Lower LVF Thresholds Could Open the Door for Insurance and Pension Funds to Enter Alternatives

In the global investment landscape, insurance companies and pension funds play the role of stabilisers along with allocators. They deploy patient capital into assets with long horizons, anchoring sectors that require time to mature. In developed markets, this often means a deep and deliberate allocation to alternatives: private equity, infrastructure, venture capital, real estate, and other illiquid strategies.

The numbers are striking. Globally, institutional investors such as pension funds and insurance companies often allocate up to 20% of their portfolios to alternative assets. In India, by contrast, allocations remain extremely limited, with insurance and pension capital still largely absent from the asset class. This is not a mere gap; it’s a structural shortfall in how domestic savings are channelled into productive, long-term assets.

A Structural Mismatch in Capital

India has one of the largest and fastest-growing pools of contractual savings in the world. EPFO, NPS, LIC, GIC, and a growing roster of private insurers collectively manage trillions of rupees. Yet, the bulk of this capital is invested in government securities, corporate bonds, and listed equities. Safe, liquid, familiar but often sub-optimal for long-term return enhancement.

Why?

• Regulatory conservatism: Exposure caps, prescribed asset classes, and a general bias toward investment-grade debt have limited flexibility.
• Operational unfamiliarity: Managing illiquid alternatives requires a different skill set and governance structure.
• Product-market disconnect: Few domestic alternative funds have been structured in ways that suit large institutional mandates.

This is where SEBI’s proposed reforms for Large Value Funds (LVFs) could shift the equation.

LVF Easing as the Catalyst

By lowering the LVF minimum investment from ₹70 crore to ₹25 crore, SEBI is sending a clear signal: alternative strategies should not be reserved for only the most concentrated capital. The new threshold still keeps the bar high but it opens the door to a broader swathe of domestic institutions constrained by internal diversification rules.

For example:

• Insurance companies often have per-investment limits as a percentage of AUM. A ₹70 crore single-fund ticket could breach those thresholds; ₹25 crore is easier to accommodate.
• Pension funds can use the lower entry point to pilot AIF allocations without overcommitting capital.

Crucially, the LVF format already offers operational advantages, including faster launches, higher single-investee limits, and now, exemptions from certain compliance burdens (PPM templates and NISM certification for managers). For large domestic institutions, these mean reduced friction and lower transaction costs.

Why This Matters for India’s Growth Story

The absence of meaningful domestic institutional participation in alternatives has two consequences:

1. Reliance on foreign LPs: Much of India’s private capital market is funded by overseas investors, whose priorities shift with global liquidity cycles.
2. Missed multiplier effects: Domestic institutions could capture more of the economic upside that their capital helps generate.

The data is compelling. According to the Indian Venture and Alternate Capital Association (IVCA), every $10 million invested in alternatives in India has created:

• $58 million in revenue, indicating a 5.8x output multiplier.
• 270 jobs, many in high-skill, high-productivity sectors.

This is not abstract GDP math. It is capital flowing into infrastructure, renewable energy, technology platforms, healthcare innovation and other sectors with real, tangible spillovers into the economy.

Learning from Global Allocators

Look abroad, and a clear pattern emerges: leading pension funds and insurers across developed markets allocate substantial portions of their portfolios to alternative assets, from private equity to infrastructure and real estate. These commitments are not ideological. They are designed to capture the illiquidity premium, which is the additional return investors can earn for locking up capital in less liquid assets. Over time, this premium compounds meaningfully, especially for institutions with long-duration liabilities and no pressing liquidity needs.

India’s insurance and pension systems share those same characteristics. They collect steady, long-term inflows and carry obligations that extend decades into the future. Far from being a vulnerability, the alignment between long liabilities and long-dated assets offers India a rare chance to channel capital into productive, high-return avenues.

The Path Forward

If Indian insurance and pension funds were to move even halfway toward global norms, which means 7–10% allocation to alternatives, the shift would be seismic. Tens of billions of rupees would flow into domestic private equity, venture, and infrastructure vehicles. This would:

• Reduce dependence on foreign capital.
• Strengthen domestic fund managers’ bargaining power and stability.
• Keep a larger share of investment profits circulating within India rather than flowing offshore.
• Allow for longer-term, higher-conviction strategies in sectors with long gestation periods.

SEBI’s LVF reforms remove a major structural impediment, but regulatory tweaks within the insurance and pension sectors will also be necessary. Investment guidelines for EPFO, NPS, and insurers need to explicitly permit and encourage AIF allocations, with risk-based, not blanket, restrictions.

Overcoming the Capability Gap

One of the legitimate reasons domestic institutional investors have shied away from alternatives is capability.

• Due diligence on private market strategies is fundamentally different from listed equity or bond analysis.
• Portfolio construction must account for liquidity constraints, cashflow forecasting, and J-curve effects in private equity/venture.

This is solvable. Global LPs build internal teams and supplement them with external consultants. Domestic institutions can follow a similar model by starting small, building expertise, and scaling as comfort grows.

The LVF reforms make this learning curve less costly. Lower ticket sizes mean institutions can diversify across multiple managers and strategies without breaching internal concentration limits.

From Passive to Strategic Domestic Capital

If domestic institutional investors embrace alternatives, their role will extend beyond just providing capital. They can:

• Influence governance and ESG standards in portfolio companies.
• Anchor domestic funds, giving managers credibility when courting foreign LPs.
• Support national strategic priorities, from renewable energy to deep tech, without relying entirely on foreign investors.

In this sense, LVFs can be more than just an investment product. They can be a vehicle for aligning domestic savings with India’s long-term economic agenda.

The Risk of Missing the Moment

If the LVF reforms pass and domestic institutions still fail to step up, the opportunity cost will be high. Foreign LPs will continue to dominate India’s private markets, extracting much of the long-term value. Domestic investors will remain locked into low-yield, low-growth assets, missing both the returns and the strategic influence that alternatives can offer.

The risk is that if domestic institutions remain on the sidelines, foreign LPs will continue to dominate, extracting much of the long-term value while domestic investors remain in low-yield assets. The window for change may narrow as global cost of capital shifts.

A Generational Shift in the Making

SEBI’s LVF reforms are not a magic bullet. They are an enabling condition, one that removes a major structural barrier to domestic institutional participation in alternatives. The heavy lifting will still come from within: regulatory permission, internal capability, and the willingness to think beyond traditional asset classes.

Should India’s insurance and pension funds step into alternatives at scale, the payoff could be transformative: stronger domestic markets, higher economic multipliers, and a more resilient growth model.