How to Vet an AIF Manager

Start with the basics. Every AIF in India must be registered with SEBI, and it must be registered under the correct category (I, II or III). Ask for the fund's SEBI registration number and match it against the registered AIF list on SEBI's website. Also confirm that the category stated in the pitch matches the registration, because the category determines what the fund is allowed to do, including whether it can use leverage.

If a manager is vague about registration, treat that as a reason to stop.

Past performance needs context, not just a headline figure. Ask:

• Realised vs. unrealised returns. Money actually returned to investors is more reliable than paper gains.

• Which funds are included. Does the track record cover all previous funds, or only the best ones?

• Who verified the numbers. Are they audited or independently reviewed?

• Market conditions. Did the returns come from skill or from a rising market?

A manager who is open about weaker funds is usually more trustworthy than one who shows only the highlights.

Investing in an AIF is a bet on specific people. Find out:

• Who actually makes investment decisions

• How long the core team has worked together

• What happens if a key person leaves (a "key person" clause in the fund documents)

• Whether the team has experience in the sector or asset class the fund targets

A strong brand name does not help if the experienced team members have moved on.

Good managers invest their own money in their funds. SEBI requires it: the manager or sponsor, or both together, must maintain a continuing interest of at least 2.5% of the corpus or ₹5 crore, whichever is lower, and this cannot be funded through a waiver of management fees. For Category III AIFs, the continuing interest is at least 5% of the corpus or ₹10 crore, whichever is lower.

That is the minimum. Ask whether the team commits more than the requirement, and whether the money comes from their own pocket. Regulators do check this: SEBI has settled proceedings in a case where a Category II AIF's sponsor was found, on a prima facie basis, not to have maintained the required continuing interest over a period.

5. Understand every layer of the fee structure

Fees directly affect what you take home. Ask for a full breakdown of:

• Management fee, and what it is charged on (committed or invested capital)

• Hurdle rate (preferred return) and how it works

• Carried interest, and the catch-up terms

• Setup fees, operating expenses and distributor commissions

A clear fee table in the PPM, with a worked example, is a good sign. If you cannot work out what you will pay on ₹1 crore, ask the manager to show you.

6. Ask how the portfolio is valued

Valuation drives the numbers you see in your reports, so it needs to be credible. Ask who values the investments, how often, and by what method. As per industry summaries of SEBI's norms, Category I and II AIFs must value their investments at least once every six months through an independent valuer. Valuation rules have been standardised and updated over time, so please confirm the current requirements before relying on this And Category III funds must update their net asset value (NAV) at least once every month (or more frequently on a weekly/ daily basis, if they are leveraged).

Be wary of managers who are reluctant to explain their valuation process.

7. Probe for conflicts of interest

Conflicts are hard to see from the outside, so ask directly:

• Does the fund invest in companies connected to the manager, sponsor or their associates?

• How are related-party transactions approved, and by whom?

• Does the manager run other funds that compete for the same deals?

• Who is the trustee, and is it independent? SEBI requires the trustee to be independent and not an associate of the sponsor or manager.

A well-run fund discloses its conflicts and explains how it manages them.

8. Review governance and reporting

Good governance shows up in routine practices. Check:

• How often you will receive reports, and what they contain

• Whether the fund is audited annually

• Who holds custody of the assets

• How the manager reports to SEBI. Category I, II and III AIFs that do not use leverage file quarterly reports with SEBI.

Quality reporting should tell you how the portfolio is doing, not just what the NAV is.

9. Read the fund documents line by line

The PPM and Contribution Agreement are the real contract. Before filing with SEBI, the PPM must go through due diligence by a SEBI-registered merchant banker, but you still need to read it for yourself. Watch for:

• Vague exit or extension terms

• Broad manager discretion with little investor oversight

• Heavy penalties for investors, with few protections in return

• Unclear definitions of fees and expenses

• Capital call and default terms that you are not comfortable with

If something is unclear, get it explained in writing before you sign.

10. Talk to other investors and ask about hard times

References are valuable. Ask the manager to connect you with existing investors, and ask pointed questions:

• Was communication clear and timely?

• How did the manager handle a company that underperformed?

• Were there any surprises on fees, timelines or distributions?

How a manager behaves when things go wrong tells you more than how they behave when things go right.

Red flags at a glance

• Guaranteed or "assured" returns

• Pressure to commit quickly

• Reluctance to share the PPM or past reports

• Vague answers on fees, valuation or exits

• A track record that is hard to verify

• A team that avoids questions about conflicts

Returns tell you what happened. Due diligence helps you judge what is likely to happen next. Before you invest, check the registration, the track record, the team, the manager's own commitment, the fees, the valuations, the conflicts, the governance, the documents and the references. A good fund welcomes tough questions. A weak one dodges them.

Disclaimer: This article is for educational purposes only and is not investment, legal or tax advice. AIF investments are subject to market risks and returns are not guaranteed. Regulatory requirements may change, so please verify the latest SEBI rules, read the PPM and fund documents carefully, and consult your advisor before investing.