Closed-end AIFs extend fundraising cycles as pandemic hits sentiment

The minimum target and the duration for the fund raise is mentioned in the private placement memorandum (PPM) along with the duration for extending the fund raising tenure, if required.
Several closed-ended alternative investment funds (AIFs), which had launched in the past two years and were in the process of completing the fundraising process after March, have sought to extend their fundraising in the aftermath of the Covid-19 pandemic, said people in the know.

Most private equity-focused AIFs are structured as closed-ended funds, with a defined tenure for fundraising and fund deployment, as well as exit. Fundraising usually extends for one to two years from the launch of the fund. Fund deployment could take four to five years and the exit another four to five years.

“All these three cycles have been affected during the pandemic,” said Divaspati Singh, partner, Khaitan & Co. “Though the commitments are coming in, we are seeing a lot of funds extending their fundraising cycles because of investor perception and the sudden lockdown.”

There are about 700 AIFs currently registered with the Securities and Exchange Board of India (Sebi). Fund-closing activities of an estimated 10-15 per cent of such funds may get affected by the pandemic.
“Our second fund launched last year had targeted raising Rs 600 crore. We have garnered about Rs 700 crore, but fundraising has been impacted in the past few months as investors have not been able to invest because offices have been shut; it has been difficult to manage all the paperwork online,” said an AIF manager.

The minimum target and the duration for the fundraise are mentioned in the private placement memorandum (PPM), along with the duration for extending the fundraising tenure, if required.

 

 
Asset managers, who were supposed to be on the road during this time, have pushed their plans to the end of the year, said Singh. “Investors who want to write a larger cheque are hesitant to commit as they cannot meet managers face to face. Others are backing off from their earlier commitments, delaying fund closure.”

Asset managers have the discretion to extend the fund-closing period, but need two-thirds majority approval from investors for up to two years from the end of the term. The decision has to be then intimated to the regulator.

A section of the industry had made representations to Sebi, seeking a mandatory extension for all those funds in the final stage of closing, and which have an extension clause in their PPM.
“New funds are generally open for fundraising for a certain period and some of them could be closing during the current lockdown. Given the current situation and the liquidity crisis being faced across the segments, such funds would want to extend the closing of the fund by three to six months. While the closing is governed by the terms of PPM, the industry was expecting clarity on whether to treat this as a material and reportable change," said Sunil Gidwani, partner, Nangia Andersen.

He added it has been cumbersome for funds to reach out individually to investors and get their consent, and it would be better if Sebi gave blanket approval to all funds depending on the extension period specified in the PPM.

Sebi had recently extended compliance test and reporting timelines for AIFs, but was silent on the issue of extending fundraising timelines.

AIFs are privately pooled investment vehicles, which collect funds from sophisticated investors, whether Indian or foreign. Investments by AIFs had risen to Rs 1.4 trillion for the quarter ended December 2019, clocking a 53 per cent rise in assets over the year-ago period.


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