Co-investment rules bring flexibility
Samir Satyam, Fund Manager at PL Capital Performing Credit Fund, says SEBI’s proposed framework marks a
“pivotal shift” for Category II AIFs.
Earlier, co-investments had to flow through separate PMS or entities. This meant dual registrations, fragmented governance, and more paperwork.
“The new rules introduce Co-Investment Vehicles (CIVs) directly linked to the main AIF,” says Satyam.
This allows deal-specific participation under one structure.
“This reduces legal and operational burden. More importantly, it aligns entry and exit between the AIF and co-investors,” he adds. The result: fewer conflicts on deal timing, valuation, or returns.
Brijesh Damodaran Nair, Managing Partner at Auxano Capital, agrees. “Clearer guidelines on co-investments and downstream deployment make Category II AIFs more nimble,” he says.
This helps funds move faster in private credit and distressed asset plays.
New costs worry smaller AIFs
While flexibility has improved, some updates add cost pressure. Seema Chaturvedi, Founder & Managing Partner at AWE Funds, points to SEBI’s new reporting requirements.
“Cybersecurity reports like VAPT add extra costs. For smaller AIFs with tighter budgets, this is a burden,” she says.
Also, fund managers must now clear the NISM exam. “While protecting investors is right, more flexibility for smaller funds would help manage costs,” Chaturvedi adds.
Who’s investing in Category II AIFs?
Family offices and HNIs are driving fresh capital.
“Family offices, especially, are shifting towards alternatives and real assets,” says Satyam. Private credit offers diversification, capital preservation, and better yields than bank deposits.
Damodaran Nair notes that “sophisticated HNIs and family offices naturally fit Category II AIFs.”
Institutions mostly stick to large-ticket, plain-vanilla strategies unless they have a dedicated alternatives mandate, he adds.
Private credit demand rises
Private credit under Category II AIFs is booming. Satyam says India’s 15,000-20,000 mid-market firms face a big credit gap.
Traditional banks avoid many use cases due to strict norms. “Private lenders can step in with bespoke solutions,” he says.
Damodaran Nair adds that post-COVID supply chain shifts and new capex cycles have created fresh demand for quick, flexible capital.
“Banks are conservative. Private credit fills the gap,” he says.
The numbers back it. Cat II AIFs’ commitments have grown at 21% CAGR over three years. Private credit’s share in total alternate AUM jumped from 2% in 2005 to 17% now.
“The AUM surged 28x from $0.7 billion in 2010 to about $20 billion in 2024,” says Satyam.
Due diligence is crucial
For lenders, robust checks are non-negotiable. Satyam says mid-market, promoter-led firms need multi-layered due diligence. This means deep dives into financials, operations, legal titles, valuation benchmarks, and promoter track record.
Damodaran Nair agrees: “It must go beyond numbers — site visits, vendor checks, forensic reviews, and understanding the promoter’s intent are vital.”
Fueling India’s $5 trillion goal
Experts believe private capital through Category II AIFs is vital for India’s $5 trillion economy target. Satyam says these funds plug credit gaps where banks pull back. They boost capacity, formalisation, and jobs.
“It’s not banks vs private credit. It’s banks plus private credit that will power growth,” he says.
