Quietly but steadily, Alternative Investment Funds in India have become more than a niche corner of asset management. Over five years, total AIF commitments grew at a cumulative annual rate of 38% to cross Rs 8.3 lakh crore — roughly US$101 billion.
Within that, the heavyweight is clearly Category II, growing at 45.7% CAGR against around 16% for Category I and 20% for Category III over the same period.
| Category | What it invests in | Share of commitments |
|---|---|---|
| Category I | Early-stage ventures, social ventures, infrastructure | ~7% |
| Category II | Private market equity, debt and hybrid instruments | 83% |
| Category III | Public-market strategies, akin to global hedge funds | ~10% |
A significant part of those commitments still comes from global institutions, but the domestic share has been growing rapidly — a real change in how Indian investors understand and price unlisted exposure.
To put the scale in perspective: private capital funding for Indian companies at the 2021 peak was around US$75 billion, driven largely by mega-cheques from global blue-chip private equity and sovereign funds. With over US$90 billion of commitments and nearly US$56 billion of undrawn capital, Indian AIFs are following the path of the public markets, where domestic capital has emerged as a significant driver of transactions and has reduced dependence on global sentiment.
Undrawn capital is a commitment to operate, not just to invest. Fifty-six billion dollars of dry powder is also several years of capital calls, allocations, statements and compliance.
The growth has been fuelled by a new breed of entrepreneurial managers stepping out of senior roles at global and domestic PE/VC firms. As in global markets, the new funds are more specialised in focus and have demonstrated the track record needed to raise successive funds. They have been supported by a regulatory regime that has facilitated that entrepreneurialism with light-touch regulation while giving global and domestic investors comfort on governance and investor protection. Adding to that is GIFT City, which is increasingly the preferred domicile for aggregating global capital to invest in India rather than using offshore venues.
The global context
Impressive as the growth is, Indian AIFs' private-market AUM represents less than 0.8% of global private-market AUM, estimated at around US$12 trillion. Globally, that pool has grown at roughly 20% CAGR over five years — a reflection of both better understanding of the asset class and its ability to generate alpha against public markets.
Median allocations by global institutions — endowments, insurers, pension funds — are estimated to have risen by over 500 basis points in a decade, alongside greater participation from family offices and HNI capital.
That growth has produced strategy proliferation: buyouts, secondaries, private credit, real estate, infrastructure. And within each, investors increasingly allocate to specialist sub-segments — venture debt rather than debt, industrial real estate rather than real estate, SaaS or fintech or blockchain rather than technology. Depth of specialisation lets managers underwrite better; it also lets larger platforms raise specialist funds by combining global fundraising relationships with sector experts.
Rising LP sophistication has also driven demand for co-investment. A World Economic Forum paper estimates the share of LPs using co-investments rose from 24% in 2012 to 71% in 2021 — used both to reduce blended fees and carry, and to double down on high-conviction positions or hold beyond a closed-ended fund's horizon.
The road ahead: three drivers to US$500 billion
1. Organic growth
Global private-market AUM has compounded at about 20% off an already high base. Our scenarios put Indian AIF AUM growth in the range of 18–25% CAGR, driven by higher allocations to Indian managers from global institutions plus stronger domestic flows.
This is both the largest growth factor and the one with the most upside, because large global pools have not yet taken meaningful exposure to Indian funds — some have only dipped a toe. Capturing it will require increasing institutionalisation of fund processes and deeper long-term relationships with global capital providers. And with domestic family-office and HNI capital becoming a larger component, funds will need a tailored approach to managing that segment too.
2. Shift of base to India
A favourable regime from SEBI and GIFT City continues to encourage managers to domicile funds in India rather than offshore, strengthened by greater long-term visibility on taxation. In the next phase, GIFT City vehicles are likely to become a route for Indian capital to diversify into global private markets as well.
The caveat is real: global capital is fleeting, and uncertainty over rules for funds or managers could materially undermine India's emergence as a fund-management hub. The delicate balance regulators have struck — investor protection alongside light-touch freedom for AIFs — is the thing to preserve.
3. Allocation by domestic institutions
Pension funds and insurers hold naturally long-duration capital and have been the bedrock of the global alternatives industry, where average institutional allocations to private markets have risen by over 500 basis points in a decade. The emergence of a large secondaries market has helped, because institutions attribute real value to having access to liquidity.
In India, insurers and pension funds face a 5% cap on alternative assets, and commitments actually made to private markets are estimated at under 0.5%. As understanding deepens and returns prove consistent, the step-up from this category will be gradual but significant — and stronger domestic institutional flows will in turn deepen the confidence of global providers.
Two obligations follow for managers. Reporting and investor management quality has to rise to institutional standards. And a visible commitment to liquidity matters — through regular distributions, or through supporting a secondary exit programme — because access to liquidity is what institutions weigh in an otherwise illiquid asset class.
What got us here won't get us there
VC and PE funds have been at the forefront of pushing their portfolio companies to adopt digital and technology initiatives. The savvier managers are realising the same argument applies to their own operations — because the scale-up ahead is exponential across three axes at once: number of LPs, number of portfolio companies, and number of vehicles and strategies.
Efficiency, under real pressure on yields, is the obvious benefit. The larger one is trust. Global and domestic institutions will expect high standards of reporting and, more pointedly, assurance about the integrity of information and allocations — which becomes materially harder with more investors and more strategies. Rising compliance obligations around both investors and portfolios push the same way.
Technology also has a role in liquidity: creating deeper pools for investors while preserving the controls managers need. A supportive environment for liquidity is part of what unlocks higher allocations from institutions and family offices alike.
And as LPs in India follow global peers in seeking co-investment and direct investment rights, the execution and ongoing management burden becomes challenging for GP and LP alike. Handling that well — execution, monitoring, exits — is a genuine strategic advantage in the eyes of an LP.
Exciting times for Indian private markets
With this many favourable factors, the sector is well placed to transition into its next phase and become a meaningful part of global fund management. Even at the top of our range, US$500 billion would be roughly 3% of global private capital — less than half India's expected share of global GDP.
Realising that potential will take a focused effort from funds to build institutional processes and relationships. Technology will be a significant facilitator, not a decoration.
Where this goes next
For the operational side of the same argument, read supercharging VC and PE funds with new-age tech, or see what institutionalising actually looks like in our case studies.