India’s economic engine is accelerating, and at the heart of this momentum lies a force that has quietly become one of the most influential segments in modern finance Small and Medium Enterprises (SMEs). While these businesses have always formed the backbone of India’s economy, their role has evolved dramatically in recent years. Today, SMEs are no longer just beneficiaries of credit support they are reshaping investment decisions, especially within Alternative Investment Funds (AIFs).
With private markets gaining traction and India emerging as a global growth hub, AIFs are increasingly integrating SMEs into their core strategies. The result is a powerful convergence that is redefining private market investing for sophisticated investors.
SME Surge: The Data Behind India’s New Growth Story
In 2025, SMEs represent nearly 30% of India’s GDP, contribute to 45% of exports, and employ over 110 million people. Their scale, diversity, and agility make them critical components of India’s next phase of expansion.
This rise is reflected in AIF activity:
- 1,550+ AIFs registered with SEBI across Category I, II, and III
- ₹13.5 lakh crore (USD 160+ billion)in total commitments as of March 2025
- 30% YoY growth in AIF commitments an unprecedented surge
- Category I AIFs raised ₹40,790 crore, deploying ₹32,522 crore directly into SMEs and early-stage ventures
This rapid scale-up is both structural and strategic. SMEs have become key contributors to innovation, manufacturing, digitalization, clean energy adoption, and employment generation. These attributes make them natural fits for AIF portfolios that seek quality, growth, and long-term compounding.
Why SMEs Are Becoming Core to AIF Investment Strategies
AIFs are specifically designed to invest beyond public markets giving investors exposure to sectors and businesses not yet listed or fully discovered by mainstream capital. SMEs fit this opportunity set perfectly.
Here’s how AIFs and SMEs align:
1. Tailored Capital for Expansion
SMEs often require growth capital that traditional lenders (like banks) cannot offer due to:
- Limited collateral
- Lack of long operating history
- Sectoral unfamiliarity
AIFs provide flexible, need-based capital, allowing SMEs to scale production, adopt new technologies, expand internationally, or invest in R&D.
2. SEBI-Backed Ecosystem for SME Growth
Category I AIFs receive regulatory support to invest in early-stage companies and SMEs including tax incentives, faster approvals, and easier compliance pathways.
This policy structure ensures that long-term investors can participate in India’s economic development while capturing strong return potential.
3. Growth in Private Credit: A Major Catalyst
Private credit is now one of the fastest-growing segments in the AIF industry, with:
- ₹1.95 lakh crore AUM in private credit
- Rising demand for structured credit solutions among SMEs
- Increasing investor appetite due to predictable yield + downside protection
AIFs offering private credit are enabling SMEs to access capital more efficiently, while investors benefit from stable, risk-adjusted returns.
4. AIFs Offer Strategic, Not Transactional, Capital
Unlike bank loans, AIF investments often include:
- Governance support
- Operational guidance
- Access to networks and industry relationships
This results in sustainable institutional growth the kind HNIs prefer investing behind.
Sector Insights: Where AIFs Are Deploying Capital in 2025
AIFs are investing across India’s most transformative sectors. Many of these sectors are SME-driven, forming the backbone of innovation and economic expansion.
Top Sectors by AIF Commitment (2025 Data):
- Real Estate: ₹69,896 crore
- IT & ITES: ₹34,553 crore
- Financial Services: ₹27,223 crore
- NBFCs: ₹25,564 crore
- Manufacturing & Specialty Industrials: Major recipients through Category II AIFs
- Green & Sustainable Businesses: Rapidly rising post-2024 policy reforms
Behind all these numbers lies a common thread SMEs dominate these value chains.
Whether it’s technology services powering global clients, fintech firms transforming credit access, or manufacturing units in Tier-2 cities producing niche products for global markets, SMEs remain deeply embedded.
Technology and Innovation: Shaping the Future of AIF-SME Strategies
Another major reason SMEs are attracting AIF capital is technology adoption.
Key Trends Transforming SME-Driven AIF Investments:
- AI and analytics are helping fund managers assess SME financial health, supply chain strength, and operational quality with higher accuracy.
- Digital platforms are increasing transparency and widening the investor base for AIFs.
- SMEs themselves are adopting automation, IoT, cloud systems, and digital commerce, making them more scalable and investment-ready.
This combination of digital infrastructure + capital access is making SMEs powerful engines for AIF-led growth.
Performance: How AIFs Are Outperforming in the Current Market
AIF performance has been impressive over the last five years especially when compared to public market volatility.
Performance Highlights:
- AIF AUM grew at a 28% CAGR (2019–2024)
- Category III AIFs delivered 68% average returns in FY2025
- Benchmark Nifty 50 delivered 65% in the same period
While AIFs include various strategies, SME-centric funds particularly private equity, venture capital, and private credit have shown consistently strong results due to the rapid expansion and resilience of the SME ecosystem.
Tax & Regulatory Landscape: A Supportive Framework for SME Investing
One of the most important aspects of SME-focused AIF investing is the policy support emerging from the government and SEBI.
Regulatory Highlights (2024–2025):
- Minimum AIF corpus requirement: ₹20 crore
- Minimum investor commitment: ₹1 crore
- LTCG for foreign investors reduced from 15% to 10%in 2025 Budget
- Long-term capital gains above ₹1 lakh taxed at 10%
- Increasing incentives for investing in Category I AIFs (startup & SME focused)
With reduced friction and greater tax efficiency, SME-focused AIFs have become significantly more attractive for both domestic and foreign HNIs.
What the Future Looks Like: SMEs at the Core of India’s Growth
SMEs will play an even more integral role in AIF strategies moving forward with several clear trends emerging:
1. Increased Digital Infrastructure
Digital lending, alternative credit scoring, and online capital platforms will expand SME capital access nationwide.
2. Sustainable & ESG-Oriented Investments
SMEs with green credentials or sustainable practices are becoming top targets for AIFs.
3. India-to-Global Expansion
More Indian SMEs are entering global supply chains, creating stronger returns for AIF investors.
4. More Specialized AIFs
Expect more sector-specific and SME-focused AIFs as investor demand rises.
Conclusion
India’s SMEs are no longer just contributors to the economy they are shaping capital flows, influencing private market strategies, and creating new wealth-building opportunities. With supportive policies, rising capital access, and expanding technology adoption, SMEs are now central to how Alternative Investment Funds evaluate and deploy capital.
For investors seeking meaningful exposure to India’s growth engine, SME-driven AIF strategies offer a unique and powerful advantage grounded in data, backed by regulation, and aligned with India’s long-term economic trajectory.
About StepTrade Capital
Steptrade Capital specializes in SEBI-regulated Alternative Investment Funds, long-only strategies, and diversified research-driven investment solutions tailored for India’s evolving economic landscape.
We help investors access:
- High-potential opportunities
- Professional research insights
- Transparent, structured investment frameworks
