AIF Performance Benchmarking – SEBI Framework | Agencies | Alpha

AIF performance benchmarking is the SEBI-mandated process by which every Alternative Investment Fund reports its cash flow and valuation data to a Benchmarking Agency, which compiles industry benchmarks for each category of AIF. Any AIF that has completed one year from its First Close must report. Benchmarking is done half-yearly on data as at 30 September and 31 March, on pre-tax NAV, with AUM taken as total capital drawn down. AIFs must then disclose the benchmarked performance in all marketing materials and investor reports. Three agencies appointed by IVCA currently publish these benchmarks: CRISIL, NSE and Preqin.

Table of Contents

1. Why AIFs Needed an Industry Benchmark
2. What Makes a Benchmark Valid
3. The Benchmarking Agencies
4. The Operational Guidelines
5. How Each Category Is Benchmarked
6. Reporting Valuation to the Agencies
7. Using a Benchmark to Measure Alpha
8. Frequently Asked Questions

Check out NISM's Alternative Investment Fund Managers, the official NISM workbook for the Series XIX-C Certification Examination, published by Taxmann. The indices and benchmarking chapter works index construction through four weighting methods with full arithmetic, covers equity and bond index families, and sets out the SEBI benchmarking framework alongside a computed alpha example under best-case and worst-case scenarios. The complete range of NISM workbooks sits on the NISM listing page.

1. Why AIFs Needed an Industry Benchmark

Benchmarking an AIF is subjective in a way benchmarking a mutual fund is not.

The Investment Manager may choose one benchmark for reporting while the investor would prefer another, and both can defend their choice. With no common reference, an investor comparing two funds is comparing two different measuring sticks. Performance claims become unfalsifiable.

SEBI’s answer was to mandate an industry benchmark, so that the performance of each category of AIF could be compared against other investment avenues including global opportunities, and to recommend the formation of market-wide Benchmarking Agencies.¹

The mechanism is delegated rather than centralised. Any association of AIFs whose membership represents at least 33 percent of the number of AIFs may notify one or more Benchmarking Agencies. Those agencies then enter into agreements with every AIF to carry out the benchmarking.

Two obligations follow for the fund. Any AIF that has completed a minimum of one year from the date of First Close must report performance-related data, cash flow data and scheme-wise valuation data to the agencies. And the AIF must enter into an agreement with the relevant agency to maintain confidentiality over the data it reports.

The payoff sits at the other end. AIFs must disclose the benchmarked performance derived by the agency in all marketing materials and investor reports, which puts every fund’s numbers on a common footing.

2. What Makes a Benchmark Valid

The CFA Institute’s position, reflected in the GIPS standards, is that the benchmark chosen for any composite or pooled fund must be an appropriate total return benchmark, meaning one that reflects the fund’s investment mandate, objective or strategy.

That single test admits several possible benchmarks, so further characteristics separate a valid one from a merely defensible one. A valid benchmark is:

• Specified in advance, selected before the evaluation period rather than after the results are known
• Relevant, reflecting the mandate, objective or strategy of the fund
• Measurable, being quantifiable
• Unambiguous, with constituents that can be clearly identified and priced
• Representative of current investment options, so the firm has current knowledge of the investable universe
• Accountable, with the firm selecting it and answering for deviations from it
• Investable, so it would be possible to forgo active management and simply hold the benchmark
• Complete, providing broad representation of the market segment it covers

The first of these does most of the work. A benchmark selected after the period has run is not a benchmark, it is a justification.

3. The Benchmarking Agencies

Three agencies appointed by the Indian Private Equity and Venture Capital Association currently publish AIF benchmarks across all categories, in both USD and INR terms: CRISIL, NSE and Preqin.

Each collects data from the AIFs, maintains a database of fund performance organised by investment strategy, and produces industry benchmarks. Because the database is organised by strategy, funds following similar strategies over comparable tenures can be set against each other, which is what makes the comparison meaningful.

4. The Operational Guidelines

SEBI has laid down how the process runs.

Requirement	Detail
Frequency	Half-yearly, on data as at 30 September and 31 March each year
Who must report	AIFs and schemes that have completed at least one year from First Close
What is reported	Cash flows and scheme-wise valuation of investments, in the form and format each agency requires. The format must include valuation principles and the name of the Valuation Agency appointed by the AIF
Audited or unaudited	Data for 31 March must be audited. Data for 30 September may be unaudited
AUM definition	The value of total capital drawn down under the scheme
Basis of measurement	Pre-tax Net Asset Value of the scheme
Currency	Performance data and benchmarks reported in both INR and USD terms
Dissemination	Industry benchmarks compiled separately for Category I, II and III, for each year since 2012, and disseminated publicly

Valuation frequency itself follows the AIF Regulations rather than the benchmarking guidelines.

4.1 Additional and customised benchmarks

Because funds within the same category can follow very different strategies, agencies may create additional performance benchmarks on other parameters, provided those parameters are objectively verifiable. Instrument of investment, tenure or vintage of the fund, and focus sectors are the examples SEBI gives.

Agencies provide each AIF with a Performance Benchmark Report setting the fund against the industry benchmark, and must state the basis on which both the individual fund and the industry benchmark were calculated.

