Where They Invest (Typical Strategies)

Private Equity (Growth / Buyout)

Minority or control deals in profitable, scale-ready companies.

Private Credit / Structured Credit / Venture Debt

Secured or mezzanine financing, acquisition financing, unitranche, yield-oriented deals.

Real Estate (Equity or Credit)

Residential, office, warehousing platforms; project finance with collateral.

Special Situations / Stressed Assets

Turnarounds, IBC/NCLT resolutions, recapitalisations, bridge-to-exit.

Sector / Theme Funds

Manufacturing, healthcare, consumer, EV, renewables, logistics.

Fund of Funds (FoF)

Allocates to other AIFs (FoF cannot invest in another FoF).

Key Features (At a Glance)

Instrument Focus

Unlisted equity, prefs, NCDs, convertibles, SPVs, AIF units (FoF).

Leverage

Not permitted beyond short, temporary borrowing windows.

Tenure & Structure

Closed-ended; typically 7–10 years with possible extensions.

Capital Calls

Commitment & drawdown model aligned to deal execution.

Concentration Limits

Max 25% per investee; up to 50% for Large Value Funds (LVF).

Co‑Investment

Allowed on no-better-terms; exits synchronized with the fund.

Valuation

Independent valuer at least semi‑annually or on material events.

Why Investors Choose Category II

Access to Private Markets

Proprietary, negotiated deals are unavailable on exchanges.

Multiple Return Drivers

Blend of equity upside, coupon/yield, and special-sits payoffs.

Structured Downside

Covenants, collateral, and seniority in credit deals.

Manager Value‑Add

Active ownership, turnaround expertise, operational levers.

Diversification

Lower correlation to listed equity/bonds across cycles.

Tax Efficiency

Pass‑through avoids double taxation on non‑business income.

Risks & Considerations

Illiquidity: Capital locked till fund maturity; secondaries limited

Execution & concentration risk; outcomes hinge on selection and value‑creation.

Credit/default risk in debt strategies despite security and covenants.

Valuation/model risk; NAVs may be less responsive vs public markets.

Regulatory or policy changes can impact strategies and outcomes.

Understand waterfalls, carry, catch‑up, and expense caps before committing.

Ideal Investor Profile

  • 7–10+ year horizon; comfort with illiquidity.
  • Seeking private equity or private credit with governance.
  • Willing to accept selection risk for premium returns.
  • Diversifying away from listed markets and traditional debt.

Example Use‑Cases

  • Growth/buyout in a profitable consumer brand scaling nationwide.
  • Unitranche financing to a logistics platform with strong asset cover.
  • Warehousing platform (equity) with contracted leases.
  • Turnaround of a stressed manufacturing asset via IBC resolution.

Regulatory Framework (Essentials)

SEBI (AIF) Regulations, 2012 govern formation, limits, valuation, and reporting.

No leverage beyond strictly defined, temporary borrowing.

25% single‑investee cap; 50% for Large Value Funds.

Permitted vehicles: Trust, LLP, company, or other allowed structures.

FoF cannot invest in another FoF; co‑investment is on arm’s‑length terms.

Side‑pocketing permitted in defined circumstances to ring‑fence assets.

Quick FAQ

What is a Large Value Fund (LVF)?

A scheme with a higher minimum commitment (e.g., ₹10 crore) that gets relaxed concentration limits (up to 50% per investee).

How are distributions made?

Typically pro‑rata as exits occur; funds may follow American or European waterfalls per the PPM.

Are returns fixed in credit AIFs?

Coupons may be contracted; the timing/realisation of principal depends on covenants, collateral, and borrower performance.

Is Category II safer than Category III?

Generally less use of derivatives/leverage than Category III; risk depends on deal quality and strategy (PE vs Credit vs Special Sits).

Explore Category II AIFs with PMS AIF WORLD

Speak with our research team to understand fitment, fee models, and live opportunities across PE, credit, real estate, and special situations.

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