Alternative Investment Funds (AIFs)

How Alternative Investment Funds can transform its back-office for competitiveness and growth


Alternative Investment Funds (AIFs) need to leverage automation to leapfrog their growth journey in line with the macro-economic growth.


In brief

  • Alternative Investment Funds (AIFs) should optimize their back-office support functions, including investor communication, fund accounting, timely data reporting, in order to deliver an exceptional experience to their investors.
  • At present, many AIFs outsource back-office functions, struggling with data quality, accuracy, and timely financial and investor reporting. 
  • Alternative Investment Funds (AIFs) need to strengthen the governance framework over the work outsourced to such third-party vendors, standardize fund accounting practices, enhance internal controls, and leverage technology for end-to-end fund accounting and reporting.     

Alternative investment funds (AIFs) have gained immense popularity in India as they provide investors with a varied choice of alternative assets such as private equityreal estate, and infrastructure. AIFs offers diversification beyond conventional investment options such as equities, bonds, currencies, or gold. 

Despite market volatility caused by global challenges such as the pandemic, Russia-Ukraine war, energy, and oil crisis AIFs in India have shown resilience and piqued the interest of investors with features such as potential for high returns and niche investment opportunities.

The AIF market has experienced tremendous growth considering the growing popularity of AIFs among both domestic and international investors, robust government initiatives, and reforms by the Securities and Exchange Board of India (SEBI). Over the past five years, total Asset Under Management (AUM) (also known as commitments raised in AIFs parlance) has increased close to three times, from US$34,408 million in FY19 to US$101,680 million in FY23. 

Investing in good governance framework, technology and upskilling of resources is key to success and market competitiveness for AIFs.

Due to this growth, AIFs have been making consistent efforts to establish a robust governance framework that involves ongoing monitoring and evaluation of the fund’s operations, performance, and compliance with regulatory requirements. Some of the challenges are faced in key support functions like investor onboarding, end-to-end fund accounting and fund operations, regulatory and investor reporting, etc., particularly for those funds with outdated technology and manual processes. 

Further, these challenges may result in inadvertent errors in computation of NAV and key ratios of the fund’s performance to external investors. This may, in turn, result in loss of investors and other stakeholders’ confidence in the fund.

The regulatory framework for AIFs is also extremely complex and ever-changing, making it difficult to comply, especially when rules and regulations are frequently updated. Failure to track regulatory changes may result in penalties by the SEBI.   

As the number of AIFs in India grows, clients seek an all-in-one solution for onboarding, accounting, reporting, communications, and tax compliance. Having a one-stop integrated technological solution would allow AIFs to remain competitive and scale-up in the long run.

AIFs need to focus on defining KPIs for work outsourced to third-party vendors, emphasize compliance with regulatory requirements and standardize fund accounting practices. Going forward, while outsourcing fund accounting work, AIFs will need to embrace leading technological and innovative solutions for managing investor onboarding, fund accounting, MIS reporting and investor communications to provide the required value addition to its investor clients and scale up its business seamlessly as the economy grows.


Download the full pdf

Related articles

Year-end considerations for 2023: what organizations need to know

EY outlines the year-end accounting and financial reporting considerations for FY 23. Read more about the updates in financial reporting standards and accounting pronouncements disclosure 2023

Navigating the latest RBI guidelines on Interest Rate Risk in the Banking Book

EY highlights how important for banks to consider IRRBB, as not just a reporting metric but a strategic measure to manage balance sheets and profitability.

How entities in the financial services sector can plan their year-end closure

EY outlines the year-end accounting and financial reporting considerations for the financial services sector FY 23. Read more about the updates in financial services for year-end closure.


    Summary

    AIFs must strengthen its governance framework with a focus on transparency, accountability, and investor protection to foster investor confidence. A best-case scenario would entail having a single unified platform for investor communications, end-to-end fund accounting and reporting and upskilling, of resources due to the evolving nature of the AIF business.


    About this article