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Indian AIFs, Limited Partners, wary of SEBI request for co-investment information
Photo Credit: Reuters

Indian alternative investment funds (AIFs) are concerned that market regulator Securities Exchange Board of India (SEBI)’s request for information on co-investment partners could dampen investor interest, multiple fund managers said, adding that they are keen to retain the co-investment model.  

The reason: Limited partners use co-investments as a way to deploy more capital in deals alongside the main fund. This ends up lowering the management fee and the carry (a cut in the profits) for limited partners or investors in funds. The co-investment framework has taken off in the Indian fund management industry over the last decade.  

What has upset them is that earlier this week, SEBI wrote to several domestic fund managers seeking information on all their co-investment arrangements with limited partners. The Economic Times reported earlier today that the markets regulator has asked fund managers to furnish co-investment arrangements with their limited partners signed over the past two years. The regulator wanted to ensure investor parity, the report said.  

“SEBI’s quest for investor protection is a critical enabler that has enormously helped the nations strident growth and development of the capital markets, and the AIF industry. It is important that their drive to remain contemporary also covers simple and easy methods  of Co-Investment by LPs/Investors, either through the fund, or via a sister pool or directly. This has now become a standard way of functioning for AIF VC/PE worldwide, and it’s important to legitimise this in India via an enunciation of a clear new SEBI Framework” Gopal Srinivasan, founder, TVS Capital Funds said.  

"Co-investments form an integral part of the LP-GP relationship, with LPs using funds as a means of diversification and discovery, especially in the unlisted space. In India, the AIF regulations define AIFs as pooling vehicles and do not specifically mention co-investments. The recent move by SEBI to investigate this seems to be a means of understanding market practises and its prevalence," said Siddarth Pai, co-founder of 3one4 Capital.

AIFs are a vehicle for sophisticated investors and co-investments are mutually beneficial to the LP and the GP as well as the attractiveness of an AIF as an investment vehicle, Pai said.

He added, "As per Indian regulations, co-investments seem to be most akin to a discretionary PMS (Portfolio Management Services) – so the question now is whether the AIF regulations would be amended to give cognizance to this worldwide market practise or whether the PMS regulations would need to be amended to incorporate this. I personally hope that the AIF regulations are amended, in a consultative manner, to allow co-investments to be driven by the Fund’s private placement memorandum and disclosed transparently to strengthen the AIF regime in the country."

Globally, co-investments are an integral part of investing through private equity and venture capital funds and serve many purposes for limited partners like access to deals, and lowering the fee and carry base, Nupur Garg, Founder WinPE, a not-for-profit advisory firm said. “For investors with small teams, this also allows them to leverage the expertise of a fund manager in diligencing and then supervising the investment till exit,” Garg, who is on the investment committee of multiple LPs said.  

"In an average co-investment, limited partners do not pay fee or carry to ensure no biases or conflicts are created for the fund manager. Co-investments done right can be a win-win for all three parties concerned - the company, the fund manager and the limited partner," she said.

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