Wealth Management

Rise of owner-fund managers: implications for Indian investors

July 2018

Read Time: 4 minutes

Winds of change are blowing across the Indian investment management sector. Buoyed by easier regulations and tax clarity for Alternative Investment Funds (AIFs), investment advisory and Portfolio Management Services (PMS), and greater availability of domestic capital, star fund managers are turning entrepreneurs. The phenomenon of the owner-fund manager is gathering momentum, and we think this could change the face of the Indian fund management industry. 

Top factors driving fund managers to start their own outfits
1. Evolving AIF Regulations and tax clarity:
Setting up an onshore fund in India became a lot easier after SEBI introduced the AIF regulations in 2012. Launching onshore hedge funds became possible for the first time. As of 30 June 2016, SEBI had permitted nearly 235 entities to set AIFs. Category I and II AIFs have been given a tax pass-through status, ending much of the uncertainty related to the taxation of gains.

2. Rise of The Domestic Limited Partner:
There are larger pools of domestic capital available in India today and investors are looking for differentiated strategies that can help them maximize their returns. Alternative investments are becoming popular among this set. 

3. Increasing momentum of alternatives as an asset class: 
More than half of the 660 global institutional investors surveyed by Natixis Global Asset Management in 2016 said that it is essential to invest in alternatives to outperform in the broader markets. Investments made by AIFs surpassed INR 24,800 crore at the end of the second quarter of 2016-17, as against INR 11,255 crore at the end of September 2015. 

4. A new breed of fund managers eager to plug the gaps:
India has a wider pool of experienced fund managers, across asset classes today. These fund managers have the confidence, expertise, as well as a strong network of relationships to fly solo. Several fund managers are dissatisfied with the typical administrative hassles and incommensurate incentives at established funds and institutions. Payoffs in a smaller setup can be similar or even better than at larger organizations, without the hassles

The rise of owner-fund managers will have significant implications for wealthy Indian investors. These include :
• Availability of differentiated and tailored investment strategies: The depth and breadth of the industry will improve and sophisticated fund structures are likely to emerge.

• Greater choice, for both investors and fund managers: As more managers enter the fray and compete for funds, investors will be spoilt for choice. On the other hand, competent fund managers will be in a position to choose the investors they work with.

• Alignment of interests: We think newbie managers, in their bid to perform well and earn the carried interest, are more likely to act in the best interests of investors. 

• Negotiated fees: Fund managers may start charging a premium for their more tailored, focused services. Negotiating fees could become a common practice.

• Greater stability: If the fund manager is the owner of the investment firm too, the risk of the fund manager leaving the firm is minimized. Over the shorter term, investor-manager relationships can look more stable in an “owner-manager” fund setup.

• Lock-ins with star managers: In case of capacity constraints at funds, portfolio managers may not entertain new investors. This could be even more pronounced in the case of high-performing managers, whose services are in greater demand. As a result, investors will have to start making an effort to build relationships with star managers.  

In conclusion
The changing regulatory and taxation climate in India is finally beginning to foster a nurturing environment for newbie investment funds. Investment professionals with 10-12 years’ experience of delivering great returns are taking advantage of these developments to launch focused investment vehicles. 

While a few hiccups related to support infrastructure, taxation and fund raising remain, the stage has been set for deeper activity in the sector, including in the alternatives space. This will enable investors to further diversify their portfolios, choose from a larger range of investment opportunities, as well as demand more personalized services. We think this is sufficient reason for both investors and fund managers to be excited! 
Author: George Mitra, MD & CEO, Avendus Wealth Management

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