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Alternative Investment Funds may shun bourses

Lack of interest from limited partners and poor liquidity seen as major drawbacks

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The Securities and Exchange Board of India’s (Sebi) decision to allow (AIFs) to list their units on stock exchanges is likely to receive a tepid response.

Sebi’s new AIF regulations, replacing the present norms governing venture capital funds (VCFs), will also govern private equity funds, real estate funds and hedge funds, among others. The new norms will allow listing of AIF units on exchanges, subject to a minimum tradable lot of Rs 1 crore. However, AIFs will not be allowed to raise funds through the stock exchange mechanism.

Under Sebi’s present VCF regulations, venture capital funds are allowed to list their units only after three years from the date of issuance. However, this provision has seen lukewarm response and no VCF has listed its units on stock exchanges.

NO listing RUSH 
  • AIF investors prefer their capital-plus returns in cash during the fund’s tenure rather than take liquidity risk through listing of units
  • in AIF units on stock exchanges may be dampener
  • Most AIFs do not operate to deliver short-term quarter-to-quarter performance
  • Poor returns from the units listed on global exchanges could also discourage AIF investors

According to industry executives, AIFs will not be keen to list their units on the exchanges, due to from limited partners (LPs), or investors in these funds.

“How many are likely to avail this option of listing the units is debatable. Typically, LPs prefer their capital-plus returns in cash during the fund tenure, rather than taking liquidity risk through listing of units,” said Raja Kumar, founder and CEO of Ascent Capital Advisors.

Poor liquidity in these instruments on a stock exchange platform is likely to be another reason for AIFs to stay away from listing of their units. “Listing would make sense only if the market is wide and deep enough to allow frequent, if not active, trading in AIFs. That can happen only if there are a large enough number of active participants as AIF investors,” said S M Sundaram, partner and chief financial officer at Baring Private Equity. “Else, we will only end up adding to the number of illiquid stocks, which already constitute a significant part of the current listed markets.”

Experts say they are waiting for details of the AIF regulations, to know whether the funds can list their units from the beginning itself. Also, the focus of most AIFs is to deliver returns over a medium term and listing of units may prove a distraction.

“The key issue is, these funds do not operate in a manner to deliver short-term quarter to quarter performance and are instead focused on delivering returns over the medium term. The stock exchanges will find it difficult to value this appropriately,” said Vikram Utamsingh, head-private equity advisory, KPMG India.

Poor returns from the units listed on international stock exchanges could also discourage LPs, experts say. “Internationally, there are a few funds that are listed and so far, their performance on the respective stock exchanges does not seem to suggest that the listings have been successful for investors,” said Utamsingh

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