Private equity funds outperform public market peers, shows CRISIL study on AIFs

Two-thirds of the 1,096 AIFs registered as of March 2023 were registered over the last five years.

Equity funds in private markets have outperformed their public market peers as of March 2023, according to a CRISIL report.

The report on the growth of alternative investment funds (AIFs) in India said that an analysis of 217 funds belonging to FY13 to FY22 showed that that Indian private markets (category I venture capital funds and category II equity funds investing in unlisted securities combined) outperformed their public market equivalents (using S&P BSE Sensex TRI) by 13.5 percent (as of March 2023).

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It added that the results were not driven by a few "superstars". A majority of more than 75 percent of the sample had an internal rate of returns (IRRs) above the public market equivalent (PME+).

There was a wide dispersion of returns between the the top and bottom performers —much wider than that in the public market.

As of March, between FY15 and FY20, the average spread between the top and bottom performance quartiles was 23.3 percent for Category-1 VCFs and Category-2 equity funds investing only in unlisted securities, compared with 5.4 percent spread between the top and bottom quartiles for the public market funds.

The analysts noted that AIFs have been growing in popularity over the recent years. Two-thirds of the 1,096 AIFs registered as of March 2023 came over the last five years.

Besides the higher returns given by the private markets, the analysts line up a few more reasons for this segment to keep growing. These include robust economic growth, rising entrepreneurship, a larger consumer base, higher adoption rate of digitalisation, a favourable regulatory environment and government initiatives.

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Domestic institutional investors such as retirement funds and insurance companies have also entered this space.

The segment has not gone unaffected by the global macroheadwinds - PE-VC funding fell by around 67 percent last fiscal. Given this, fund managers will be scrutinised for their "ability to make timely exits at favourable valuations", said the analysts.