Alternative investment products like private credit and venture capital are gaining traction in India, but they often carry hidden risks. These vehicles frequently differ from public market assets in terms of liquidity and regulatory oversight. Investors should understand how these structures operate before committing capital.
The financial landscape in India has seen a rapid increase in the popularity of alternative investment vehicles. From Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) to private credit offerings, wealth managers are increasingly pitching these as exclusive opportunities for high-net-worth investors. While these products are designed to offer diversification, they operate under a different set of rules compared to the publicly traded stocks that most investors are familiar with.
The Liquidity Disconnect
The most significant difference between public markets and alternative assets is liquidity. In the public market, shares of listed companies can be bought or sold within minutes, providing investors with a safety valve during times of market stress. In contrast, alternative assets like unlisted shares, private equity, or venture capital funds are inherently illiquid. Once capital is deployed into these structures, investors often face long lock-in periods. Exiting these positions is not always straightforward, as it usually requires finding a secondary buyer or waiting for a specific event like an Initial Public Offering (IPO). This lack of immediate liquidity can turn into a trap if an investor needs cash quickly during a personal or market downturn.
Regulatory Oversight and Governance
Publicly listed companies in India are required to follow strict disclosure norms set by the Securities and Exchange Board of India (SEBI). This ensures that critical financial and operational information is available to the public. Private entities, however, operate in a much quieter space. While they are not exempt from all rules, their disclosure requirements are often less stringent than those of listed companies. This reduced transparency can lead to governance risks. Investors in private structures may find it harder to track how their money is being managed, which increases the reliance on the fund manager’s integrity and operational expertise.
The Reality of Private Credit
Private credit is often marketed as a way to generate higher yields than traditional bank deposits or government bonds. However, it is essential to recognize why these yields are higher. Borrowers in the private credit market often seek these funds because they cannot access cheaper, regulated bank financing. This gap implies a higher probability of default. Furthermore, the performance of these funds is not immune to market cycles. During economic downturns, these structures can face stress if they rely on new capital inflows to provide liquidity to existing investors, creating a potential sustainability risk.
What Investors Should Monitor
Before considering alternative assets, investors should look past the marketing appeal of exclusivity. A critical step is evaluating the fee structure, as higher fees can eat into net returns. It is also important to scrutinize the fund manager’s track record, the specific exit strategy for the underlying assets, and the historical performance of the fund during previous market stress events. Understanding that these assets are not substitutes for liquid equity is key to maintaining a balanced and resilient investment portfolio.