Sophisticated Investors look beyond conventional Investment Options. Alternate Investment Fund (AIF) caters to the need of a sophisticated Investor.
As per SEBI guidelines, AIF means “any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors”.
In simpler terms, AIF funds pool money from High Net Worth Individuals & invest in Start-ups, Infrastructure Companies, SMEs, or any business which has high growth potential.
It is a perfect blend of Mutual Funds & PMS. The operations are similar to a mutual fund where the pooling of funds from the individual is common. The ticket size & alpha generation is similar to PMS.
Table of Contents:
- What is Sundaram Alternates -Emerging Corporate Credit Opportunities Fund – Series I (ECCO-1)?
- What is Category II AIF?
- Basic details of ECCO-1
- Deployed Deals worth 33 crores of ECCO-1
- Pipe Line Deals worth 280 Crores of ECCO-1
- Inference from the above details
- Who is Suitable for Investing in ECCO-1?
- Limited or zero overlapping of ECCO-1 with your other Investments
- Less Volatility of ECCO-1
- Growth Avenue of ECCO-1
- Risk Involved in AIF
An overview of ECCO-1 & Category II AIF
What is Sundaram Alternates -Emerging Corporate Credit Opportunities Fund – Series I (ECCO-1)?
The primary investment objective of the Emerging Corporate Credit Opportunities Fund – Series I (ECCO-1) Fund is to undertake activities of a Category II AIF and invest in high-yielding debentures and mezzanine securities (including equity warrants) primarily to;
- Services Companies in the Non-Real Estate Sector
Which are backed by a combination of business cash flows, promoter assets, corporate guarantees, share pledges (including unlisted majority / blocking vote shares), and other security structures, as may be applicable.
What is Category II AIF?
ECCO comes under Category II AIF. As per SEBI’s definition, Category II AIF is AIFs that do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements.
AIFs that invest in a business’s unlisted or private space either in debt or equity come under this category. Various types of funds such as;
- Real Estate Funds
- Credit Opportunities Funds
- Private Equity Funds (PE funds)
- Funds for Distressed Assets, etc. are registered as Category II AIFs.
ECCO-1 comes under the credit opportunities fund, which is utilized in the form of debt financing to support the business cash flow of Mid-Sized companies.
Basic details of ECCO-1
You can find the basic information about the Sundaram Alternates -Emerging Corporate Credit Opportunities Fund – Series I (ECCO-1) below;
|Fund Name||Emerging Corporate Credit Opportunities Fund – Series I|
|Investment Manager||Sundaram Alternate Assets Limited|
|Trustee||Sundaram Trustee Company|
|Sponsor||Sundaram Finance Limited|
|Type of investors||Indian Residents (Individuals, Companies, Trusts, etc.); NRIs – Through NRO / NRE bank accounts (except US persons)|
|Fund Status||Launched in May 2022; open for investment (Initial Closure – January 02, 2023)|
|Fund Currency||INR denominated|
|Fund Structure & Size||Close Ended Category II AIF; Target Size INR 500 crores at Final Close plus a green shoe option to accept additional INR 500 crores|
|Total Commitments to date||INR 205 crores (Initial Closure – January 02, 2023)|
|Capital called from investors||INR 53 crores|
|Deals recommended by Investment Committee||INR 64 crores|
|Pipeline (Quarter-to-date)||~INR 280 crores|
|Distributions to Investors||• Pre-closure liquid returns: ~INR 18 lakhs which will be distributed on allotment of units.
• Quarterly income distributions from the Fund will commence beginning QE March 2023 when the Fund invests in deals.
|Drawdown||First Drawdown – 25% of Capital Commitment; Subsequent Drawdowns on an as-needed basis within 12 months of closing|
|Term of the Fund||6 Years (Extendable by 2 Years with approval of a supermajority of investors by value)|
Deployed deals & deals that are in Pipeline for ECCO-1
So far ₹ 53 Crores capital called in from investors. Out of ₹53 crores, 2 deals are finalized & funds worth ₹ 33 Crores have been deployed.
Five more deals worth ₹ 280 Crores are in pipeline. All these metrics are as of Jan 2023.
|Net contribution called from Investors||~INR 53 crores|
|Deployed into deals||INR 33 crores|
|Repayment of principal from investees||N/A|
|Capital available with the Fund||~INR 20 crores|
|Deal deployment expected in Q2 CY23||~INR 200 crores|
Deployed Deals worth 33 crores of ECCO-1
|Investments||Sector||City||Deal Size (Crores)||Disbursed (Crores)||Tenure (Years)||Security Cover||Contracted IRR %|
|Jaap Clothing Private Limited||Textiles||Coimbatore||22||22||5||2.65x||20.30%|
|Arka Eduserve Private Limited||Education||Bengaluru||42||11||5||1.50x||18.00%|
Pipe Line Deals worth 280 Crores of ECCO-1
|Deal||Sector||City||End Use of Capital||Deal Size (Crores)||Tenure (Years)||Security Cover||Contracted IRR %|
|Deal 1||Infra||Bengaluru||Bridge financing||70||2||2.5x||19.00%|
Capital & Fees Structure of ECCO-1
All expenses below are excluding applicable taxes;
- Set up fees – Up to 2% in each case;
- Administrative expenses – Up to 0.50% p.a.
