PREFACE
AIFs are established to mobilise funds from domestic & foreign investors for investment as per pre-defined criteria & guidelines. In May, 2012, Securities Exchange Board of India had prescribed regulations for AIFs, replaced the then existing SEBI (Venture Capital Funds) Regulations,1996.As per such regulations, there are three types of AIFs which mentioned below:
CategoryI- VCFs,Small and Medium Enterprises (SME) funds, infrastructure funds and social venture funds.
CategoryII - Private equity funds, and debt funds.
Category-III Funds in the nature of domestichedge fund structures.
The AIF Regulations are an attempt to extend the perimeter of regulation to hitherto unregulated funds, so as to ensure systemic stability, increase market efficiency, encourage formation of new capital and provide investor protection. Based on the above, Infomerics has formulated the rating methodology for rating of AIFs. The AIF rating methodology encompasses detailed evaluation of Sponsor, study of Investment Manager’s track record & expertise in the respective segments or asset classes they manage, risk management mechanism, investment processes and operations & technology preparedness.
WHAT IS AIF RATING
AIF Rating is an opinion on the asset selection ability and asset management capabilities in the relevant segment i.e., the industry / sector / asset class in which AIF desires to deploy the fund.
What AIF Rating is not?
AIF ratings is not a recommendation to buy, sell or hold a security / units in a fund. Also it does not comment on the future performance of the fund in terms of appreciation, fluctuation in net asset value (NAV), or yield of the fund. The rating does not indicate the ability of the fund to meet the payment obligations to the unitholders.
RATING METHODOLOGY
DETAILED EVALUATION OF SPONSOR
a) Business model & objectives of Sponsor.
b) Qualification & experience of the senior management.
c) Stature of the group and market position.
d) Growth.
e) Profitability.
f) Capital structure gearing.
g) Asset quality.
h) Liquidity position.
i) Resource mix and raising ability.
j) Sponsor’s financial commitment to AIF.
k) Strategic importance of AIF to Sponsor.
l) Business linkage with segments/sectors AIF proposes to deploy.
m) Sponsor’s track record & experience in the targeted segments/sectors.
STUDY OF INVESTMENT MANAGER’S TRACK RECORD & EXPERTISE
a) Board of Directors & composition.
b) Presence of independent directors.
c) Investment Committee & composition.
d) Any independent member in Investment Committee.
e) Other Committees like Risk Management Committee, Investment Committee,and Valuation committee.
f) Experience of the key managerial personnel in fund management in different segments/sectors/asset classes, including the segment the AIF proposes to invest.
g) Investmentplans & policies.
h) Geographical spread.
i) Clientprofile.
j) Asset class in which fund proposes to invest.
k) The size of the AMC in relation to it speers.
l) Amount of funds under management for a particularsegment in which the AIF proposes to deploy funds.
m) Qualityofthirdpartyvendors.
n) AMC’s ability to cover expenses, sufficiency of cash in hand to meet unexpected contingencies and operating expenses in a period of severe stress, in case of open-ended schemes.
RISK MANAGEMENT MECHANISM
a) Frame work for identifying & measuring various risks like market risk, credit risk, operational risk and liquidity risks.
b) Risk estimation techniques like value at risk,scenario analysis, stress test, default risk,etc.
c) Risk monitoring processes.
d) Internal limits in terms of exposure by obligor, geography, industry and sector.
e) Key Man Risk covering the number of key personnel in the AMC, their responsibilities,in centive structure and whether they have any investment in the AIF.
f) Level of acceptable risk & measures taken to mitigate, if necessary.
INVESTMENT PROCESSES
a) Investment objectives.
b) Internal investment appraisal system – quality & soundness.
c) Investment limits to contain concentration risk.
d) Periodicity of Investment Committee Meetings.
e) Research support - captive or outsourced or both.
f) Regulatoryguidelines– compliance status.
g) Maturity profileof the investments vis-a-vistenureofthefund and the proposed maturity profile incaseof newly launched AIF.
h) Analysis of portfolio - periodicity&methods of valuation of illiquid investments, credit rating of the investments & external ratings and rating migrations.
OPERATIONS & TECHNOLOGY PREPAREDNESS
i) Internal controls and adequacy of theinformation system.
j) Quality & timeliness of information system.
k) Thequalityofback officesystems.
l) Checks & balances.
m) Segregation of trading and back office operations.
n) Compliance withdefinedpolicies.
o) Organization Structure.
p) Disclosure and Transparency.
q) Pendinglitigation, if any.
r) Level of statutory and regulatory compliance.
s) Adequacy of staff and the existence of separate department/wing for different activities like front office activities, operations ,investmentteam and risk management.
t) Timelinessand quality of the investor reporting.
u) Adequacy of the physical and IT infrastructure with respect ofstorage & data integrity, data back-up, mitigation of business continuity risk, etc.
RATING SCALE AND DEFINITIONS
Rating | Definition |
---|---|
IVR AAA (AIF) | The asset selection ability and asset management capabilities in the respective segments/sectors for these funds are expected to be very good. |
IVR AA (AIF) | The asset selection ability and asset management capabilities in their respective segments/sectors for these funds are expected to be good. |
IVR A (AIF) | The asset selection ability and asset management capabilities in their respective segments/sectors for these funds are expected to be adequate. |
IVR BBB(AIF) | The asset selection ability and asset management capabilities in their respective segments/sectors for these funds are expected to be moderate. |
IVR BB (AIF) | The asset selection ability and asset management capabilities in their respective segments/sectors for these funds are expected to be to be inadequate. |
IVR B(AIF) | The asset selection ability and asset management capabilities in their respective segments/sectors for these funds are expected to be poor. |
IVR C (AIF) | The asset selection ability and asset management capabilities in their respective segments/sectors for these funds are expected to be weak. |
Modifiers {'+' (plus) / '-'(minus)} can be used with the rating symbols for the categories IVR AA (AIF) to IVR C (AIF). The modifiers reflect the comparative standing within the category.