Separately, an AIF may request a customised report. The agency identifies the set of AIFs meeting the specified criteria, either by self-attestation from those AIFs or by independent verification, and obtains express consent from every fund whose data is used. This may be a fee-based service agreed between the parties.

The naming distinction matters and is easy to miss. A customised report is called a Performance Report. The standard report produced under the SEBI mandate is called a Benchmark Report. They are not interchangeable, and a fund citing one should not be read as having cited the other.

5. How Each Category Is Benchmarked

5.1 Category I and Category II

Benchmarks are built on vintage years, so that every sub-category of fund is compared against funds with a similar First Close timeline. Comparing a 2019 vintage against a 2023 vintage would otherwise measure the J curve rather than the Manager.

The measures used are pooled internal rate of return together with the investment multiples: DPI, RVPI and TVPI.

5.2 Category III

Benchmarks are constructed as asset-weighted indices using the fund’s AUM and its quarterly returns.

Returns are computed on a post-expense, pre-carry, pre-tax basis. That definition is worth holding onto, because it sits between gross and net and matches neither. Selection of funds for the index depends on how many years the fund has completed measured from its First Close date.

6. Reporting Valuation to the Agencies

SEBI has clarified that Managers must report portfolio valuation to the benchmarking agencies on time, and has attached two practical conditions to make that possible.²

First, the Manager must include a specific timeframe for the investee company to provide audited accounts as a term of the subscription or investment agreement with that company. Without that contractual hook, the Manager cannot control when the underlying numbers arrive, and it must report valuation based on audited investee data as at 31 March within seven months.³

Second, valuation based on audited investee data may be reported to the agencies only after the AIF’s own books have been audited, within the stipulated timelines.

The sequence therefore runs: investee company audit, then AIF audit, then reporting to the agency. A Manager who has not built the first step into its investment agreements will struggle to complete the third on time.

7. Using a Benchmark to Measure Alpha

Alpha is the excess return an AIF generates over the benchmark return, computed over the same period in which the fund return was generated.

The standard method uses the Capital Asset Pricing Model. Expected return is computed first, then alpha is the difference between the return achieved and that expected return.

Expected Return E(R) = Rf + Beta × (Rm − Rf)

Alpha = R − E(R)

where Rf is the risk-free rate, commonly the 364-day Treasury bill rate, Rm is the benchmark return, and Beta is the fund’s sensitivity to the benchmark.

Two things follow that are easy to lose sight of. Beta enters the calculation, so a fund carrying more market sensitivity has a higher hurdle to clear before it can claim alpha. And the closer the benchmark matches the fund, the more the alpha figure is worth. A Category III fund measured against a Category III AIF index is measured against a like-for-like pool. The same fund measured against a broad-based market index published by NSE or BSE is measured against what the workbook calls an indicative benchmark rather than a perfect one, which is useful for monitoring but weaker as a claim.

Professionals working through these computations will find calculators and utilities at Taxmann’s Tools. For structured programmes covering fund performance measurement and the NISM certifications, see Taxmann.com | Learning. For the SEBI circulars on benchmarking and valuation reporting, see Taxmann.com | Research.

8. Frequently Asked Questions

8.1 Is AIF performance benchmarking mandatory?

Yes, for any AIF or scheme that has completed at least one year from its First Close. Such funds must report performance, cash flow and scheme-wise valuation data to a Benchmarking Agency and disclose the benchmarked performance in all marketing materials and investor reports.

8.2 Who are the AIF benchmarking agencies in India?

Three agencies appointed by the Indian Private Equity and Venture Capital Association currently publish AIF benchmarks in USD and INR terms: CRISIL, NSE and Preqin.

8.3 How often is AIF benchmarking done?

Half-yearly, on data as at 30 September and 31 March. The March data must be audited; the September data may be unaudited.

8.4 What is AUM for benchmarking purposes?

The value of total capital drawn down under the scheme. Performance reporting and benchmarking are carried out on the pre-tax NAV of the scheme.

8.5 How are Category III AIFs benchmarked?

As asset-weighted indices built from the fund’s AUM and its quarterly returns, with returns computed on a post-expense, pre-carry, pre-tax basis. Category I and II funds are benchmarked on vintage years using pooled IRR, DPI, RVPI and TVPI.

8.6 What is the difference between a Benchmark Report and a Performance Report?

A Benchmark Report is the standard report an agency generates under the SEBI mandate. A Performance Report is a customised report produced at a fund’s specific request, which requires the express consent of every AIF whose data is used and may be charged for.

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1. SEBI Circular No. SEBI/HO/IMD/DF6/CIR/P/2020/24 dated 6 February 2020 and SEBI/HO/IMD/DF6/CIR/P/2020/99 dated 12 June 2020, Disclosure Standards for Alternative Investment Funds.
2. SEBI Circular No. SEBI/HO/AFD/PoD/CIR/2023/97 dated 21 June 2023, Standardised approach to valuation of investment portfolio of AIFs.
3. SEBI Circular No. SEBI/HO/AFD/PoD-1/P/CIR/2024/123 dated 19 September 2024.