• 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.
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!