kapoor.

While venture capital is one of the most sought-after alternative asset classes among family offices, other alternative assets have also climbed.

India-focused private debt assets under management grew from about $18 billion by the end of 2023 from below $14bn at the end of 2022 – a 29% growth, according to Preqin data.

Preqin also said that India is now a regional leader in private debt, with assets under management higher than each individual market in the Asia-Pacific.

High-yield debt, structured credit, etc. have appealed the most to sophisticated investors given the mid-teens fixed returns with regular distributions, according to Yogesh Kalwani, head of investments at InCred Wealth.

“Real estate (commercial, residential), private real estate investment trusts (REITs) and Infrastructure investment trusts (INVITs) and infrastructure AIFs have also seen good investor interest given its high potential returns with ease of investment and diversification as compared to single asset ownership,” he told AsianInvestor.

Kapoor from 360 ONE Wealth also echoed the positive on real estate, particularly office properties.

In addition, there is interest in secondaries, especially as private equity has faced a fundraising winter, which usually throws up late-stage growth plays with good value.

“360 ONE Asset recently raised a $500 million secondary fund, where local family offices and the wealthy individuals contributed majority of the capital,” Kapoor added.

Roads are another interesting emerging asset class as are warehousing and data centres, he said.Lucknow Investment

“Earlier, many family offices and HNWIs (high net worth individuals) were investing in these sectors on a deal-by-deal basis, majorly through an unorganised market; now they are looking at doing it via funds,” Kapoor added.

Returns on these investments are also attractive, ranging in the high teens and above.

Within private equity, investors could look at an internal rate of return of 18%-22%, while with venture capital, they could look to make even higher returns,” said Kapoor of Nuvama Asset Management. Infrastructure, meanwhile, could generate 15%.

Co-investments are also rising in popularity.

“Family offices and HNWIs love deals. They like to seek out investments right along with the fund and it’s the same in other markets as well,” said 360 ONE Wealth’s Kapoor.

While private equity and venture capital have attracted the bulk of investment commitments, other assets are expected to grow rapidly as well,Ahmedabad Investment

“We expect high yield debt, infrastructure funds (road assets, power, real assets, INVITs, etc.,) and hedge funds to gain significant AUM over the next five years,” added InCred Wealth’s Kalwani.Surat Wealth Management