Indian GPs must show patience with pensions alternatives

As of this year, Indian pension funds are allowed to back alternative investment vehicles for the first time, but it could take months for them to see the results.

A series of Indian regulatory changes made in 2021, intended to unlock approximately $28 billion of institutional capital for alternative assets, could take time to have a material impact on the market.

In April, India’s Ministry of Labour and Employment authorised pension funds to back alternative investment vehicles targeting domestic small and mid-cap enterprises, social ventures, venture capital and infrastructure. Pensions are limited to funds larger than 1 billion Indian rupees ($13.5 million; €11.4 million) and cannot provide more than 10 percent of the vehicle’s total capital.

The move coincided with a circular from the Insurance Regulatory and Development Authority of India permitting local insurers to back India-focused alternatives funds of funds. Though certain insurers have been able to invest up to 5 percent of their AUM into alternative assets into alternatives since 2013, the reforms mean those less familiar with the landscape can gain exposure while reducing their potential selection risk.

“There is a decisive move towards opening up domestic capital for alternative assets,” Renuka Ramnath, founder of Mumbai-headquartered Multiples Equity and IVCA chair, tells Private Equity International. “There is much renewed confidence in the start-ups as the future job creators and wealth creators, there is a whole world of unlisted value creation opportunity that the economy is presenting. And this regulatory change is to address the opportunity to be appropriated by the pensioners and policyholders.”

Investable universe

But reaching their full potential in alternatives may be easier said than done for insurers. As of mid-2021, there were only four Indian GPs managing private equity funds of funds and one managing an infrastructure fund of funds, according to data from PEI and affiliate title Infrastructure Investor.

The largest of these vehicles is the $800 million NIIF Fund of Funds, which was launched in 2018 by India’s sovereign wealth fund, the National Investment and Infrastructure Fund. The vehicle backs local private capital funds in sectors such as green energy, social infrastructure and technology.

“The whole framework needs to change in terms of investment; this change itself will not bring in the money,” says Tushar Sachade, a Mumbai-based partner in PwC’s tax and regulatory services practice. “When people are committing money to pensions, they have to select what type of investments they want to make. That becomes challenging in terms of pension funds to get a buy-in from the pension committers, [and] there will be some level of regulatory change required beyond this to make it more practically possible.”

Indian mid-market firm Motilal Oswal Private Equity, for example, is seeking 40 billion Indian rupees for its fourth growth fund, and expects a smaller proportion of the vehicle to come from domestic investors than its predecessor. Local LPs are expected to provide about 50 percent of the fund, compared with about 75 percent of Fund III, with private equity activity among domestic pensions expected to level up slowly.