India’s quasi SWF buys infra debt fund to draw in others

By buying a private debt fund that helps to refinance operational projects, NIIF aims to boost the global appeal of India's infrastructure sector.
India’s quasi SWF buys infra debt fund to draw in others

India’s National Investment and Infrastructure Fund (NIIF) has made a strategic acquisition in a move that aims to boost the role of private debt funding in the country's infrastructure sector.

Touted as a quasi-sovereign wealth fund, NIIF announced this week the acquisition of IDFC Infrastructure Finance, a local infra debt fund that helps infrastructure financiers to refinance their capital once projects become operational.

The transaction comes at a time when momentum is building to invest in India's hugely under-developed infrastructure sector, especially among large global institutional investors.

Speaking to AsianInvestor on Thursday, NIIF's managing director and chief executive, Sujoy Bose, said private debt had the potential to appeal to a broad range of investors.

"Given the significant need for infrastructure build-up in India and the increasing gap in financing options available, NIIF believes that infra debt fund platforms having healthy portfolios, strong systems and processes and experienced management teams can appeal to a wider section of international investors who are willing to participate in the Indian infrastructure growth story but are not able to take significant equity exposure," he said.

Financial details of the IDFC-IF deal were not disclosed, but in an accompanying release NIIF said the debt fund had a loan book of around $612 million, strong asset quality and no material repayment obligations for the next two years.

Sujoy Bose, NIIF

Infrastructure lending in India has a chequered past: following a series of failed public-private partnerships, high debt levels at private-sector companies and political and civil challenges related to land and forest clearances, there is a massive funding gap, especially in power and telecom projects.

Yet infrastructure-starved India needs about $4.5 trillion of investment in the next 25 years to build up its roads, airports, ports, rail and power networks as well as other urban and rural infrastructure. 

Making things worse in recent years is the tendency for traditional lenders – typically state-owned banks and some private sector banks heaving under piles of bad debt – to go slow on lending to infra projects, Karthik Srinivasan, group head for financial sector ratings at local agency ICRA, said.

By refinancing the bank loans of existing projects, infra debt funds were expected to take over existing bank debt (becoming an alternative to bank lending), releasing funds for fresh lending by banks for new infra projects. Yet they have been slow to take off, partly because there haven't been enough operational projects.

Another potential impediment is cost. Funding costs have climbed higher in the past 12 months, with the yield on India's benchmark 10-year government bond up about one percentage point at around 7.8%.

“Arriving at a common ground on pricing and tenure by Investors and debt issuers will be crucial in enabling such entities to raise long [term] funds,” Srinivasan added.


Such medium-term challenges notwithstanding, the [long-term] trend is definitely towards more private sector participation in Indian infrastructure, NIIF’s Bose said at an earlier event in Hong Kong.

“There is also an aspect of having the right private entities being involved – they need to be well governed, well capitalised, with world-class operations and environmental, social and governance standards,” he said.

The hope is that roping in ESG-conscious investors will improve the governance standards of the companies being invested in – and encourage yet more global investors to the sector.

There are ways of investing in, say, renewables, while honouring ESG standards, the executive director of a North American pension fund told AsianInvestor, who declined to be named.

“Renewable projects, for instance, need land, so how the sponsors go about acquiring land is an important [ESG] consideration for us,” she said.

Her fund is also particular about the governance standards of the companies it invests in. “It’s a virtuous circle because as we publicise that we invest in companies that have these high standards [on ESG], other companies realise that if they want access to long term capital, they need to up their standards as well,” she said. 


NIIF is considered part of the new breed of SWFs from countries that don’t have huge surpluses to invest; instead, they tend to have large current account deficits or high levels of external debt, and want to use these funds to help boost their own economic momentum.

Apart from India, Turkey and Romania have also set up this kind of fund to help kickstart growth.

In the case of NIIF, the Indian government owns 49% while the rest will be brought in by institutional investors such as pension funds and other sovereign wealth funds.

Singapore’s TemasekAbu Dhabi Investment Authority and Asian Infrastructure Investment Bank are among the names that have collectively pledged a few billion dollars for infra-related investments alongside NIIF.

Bose told AsianInvestor that after two decades of troubled private-public partnerships, infrastructure investing in India is entering a more mature phase with new financing structures such as infrastructure investment trusts, infra debt funds and the NIIF.

Certainly, some major international investors appear already to be waking up to India's potential.

In May, the $270 billion Canada Pension Plan Investment Board became one of the anchor investors in a private placement of an infrastructure investment trust (basically the infra version of a real estate investment trust, or Reit), putting in $152 million. 

And last month another Canadian fund, CDPQ, invested an additional $100 million in Azure Power Global, hiking its stake in the Indian solar energy producer to 40% and bringing its total investment in the firm to $240 million.

Ernest Chan contributed to this story.

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