India's super rich now have a new toy to play with

Stressed asset funds could offer higher returns than traditional fixed-income funds, but holding period will be longer due to the risky underlying assets

Ultra-high net worth investors (UHNIs) looking for investment options other than the regular debt and equity are turning to Alternative Investment Funds (AIFs).

Until recently, most AIFs invested in real estate, private equity or venture capital. A new category that is slowly emerging is funds that invest in stressed assets or non-performing assets (NPAs).

These funds invest in troubled assets sold by banks, asset reconstruction companies (ARCs) or, in some cases, by promoters or sponsors of the companies.

The money raised is used to revive these stressed companies or projects and turn them around. Once the companies are operational and start generating revenue, investors get their returns.

Edelweiss Group was the first to launch such a fund, in 2012, called the Edelweiss Stressed and Troubled Assets Revival Fund (E-STAR). Recently, Srei Alternative Investment Managers (SAIML) launched a similar one, India Vision Fund. As these funds are in the AIF category, the minimum investment is Rs 1 crore.

However, these are only for select investors, even among UHNIs*, say experts. These funds are targeted at investors with capital, can understand the risk and are looking at this as the core component, as the fixed income-plus component of their portfolio, says Nalin Kumar, investment head, SAIML. "This fund is for investors who can understand the risks.''

Vaibhav Sanghavi, managing director, Ambit investment Advisors, says he'd advise clients to invest in such a fund for diversification. Stressed asset funds are in an illiquid space but provide great opportunity. "It requires a huge amount of domain expertise to invest in distressed assets. It is pertinent for investors to assess the risk-return matrix,'' he says.

There is opportunity only if there is recovery, points out Rajendra Kalur, director and chief executive, TrustPlutus Wealth Managers.

"There is scope for value buying because the assets are available at a discount or haircut. But, one needs to be patient and well-informed in terms of documentation and contract details,'' he says.

Nishant Agarwal, head of products, investment advisory and family office at ASK Wealth Advisors, says he'd prefer to wait, watch and monitor such funds, due to the lack of a performance record to judge the returns and exit route for investors.

"In terms of opportunity it will become big. Everything that goes into the fund need not become an NPA. Some promoters and businesses are genuinely good businesses. But, because the market is not very big, people find it difficult to evaluate,'' he says.

In terms of extent of disclosures, there is a comfort since AIFs are regulated by the Securities and Exchange Board of India (Sebi), says Sanghvi.

Agarwal agrees it is much better to go through a fund than try to invest in a risky asset directly, as a professional is managing it. But there are apprehensions about the whole legal system and how the asset will be retrieved in case it goes bad.

Longer investment horizon

India Vision Fund will largely look at infrastructure projects and those at a fairly advanced stage of funding. "We are looking at the last-mile funding and not purely new projects. The sweet spot for such projects comes after five to seven years. So, that will be the range of our investment horizon,'' Kumar says.

Investors will need to be patient because all AIFs have holding periods ranging from five to 10-11 years, points out Agarwal.

Higher returns than fixed income

According to Kumar, returns would be much higher than traditional fixed income funds. "It is premature to comment on the returns but they will much higher than eight to 10 per cent (a year),'' he says.

In fact, investors must not even consider it if returns are not higher than fixed income investments, says Agarwal. "These funds are low on liquidity, low on the credit curve and there is a higher risk of turnaround. So, investors could easily expect a premium of five per cent or more over traditional fixed income assets. I would say 15-18 per cent (yearly),'' he says.

Being fixed income, the payouts might be in the form of coupon rates but in terms of price, returns from such funds behave more like equity due to their volatility, says Kalur.

"Most of the assets are unrated and recovery happens after a fair deal of time. Also, there is no extra benefit of tax and some portion is destroyed for recovery. Beside, investors would have to bear the additional cost of investing through a fund,'' he points out.

Allocation to AIF

Investors must decide the cap keeping in mind that these are alternative assets, not core ones. So, Kalur advises allocation of not more than 10 per cent of the entire portfolio.

Agarwal says it can range from five per cent in the case of conservative investors to as much as 20-25 per cent in the case of aggressive assets.

According to Sanghvi, globally the percentage of allocation to AIFs is 12-15 per cent. In India it is negligible. So, we have a long way to go. But investors should look into the merit of these categories.

How India Vision will work

The fund is looking to raise up to Rs 2,000 crore from international and domestic investors, through private placement. It will look at projects which have a cash flow, as these are less risky.

While the focus will be largely on infrastructure projects, the fund may also look at other sectors that come in through the stressed assets space.

If required, the fund manager will have a say in the management.

"We will have the flexibility to come in and drive the assets, if required. Sponsors have ideas and they need capital. Investors have capital and they want returns. All of these need to get aligned in the right mechanism. If sponsors are not driving it correctly, then in the interests of investors, we will come in to ensure that alignment is being achieved,'' says Nalin Kumar.

The challenge is that banks want to sell stressed assets at a premium to the current value. "That is where we add value. Our ability is to explain to the banks why it is in their interest to sell it to the fund,'' he adds.

* UHNI is someone with an investible surplus (excluding real estate) of $30 million-plus.

Illustration: Uttam Ghosh/Rediff.com