The Basic fee structure has two components.
The first one is management fees which are based on the amount invested – the higher the amount, the lower the fees.
The next one is the performance fee which is based on the alpha generation. If they were able to meet the hurdle rate, then a performance fee is charged.
|Share class||Min investment (INR Cr.)||Management fee (p.a.)||Hurdle rate (pre-tax INR IRR)||Performance fee (without catch-up)|
Performance review of Sundaram Alternates
Sundaram Alternates offers both Portfolio Management Service (PMS) & Alternative Investment Fund (AIF).
Under the AIF category, ECCO-1 is open for subscription & in category III, Atlas 1 & Atlas II is open for subscription.
The following table will give you a glimpse of funds managed by Sundaram Alternates under AIF.
|Category II AIF||Launch date||Maturity||Deal IRR|
|RE Credit Fund – I||Aug-17||Oct-22||19.34% (Exit IRR)|
|RE Credit Fund – II||May-19||–||19%|
|RE Credit Fund – III||Jul-21||–||19.40%|
|Emerging Corporate Credit Opportunities – I||May-22||–||16-18%|
|Category III||Launch date||Maturity||Deal IRR|
|Sundaram India Premier Fund||Sep-18||–|
|ACORN mid & small cap fund||Feb-20||–|
|ATLAS I, an open-ended multi-cap AIF||Jan-22||–|
|ATLAS II, a close-ended multi-cap AIF||Dec-22||–|
When you look at the above table, there is only one fund that has matured & closed. You could see the actual return (Exit return) of RE Credit Fund – I as 19.34%.
ECCO-1, Atlas I & Atlas II are still open for subscription & are ongoing schemes. All other funds (other than these 3 funds) are closed for subscription & are ongoing projects (yet to mature). So, there is no data available to analyze the cash flow & the potential return we might get by investing in the funds offered by Sundaram Alternates.
Inference & Analysis of ECCO-1
Inference from the above details
The Minimum ticket size is ₹ 1 crore & there after 5, 10 & 25 crores is the maximum limit. Currently, it is still open for subscription but it is a close-ended scheme.
The tenure is 6 years, the capital repayment starts after 4 years. Meanwhile, you will be receiving returns every quarter from Apr 2023.
To Whom Investing in Sundaram ECCO-1 is Suitable?
When you look at the details of the fund it is clear that ECCO-1 is suitable for
- those who are well-off.
- those who have built corpus through various assets class & invested in a wide spread of investment avenues Viz. Direct Equity, PMS, Mutual funds, Gold related investments, Real estate, etc.
- those who have an aggressive risk profile.
- Those who want to diversify beyond traditional investments
Limited or zero overlapping of ECCO-1 with your other Investments
There is zero overlapping of underlying securities between the stock market & ECCO-1.
In direct equity, there is a list of companies that are grouped as Large, mid & small cap stocks.
Whereas, under AIF most of the investments are made in Start-ups & medium & small-scale enterprises. So, ECCO-1 investments do not overlap with any of your other investments.
Less Volatility of ECCO-1
Short-term volatilities generally upset investors.
Under ECCO-1, though the investment risk is high, it is not as volatile as the stock market.
Also, AIF is not affected due to the ripple effect of other stock market movements.
Growth Avenue of ECCO-1
There is a huge opportunity for capital investment in India. Especially MSME & SME areas have a lot of scope for growth in the upcoming years.
ECCO-1 focuses on these companies which require capex. Most of the businesses are in the Southern part of India & with few in Maharashtra & Gujarat. To mitigate risk, they restrict credit ranging from BB to A.
They look for sustainable growth during the lending period & also study the revenue history. The pipeline deals indicate a diversified investment covering Textile, Pharma, Financial Institutions, Hospitality, and Healthcare.
They plan to provide capital for a tenure of 5+ years & their target IRR is 17% -18%.
Risk Involved in AIF
This new-age investment should not be chosen based on the returns alone, the consistency of the return & the risk involved also needs to be evaluated.
As we do not have much data on past performance to analyze the overall performance of these types of investments, the risk is on the higher side.
Final verdict of ECCO-1
ECCO-1 is ideal for Very High Net Worth Individuals as the minimum ticket size ranges in crores. Those who are having a strong asset base through a wide range of asset classes can consider this for diversification.
Even for VHNIs, should be placed in your Investment Portfolio only if it adds value to your Portfolio. Also, don’t plunge into funds without analyzing your risk appetite as there is a risk to principal investment too.
ECCO-1 offers quarterly income but bear in mind that any income (other than business income) generated by the fund will be taxed at the hand of the investor and not by the fund house (pass-on status).
It is an illiquid investment as it is a closed-ended scheme. It can be part of your satellite portfolio & not a part of your core portfolio. It is necessary to deep dive in & understand the whole process before making any investment decision.
You must consult with a Professional Financial Advisor before making any huge investment decisions as your Investment Portfolio needs to be stable.