India’s alternatives market has scaled, but remains under-institutionalised, says IVCA President Rajat Tandon

Alternative Investment Fund (AIF)

India’s alternative investment fund (AIF) industry has expanded rapidly over the past decade, with assets rising to Rs 13.5 lakh crore. Yet, the IVCA-Crisil-360One  report’s latest study highlights a structural imbalance. While foreign capital, family offices and high-net-worth investors have driven growth, participation from large domestic institutions and balance-sheet allocators remains limited. In a conversation with Moneycontrol, IVCA president, Rajat Tandon explains what the data reveals about this imbalance, where capital is actually flowing, and what could shape the next phase of growth.

The expansion reflects broader acceptance of alternatives, not speculative excess. AIF commitments have grown nearly 16x over the last eight years, reaching about Rs 13.5 lakh crore. What is important is that this growth is largely allocation-led, not driven by money exiting mutual funds. Investors are using AIFs to access strategies that are not available in traditional products — private markets, private credit, structured strategies and market-linked approaches. Alternatives have become a permanent allocation bucket rather than a tactical trade.

If alternatives have scaled so much, where does the imbalance lie?

The imbalance is in who the capital is coming from. Growth so far has been driven largely by foreign investors, family offices and high-net-worth individuals. Large domestic institutional and balance-sheet allocators (such as insurers, retirement pools and corporate capital) remain underrepresented. This matters because these pools bring long-duration, stable capital, which is critical as the market matures.

There is frequent reference to a 5% allocation limit for institutions. Why is this relevant now?

Domestic institutions are permitted to allocate up to 5% of their assets to AIFs. The relevance of this limit today is not regulatory change (the rule has existed) but the fact that actual utilisation remains negligible, well below 0.1% by industry estimates. As AIFs move from being niche products to mainstream investment vehicles, this unused headroom becomes a meaningful constraint on scale rather than a theoretical number.

At this stage of market development, institutional behaviour becomes a signal of maturity. These allocators typically enter only when governance standards, reporting quality and outcome visibility are sufficiently robust. Understanding their hesitation helps identify what still needs strengthening — whether that is track record depth, predictability of distributions, or operational comfort. Their participation is less about immediate flows and more about setting benchmarks for the ecosystem.

How would higher institutional participation change the structure of AIFs?

It would change both fund stability and capital planning. Foreign capital will continue to play an important role, but it is often more sensitive to global cycles. Domestic institutional capital tends to be longer-term and less volatile. Its presence can reduce vintage risk, smooth fundraising cycles and allow managers to deploy capital more strategically rather than opportunistically.

Category III AIFs are often cited as underpenetrated. What does the data show?

Category III AIFs currently manage about Rs 1.5 lakh crore, compared to total AIF commitments of around Rs 13.5 lakh crore. This is a relatively small share for strategies that globally form a much larger part of the alternatives universe. These funds run market-linked strategies such as long-only and long–short approaches. From this base, growth potential is significant, particularly if regulatory and taxation clarity improves.

Is performance a limiting factor for Category III and other alternative strategies?

Performance needs to be evaluated by strategy type. Some approaches have longer gestation periods than others. That said, there have been cases where returns from alternative strategies, including unlisted exposure, have compared favourably with mutual fund returns. The conversation has gradually shifted from headline IRRs to consistency, risk management and realised outcomes.

The report flags private credit as a fast-growing segment. What is driving this trend?

Private credit has expanded after banks and NBFCs turned more cautious following the NBFC stress period. This created demand for alternative sources of capital. Today, private credit funds are active in infrastructure, real estate, and growth-stage companies between Series B and Series D. These are areas where capital demand remains strong but traditional lending is constrained. The report also points to growing dry powder in this segment.

How are family offices positioning themselves within this evolving market?

Family offices have become more selective and institutional in their approach. Capital is increasingly concentrated with established managers, particularly those on their fourth fund or later. Roughly one-third of IVCA members are on Fund IV or beyond, reflecting growing maturity within the ecosystem. First-time managers, especially in deep-tech strategies, continue to face higher scrutiny until outcomes become visible.

The report highlights DPI as a key metric. Why has this become important now?

DPI — distributions to paid-in capital — measures how much cash has actually been returned to investors. As the market matures, investors are focusing less on interim valuations and more on realised outcomes. The report shows improving DPI trends across several AIF categories, which is critical for building confidence among more conservative and institutional allocators.

What does all this suggest about the next phase of India’s alternatives market?

The growth phase is already behind us. The next phase is about institutionalisation. As governance standards strengthen, outcomes become more visible and participation broadens beyond early adopters, the alternatives ecosystem can scale in a more stable and sustainable way.