India’s infrastructure sector has been attracting growing attention from both domestic and foreign investors – including insurers and pension funds – after the launch last year of the first infrastructure investment trusts, or ‘Invits’.
India is one of the fastest expanding major economies, but its infrastructure development has lagged well behind its growth (see box below). The hope is that the introduction of Invits could help plug this gap.
The infrastructure equivalent of real estate investment trusts (Reits), Invits are structured as listed securities, pooling money from investors to buy assets that provide a cash flow over a period of time.
There are three Invits currently: IRB Invit Fund, India Grid Trust and IndInfravit Trust. The first two listed last year after initial ppublic offerings, while the latter listed in May this year after a private placement.
The sector is still in an embryonic phase, but is starting to lure more asset owners – including large foreign ones.
In May, the C$356 billion ($270 billion) Canadian Pension Plan Investment Board (CPPIB) became one of the anchor investors in the first private placement of an Invit, putting in $152 million.
IndInfravit Trust, sponsored by local firm L&T Infrastructure Development Projects, will initially acquire five operational toll roads and plans and the platform aims to grow by making more investments in road infrastructure in India, Suyi Kim, CPPIB’s head of Asia Pacific, told AsianInvestor last month.
She said the pension fund expects Indinfravit to deliver “solid” long-term, risk-adjusted returns, given India’s economic fundamentals and prospects, as well as the strong regulatory environment for toll roads in the country. But she declined to give specific target numbers.
CPPIB has a lot of experience investing in toll roads, Kim noted, citing assets such as Arco Norte, one of the largest federal toll road concessions in Mexico, and the Chicago Skyway in the US.
The pension fund had $5.4 billion in total investments in India at the end of March 31, across infrastructure, real estate and financial services, as well as co-investments and public holdings.
For institutional investors with long-term liabilities, Invits are seen to provide reliable income streams, because at least 80% of an Invit must be invested in established revenue-generating assets.
“Since most of the assets under Invits are fairly mature, project execution risk is almost eliminated,” said Chockalingam Narayanan, head of equity research at India’s BNP Paribas Mutual Fund.
“However, these assets tend to have finite lives, so to continue providing the expected returns, more assets have to be periodically added to the [Invit] portfolio,” he told AsianInvestor.
Local asset owners are also showing growing appetite for these infrastructure vehicles.
Take Reliance Nippon Life Insurance, a joint venture between Indian conglomerate Reliance and Japan’s Nippon Life Insurance, which had $2.8 billion in investment assets as of March 31. About 1.5% of its biggest life fund, which is $1.7 billion in size, is invested in Invits, which it put in over the past year or so.
Chief investment officer Akhilesh Gupta said Invit yields and duration fit well with the insurer’s liability requirements.
“Invits have asset maturities that are long-term in nature – up to 15-20 years – which help with our asset-liability management and offer good returns,” he told AsianInvestor last week. Gupta said the insurer could raise its allocation if it found more suitable opportunities and regulations are eased.
Indian insurers can currently invest up to 3% of their portfolio in Invits.
Meanwhile, they must invest at least 15% of their portfolios infrastructure and housing assets, as part of their social obligations. These investments can include shares and bonds of infrastructure companies, such as telecommunications firms.
Reliance Nippon Life’s biggest fund has 13.5% of its investments in infrastructure-related assets, beyond Invits – mostly bonds issued by infrastructure companies such as Power Grid Corporation of India.
Mumbai-based Edelweiss Tokio Life Insurance, a joint venture between India’s Edelweiss Financial Services and Japanese insurer Tokio Marine, has also allocated a small portion of its portfolio to Invits. CIO Bismillah Chowdhary told AsianInvestor that annual return expectations from its investment ranged between 6% and 10%.
INDIA'S INFRASTRUCTURE NEEDS
Infrastructure-starved India needs about $4.5 trillion of investment the next 25 years to build up its roads, airports, ports, rail and power networks as well as other urban and rural infrastructure, according to the government’s 2017-2018 Economic Survey, released in January.
There has long been a massive funding gap in the country, especially in power and telecom projects, 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 for infrastructure projects.
Infrastructure-related loans (including some made to power companies) accounted for 19% of the non-performing assets in India’s banking sector at the end of March, according to data from Moody’s Investor Services and the Reserve Bank of India.
India is not the only Asian country ramping up its push to attract investment into local infrastructure in recent years. This is also a priority for the likes of Indonesia, the Philippines and Thailand.
Asia as a whole needs to invest $26 trillion by 2030 to fill an infrastructure gap – requiring the current annual spend to double to around $1.7 trillion, the Manila-based Asian Development Bank said in February 2017.