#8thIWMC 2023 – Role of Alternative Assets in Portfolio Construction

Venkat Ramaswamy stands as a trailblazer in India’s alternative investment landscape. His presentation began with a straightforward observation: the global alternative asset industry has experienced a remarkable tenfold growth over the past 15 years, while the Indian counterpart has witnessed an astounding 45-fold expansion. Within this context, two prominent asset classes, private debt, and real assets, have emerged as pivotal players, now constituting a substantial 45% share of the Assets Under Management (AUM) in India. One of the most striking aspects is India’s potential for robust growth. Remarkably, private markets in India presently contribute a mere 3% to the country’s GDP, a stark contrast to the 14% and 25% figures observed in Europe and North America, respectively. This statistic underscores the significant room for expansion and development within India’s private market arena.

The evolution of InvITs and REITs in India has played a pivotal role in democratizing alternative investments within the country. The combined enterprise value of InvITs and REITs stands at approximately Rs. 4.5 lakh crore and Rs. 1.0 lakh crore, respectively. However, it’s crucial to exercise prudence when considering developer-led investment products, where the entity creating the product also manages it. Such products often carry elevated risks and display inconsistency in their performance.

Furthermore, during his talk, he stressed the importance of understanding the time horizon associated with alternative investments. He eloquently stated, ‘Money doesn’t come quickly in alternatives within 4 years!’. In most cases, a portion of the invested capital might be realized within 4 years, while exceptionally rare instances might witness a complete return within this timeframe. Generally, alternative investments require a minimum of 6 years to yield profitable results.

Global Family Offices exhibit a strong inclination toward alternative investments due to their ability to offer compelling risk-adjusted returns. Frequently, Ultra High Net Worth Individuals (HNIs) anticipate alternative investments to deliver returns akin to Private Equity (PE) investments, along with the liquidity characteristic of Infrastructure Investment Trusts (InvITs). It’s imperative to account for both liquidity requirements and return expectations when making decisions regarding alternative investments.

During his discussion, he highlighted the distinction between yield and credit, underscoring that yield represents the actual returns received, whereas credit pertains to the anticipated returns. In India, hedge funds are still in their nascent phase and exhibit potential for success.

Addressing concerns about valuations in the realm of private equity and venture capital, he made a noteworthy point. He suggested that if you’ve entrusted funds to a skilled manager, it’s wise to refrain from excessive questioning. Instead, allow the manager to execute their role effectively. The key lies in selecting a manager in the private equity and venture capital space whom you have faith in and can rely upon.

Although Credit Alternative Investment Funds (AIFs) are generating significant interest, their widespread adoption in India is still evolving. A notable apprehension with credit investments pertains to the question of reliability—’Will the promised returns in credit investments actually materialize, and is the issuer truly credible?’

In the realm of credit investments, the emphasis shifts from focusing solely on return on investment to a more nuanced approach. Here, the priority is on ensuring the repayment of principal amounts before directing attention to returns. Contrasting this with private equity, where the success stories often hail from Harvard Business School alumni, lending operates on a distinct paradigm. It’s important to acknowledge that unlike private equity, the dynamics of credit investing are more complex. It’s not a scenario where a small group of individuals, can proficiently handle credit operations.

He closed the session by saying:

“The next 10 years are India’s years, as long as we don’t stumble TOO OFTEN, 10% GDP growth zaruri nahi hai slow drive karenge toh bhi jeetenga”