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Private Equity, Debt Securities, Fund of Funds, Hedge Funds and PIPEs

Alternate Investment Funds (AIFs) differ from regular investment asset classes such as stocks and debt securities. AIFs are privately pooled vehicles that are structured to rope in high net worth investors with an appetite for high risk and are attracted to high returns. AIFs include private equity, venture capital, hedge funds, angel funds, infrastructure funds, etc. 

AIFs are not regulated by the Securities and Exchange Board of India (SEBI) mutual fund regulations. However, SEBI mandates that AIFs to be registered category-wise based on the funds each category encompasses. For instance, category I AIFs include Venture Capital Funds, Angel Funds, Social Venture Funds, and Infrastructure Funds. Category II includes various equity securities and debt securities. These receive no concessions from the government, unlike some Infrastructure or Social Venture Funds that come with tax exemptions. 

Category II of AIFs includes:

Private Equity Fund

These funds invest in unlisted private companies in turn for a percentage of share ownership. As private companies cannot raise funds by issuing equity or through debt instruments, they seek out private equity funds to expand their business, develop infrastructure or fund new projects. Investing in an unlisted firm allows investors to unlock profits when the company goes public, especially if the company list at a higher price than the shares they have in hand.

Debt Funds

These funds seek out debt instruments of listed and unlisted companies, especially those with a lower credit score. This largely includes high yield debt securities clubbed with high risk.
Companies facing a capital crunch but having good corporate governance practices and high growth potential are considered to be optimal investment options for debt fund investors.

Fund of Funds

This instrument is a combination of several AIFs. The strategy here is to invest in a portfolio of other AIFs rather than making an independent portfolio or investing in a specific sector like social or infrastructural. However, Fund of Funds under AIFs do not issue units of funds publicly unlike in the case of Mutual Funds.

Category III AIFs include funds that trade to make short-term returns or funds for which there are no specific incentives offered by any regulator or the government. These funds include:

Hedge Fund

Hedge funds are formed with institutional and accredited investors pooling capital to invest in domestic and international markets to generate high returns. These funds are relatively less regulated when compared to mutual funds and other similar investment vehicles. They also take up leverage to a great extent and employ aggressive management styles for their portfolios. This makes hedge funds a more expensive financial instrument when compared to another tools. They typically charge 2% as asset management fees and 20% of the profits earned goes towards fees.

Private Investment in Public Equity Funds (PIPE)

These are privately sourced funds that are also managed privately and earmarked for public equity investments. This involves buying shares of publicly traded stock at a discounted price, enabling investors to purchase stakes in companies while companies selling stakes receive capital infusions to expand businesses. 

If you are interested in investing in unlisted shares, get in touch with Unlistedkart. We’ve created a vast ecosystem of pre-IPO and new-age companies for HNI, investors, and retailers to create wealth. And if you are a company seeking liquidity for ESOPs, we could add you to our network of potential buyers to help you grow your business.

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