What to make of HDFC AMC’s first product in alternative assets

The FOF is currently open for subscription. According to its presentation, the AMC plans to raise Rs. 1,500 crore with an option to collect up to Rs. 1,500 crore more through a greenshoe option. The FOF is expecting its first close before March-end.

As per Sebi regulations, the minimum commitment amount in an AIF is Rs. 1 crore. With the aim of making the scheme accessible to more investors, the AMC will take this commitment amount over a period of five years. As an FOF, the scheme will provide investors the opportunity to invest across many AIFs without having to commit a significantly larger sum had one invested individually in each of these funds. According to the AMC, the FOF is for investors who want a diversified exposure in the unlisted space – with a portfolio comprising of investments in zero-day to pre-IPO stage ventures.

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About the fund

HDFC Select AIF FOF – I will invest in 12-15 VC/ PE funds differentiated by stages (underlying funds investing in early and late-stage ventures), sectors and vintages (underlying funds with different start years for deploying investor money). Among the criteria for shortlisting funds are — investor profile of the underlying funds; quality of the fund team; fund’s exit record; and governance standards. In terms of investor profile, funds attracting domestic and foreign institutional investors will be viewed more positively.

To ensure skin in the game, the AMC will commit a minimum of 10% of the capital raised from clients to the fund from its own capital. The FOF will have a tenure of 11 years with the option to extend the tenure by up to two years (one year at a time) subject to approval from two-thirds of the investors by value of their investment. The underlying funds will have a tenure ranging from 7-10 years (plus two years). The FOF expects to start retiring capital (returning money to investors) from the sixth year onwards.

The FOF will have two share class of investors. Class A will be charged annual management fee of 2% (of the committed amount for the first five years, and thereafter, of the net capital invested). For Class D, the annual management fees will be 2.5%. Apart from this, both classes will be charged a one-time set-up fee of up to 0.1%, annual operating expense of up to 0.15%, and performance fee (profit share) of 20%. This is including the fee charged by the underlying funds. Since the underlying funds are Category-I and Category-II AIFs that enjoy tax pass-through status, they will return full capital to the FOF (with no TDS or tax deducted at source). The FOF will deduct 10% TDS before passing on the investment proceeds to the investors.

Non-resident Indians (NRIs) except those based out of Canada and the US can invest in the fund. However, US-based NRIs can invest in the fund provided they are in India at the time of making the investment.

Other funds

While this is the first AIF from HDFC AMC, this is not the first FOF in this space. Kotak Mutual Fund and Nippon India Mutual Fund too have FOFs that invest in AIFs, as does Waterfield Advisors.

Lovaii Navlakhi, CEO of International Money Matters, a Sebi-registered investment advisory firm, says he doesn’t see a compelling reason for investing in HDFC Select AIF FOF – I. “If it is offering something that is not currently available in this market, then it’s worth evaluating. Otherwise, I would wait for a track record before I recommend it,” he says. According to Munish Randev, founder & CEO, Cervin Family Office & Advisors, this product is primarily for mass-affluent investors who have ₹1 crore to Rs. 7 crore to invest in total in the venture capital space, and for that amount, they can’t get enough diversification across funds in this space. The minimum investment for some of these funds can otherwise be quite high. This is surely not a product for HNIs, ultra HNIs, and family offices.