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Credit funds, family offices fill void left by banks at AIFs

June 21, 2024

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The Private wealth funds and family offices are stepping in to fill the gap left by banks and non-banking finance companies (NBFCs) in investments into alternative investment funds (AIFs) following the Reserve Bank of India’s tightened norms for financial institutions investing in AIFs. Vivriti Asset Management, which had a 15% share of banks in its first fund and 10% in the second, has not seen any participation from banks and NBFCs in the latest fund. The entire fund is made up of private wealth investments only.

Banks and NBFCs now must ensure that the investments they make into AIFs are compliant with the RBI’s latest norms. The central bank came out with a circular in December 2023, requiring mainstream banks and NBFCs to divest their investments in AIFs that have funded any company that has borrowed from the bank or NBFC. The regulator had also raised provisions for banks or NBFCs investing in AIFs that subsequently lend to their borrowing companies.

Vivriti Capital is in the process of raising a new fund, Diversified Bond Fund 2, with a corpus of Rs.2,000 crores and a greenshoe option of Rs.500 crores. The fund is being raised from existing limited partners (LPs), ultra-HNIs and family offices. Banks and NBFCs are not investing in the fund this time, unlike in the earlier two funds, where they had contributed 10-15%. There was a slowdown in fundraising activity in the December-March quarter, which affected regulated and unregulated investors, leading to market flux and increased secondary market supply. The fund is targeting yield of 15%-16%. The first close of the fund is scheduled for this month, with deployment starting from June and July.

AIFs have been seeking clarification from RBI regarding the treatment of equity shares in the form of compulsory convertible instruments like compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs). There are roadblocks in terms of banks’ and NBFCs’ full-fledged investments into AIFs now because RBI has not yet formally clarified as to whether the equity equivalent instruments majorly invested in by AIFs, like CCPS and at times CCDs, will fall under the similar exemption category of pure equity. Due to the current reduction in banking inflows in the AIFs, the fund of funds, family offices and other institutions, both domestic and foreign, hopefully would fill in this void for the time being.

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