Indian GPs patiently await $28bn of pension, insurance inflows for alts

A series of Indian regulatory changes 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.

According to Indian Private Equity & Venture Capital Association estimates, insurance inflows could amount to $20 billion to $24 billion by 2030, assuming allocations of between 1 percent and 3 percent. Private pensions could represent an additional $2 billion to $4 billion based on allocations of 0.5 percent to 3 percent.

“There is a decisive move towards opening up domestic capital for alternative assets,” Renuka Ramnath, founder of Mumbai-headquartered Multiples Equity and IVCA chair, told 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

Reaching $24 billion of alternatives allocations by 2030 may be easier said than done for insurers. As of late July, there were only 10 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.

For voluntary pensions, beneficiaries may choose to invest up to 5 percent of their pension in alternatives investment funds – an already small figure that may be diminished further by a lack of public awareness around such asset classes.

“The whole framework needs to change in terms of investment; this change itself will not bring in the money, I think,” said 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.

“I think they will be investing, but it will take them a little bit more time,” MOPE’s chief executive Vishal Tulsyan said during a virtual press conference on 20 July. “It’s bound to happen, but whether it’s going to play out in the next six to 12 months in a big way could be difficult to say.”

Getting the ball rolling

IVCA has enlisted the help of Caisse de dépôt et placement du Québec and CPP Investments – two of the largest private equity investors globally – to help guide Indian pensions through the process of setting up a dedicated programme.

“We are trying to bridge the awareness gap by bringing some of our world class LPs who are already investing with GPs, and are therefore quite familiar with the market,” Ramnath said. “Through IVCA we are already conducting a few training programmes and already make it a way of life where we bring the knowledge of the west to our Indian pension funds.”

Industry participants are optimistic that these reforms will catalyse the development of India’s alternatives ecosystem more broadly, with PwC already seeing managers launching new strategies in response.

“Fund of funds are coming now,” Sachade noted. “The journey has started.”