The ecosystem of India when it comes to the private market is still developing in terms of innovative regulation and investment-friendly regulation. One of the latest steps on this path is the formalized Co-Investment Vehicle (CIV) framework of Category II Alternative Investment Funds (AIFs) which has been introduced by the Securities and Exchange Board of India (SEBI).
Previously, the co-investment opportunities, where investors could invest with the AIF in a specific deal were usually established in a form of Portfolio Management Services (PMS) or independent investment vehicles. Under the new structure, SEBI has introduced co-investment to the very structure of the AIF, which implies improved governance, transparency and operational convenience.
In the case of Category II AIFs, such as private equity, debt and hybrid funds, this development opens up a new dimension of flexibility by giving investors the ability to co-invest in the unlisted portfolio companies by a different and ring-fenced CIV scheme.
Core Highlights of the CIV Framework
DedicatedCIV Schemes
Any CIV is set up as an independent scheme of the key AIF to co-invest in an
unlisted corporation in which the AIF has invested or is intending to invest.
Deal-Specific Schemes
Each and every investee company needs to have a separate CIV, and a Shelf
Placement Memorandum (PPM) specifying key terms, disclosures, and
governance.
Creating Your “Life Razor”
To keep priorities clear amid complexity, Bloom suggests defining a simple guiding principle — what he calls a “life razor” — that shapes your choices.
For example, Netflix co-founder Marc Randolph made an early-career rule: he always left work at 5 p.m. on Tuesdays to have dinner with his family. If someone needed to discuss something at that time, they could join him on the walk to his car. The ritual made his values visible to both his colleagues and loved ones. Bloom’s own life razor is equally direct: “I will coach my son’s sports teams.”
He recommends starting with the phrase: “I am the type of person who…” Choose something within your control that positively affects multiple areas of your life and reflects the kind of person you want to be.
Ring-Fenced Structure
Every CIV has its bank account, Demat account and PAN so that its assets and
liabilities are not confused with the parent AIF or any other schemes.
Accredited Investors Only
The AIF requires accredited investors to participate in CIV schemes to ensure
that the investors are sophisticated and that they are in line with the rules of
SEBI.
Investment Cap
The maximum amount of co-investment of an investor in the schemes of CIV in
one investee company is three times their commitment on the primary AIF. There
are exemptions to financial institutions like sovereign funds or development
financial institutions.
No Leverage Allowed
CIV schemes simply are not allowed to borrow or leverage capital and have a
very conservative and open investment strategy.
Simplified Regulations
SEBI has eased some of the AIF norms such as diversification and minimal
tenure on CIVs and made them more flexible and efficient investment vehicles.
Why is the CIV Framework Important?
The CIV structure brings clear benefits to all market participants:
- For Fund Managers: It enables the managers to provide select investors with participation in particularly high conviction deals without having to rely on different PMS structures.
- For Investors: Accredited investors receive access to deal-level opportunities that are exclusive as well as a direct alignment of their interests to the fund.
- For Investee Companies: The integration of AIF-CIV structure eases their cap table and prevents the existence of many independent investors.
- For the Market: The action establishes co-investment, which promotes transparency, accountability, and uniformity of regulation within the India fast-growing private capital sector.
Challenges and Considerations
Despite its advantages, CIV schemes comes with compliance problems such as:
- Limiting participation to accredited investors limits participation.
- The 3x co-investment is a capped limit on exposure flexibility of investors.
- Each CIV scheme has to have several separate accounts and disclosures that a fund manager should keep.
- CIVs will not be abused to dodge regulatory limits or establish a roundabout exposure to investment.
- Smaller AIFs may be affected by operational complexity and an increase in compliance costs.
However, these are very essential in order to maintain discipline, protection of the investors and integrity of the systems in the alternative investments arena.
Conclusion
The formalized co-investment framework under Category II AIFs is an essential regulatory innovation, which provides an investor-friendly, transparent, secure, and investor-aligned entry point to co-investing in the Indian private markets. It is a balance between innovation and governance because it enables accredited investors to partner directly in high-potential deals and maintain clarity of oversight and risk segregation.
To fund managers, this structure presents new opportunities to consolidate relationships with investors and maximize the participation in deals. To investors it improves access, control and confidence in a regulated ecosystem.
At Punji Baazar, experts believe that this development is a new chapter in the history of alternative investments - introducing structure, flexibility and inclusiveness to co-investment. Since SEBI is still working on the AIF framework, efforts such as the CIV scheme will be significant in enriching the Indian private capital markets and contributing to the growth of the economy in the long-term.