Mounting enthusiasm among more foreign asset owners to invest into infrastructure, private credit and property assets in India could rise even more, following newly announced budgetary plans designed to sell existing infrastructure to help fund new projects and attract international capital to support these efforts.

However, newly interested asset owners will likely require trusted local partners to help them invest into a country that has enormous needs, but also barriers to entry and understanding.

In its latest budget, announced on February 1, the Indian government laid out plans to monetise existing infrastructure projects and divest from state-owned companies as part of efforts to fund $1.5 trillion in new projects in the National Infrastructure Pipeline (NIP) in the coming four years.

In her budget speech, finance minister Nirmala Sitharaman also proposed a 100% tax exemption on interest, dividend and capital gains income on any earnings that sovereign wealth funds make from any investments into infrastructure and other specified sectors until March 31, 2024, provided they invest for a minimum period of three years. In addition, she outlined proposals to introduce Reit-like infrastructure investment trusts.

The latest budget also announced the creation of a new Development Finance Institution, with Rs200 billion ($2.75 billion) in capital and an eventual lending portfolio of Rs5 trillion, or $70 billion in three years. The new institution is expected to offer "superior liability management solutions" and offer debt products such as long-term fixed rate loans, said Sujoy Bose, chief executive officer of the National India Infrastructure Fund (NIIF).

"These would be more aligned to long term infrastructure development projects and assets," he told AsianInvestor.

The potential new incentives underscore just how much New Delhi's infrastructure plans require foreign investor funding if the NIP is to attain its $1.5 trillion target. Attracting it in the amounts required could prove challenging.

"The main issue that investors have – except the likes of [Canadian pension funds] CPPIB and CDPQ who are large enough to have established their own offices in India – is how to access the opportunities in this market, and alongside whom," said Bose. 

If enacted, the new budgetary plans and incentives could add to the number of prominent asset owners who already invest into the world’s second-most populous country.

A Global SWF report published on January 1 estimates investment from sovereign wealth and pension funds poured $15.8 billion into Indian private assets in 2020 at $15.8 billion, triple the amount directed at China during the same period.

RISING INVESTOR INTEREST

Dutch pension fund manager APG, which has €85 billion ($102 billion) invested across Asia Pacific, is such an international investor.

It has established several infrastructure and real estate partnerships in India. These include a $1 billion mezzanine financing platform, through which it has already conducted a number of successful exits and gained “pretty attractive returns,” said Hans-Martin Aerts, Asia Pacific head of infrastructure and natural resources at APG.

“Foreign institutional investors like ourselves and our peers have been pretty active in India; probably more so than in any other market in Asia,” he told AsianInvestor in January.

Canada Pension Plan Investment Board and CDPQ are leading growing Canadian pension fund interest in Indian private credit and infrastructure assets. CPPIB had C$10.6 billion ($8.29 billion) invested across real estate, infrastructure, public and private equities, funds and co-investments and credit in India as of September, representing 2.3% of its total assets.

By 2025, CPPIB expects to have up to one third of assets invested in emerging markets, with India a key component of that allocation, said Suyi Kim, head of Asia Pacific at CPPIB. “We specifically see domestic consumption, technology and increasing demand for infrastructure to underpin many of the themes and opportunities in India,” Kim told AsianInvestor.

Similarly, CDPQ has used its New Delhi office to source investments across private credit, real estate, logistics, and renewable energy. Most recently, it marked its first transportation investment through a new dedicated road infrastructure platform. Ontario Municipal Employees’ Retirement System and Ontario Teachers’ Pension Plan (OTPP) both partner Indian corporates and asset managers on infrastructure and private credit opportunities.

NIIF is already facilitating foreign investors into infrastructure, via a $4.5 billion across an infrastructure fund, one private equity fund and a fund-of-funds. Its $2.34 billion Master Fund reached a final close in December 2020, and gained commitments from the likes of CPPIB, OTPP, the US International Development Finance Corporation, PSP investments, Abu Dhabi Investment Authority, AustralianSuper and Singapore's Temasek. They can co-invest an additional $3 billion alongside the 15-year fund into infrastructure investments.

The Master Fund has invested in around 20 projects, primarily across container logistics, renewables, roads, and smart meter deployment.

A FIVE-YEAR OPPORTUNITY

India is also seeking foreign capital to help fund a growing performing and distressed credit funding need.

Sitharaman’s budget speech on February 1 proposed increasing the foreign portfolio investment limit into corporate bonds to 15%. And Hemant Daga, the chief executive officer of Indian fund house Edelweiss Asset Management, said India's credit growth has averaged 15% per annum. That translates to roughly $100 billion in investments in performing and distressed credit over the coming five years, plus $50 billion to $60 billion in operating infrastructure assets, he said.

Banks have been unable to fill the gap due to longstanding rules that prohibit them from lending for capital market activities and using real estate as a collateral. Plus, their non-performing assets been rising, while shareholders have pressured them to shift towards retail lending.

Meanwhile, non-financial companies and mutual funds, once active providers of long-term, structured credit, have struggled to manage the ALM difficulties of heavily investing into such lengthy assets. And local regulations require local pension funds and life insurers to largely invest into government securities, while private mutual funds constitute just 5% of India’s wholesale private credit market.

“About $6 billion to $8 billion of [mutual fund] capital per annum is chasing this $150 billion opportunity over the next five years,” said Daga.

He claimed that international investors who partner with local players to invest in this space could enjoy 10% to 14% net returns post expenses, with distressed assets yielding towards the higher end of this range.

Richard Morrow contributed to this article. 

This article was updated to clarify the name of the National India Infrastructure Fund.