InvITs: The next big Infrastructure story of India?

November 30, 2020Infrastructure

Journey of  InvITs so far:

Infrastructure Investment Trusts are popular investment vehicles for long-term infrastructure funding globally with over 400 listings of similar instruments accounting for ~1.5 trillion USD of market capitalization. The Securities and Exchange Board of India (Sebi) first notified InvIT Regulations in 2014, allowing setting up and listing of such trusts which are popular in some advanced markets. There have been 7 InvITs in the last 6 years across infrastructure assets like roads, power transmission, commercial estate and gas pipelines with a market capitalization of 18 billion USD. These InvITs and REITs put together garnered over INR 2 lakh cr worth of asset under management.

Global rating agencies also believe that InvITs-REITs have enormous potential of ~Rs 8 lakh crore in India over the next 4-6 years.  InvITs are likely to gain significant traction in the next few years and have the potential of channelising significant long-term capital (like pension and insurance funds) into the infrastructure sector. It is  estimated that InvITs alone can acquire over Rs 4 lakh cr of infrastructure  assets in five years. InvITs are seen as the preferred route of infrastructure investment for long-term investors, given the stable regulations and a supportive taxation regime, and a conducive macro environment will be required to support investors' appetite.

Need of InvIT:

Banks are facing the twin-balance sheet problem - highly leveraged companies and banking systems plagued with rising NPAs and slowdown in credit demand. Banks’s deployment to infrastructure sector grew at a CAGR of 19% over FY2010 to FY2015 and plummeted to 3% CAGR over FY2015 to FY2020 as the credit cycle turned down under the weight of a large overhang of stress on the balance sheets of banks due to NPAs. From FY2015 to FY2020, power sector registered nil CAGR, leading to sharp fall in credit growth to infrastructure space.

Infrastructure Investment Trusts provide a better way in which private developers could monetise their investments in infrastructure projects to enable them to raise cash for new project development, thus freeing up the much needed- capital to spur infrastructure growth. Also, because of their pass-through status, InvIT units offer tax-efficient returns and are ideally suited for long-term institutional investors.

Infrastructure Investment Trust (InvIT), a hybrid platform of debt and equity, is best suited to plug the infrastructure financing gap. InvITs offer an efficient platform not only to attract the long-term patient capital, but also to channelize the power of the untapped domestic savings.

Key Challenges Faced by InvIT Stakeholders

One of the main challenges faced by various stakeholders of InvITs is, how to make InvIT more accessible to retail investors. Currently InvITs are seen more as a vehicle of investment for institutional investors only and not for retail investors. Another challenge is to ensure governance frameworks are strengthened to bring regulatory clarity on debt financing and to achieve scalability of the InvIT platform. Some members felt the low fees paid to the investment managers could be a cause of concern. Another challenge is to ensure market is mature enough to understand the risk and modalities of the InvITs platform.

What the Future Looks Like for InvITs

InvITs are an excellent medium to recycle capital. InvITs have the best of both worlds being a yield product with leverage caps. Regulators have done a great job by being nimble and providing public/private/unlisted InvIT options as per the risk-reward appetite. The first battle of making this product understandable to sophisticated investors is done, the next challenge is to make it more attractive to retail. Yield expectation has come down from 13-14% to as it was unrealistic. Return expectations would come down further given we are at bottom of yield curve.

Even though members acknowledged the possible challenges of the product, they expect InvITs to reach 5 lakh crore AUM by 2025. To make this happen it is important to deepen all sources of capital available to InvITs. It is expected that the industry will slowly move from developer-sponsor to financial investor-sponsor structure. The next phase of InvITs will see management testing - some managements will outperform while some will keep falling out. While InvITs in Infrastructure sectors like Roads, Transmission assets have been more popular so far, newer sectors like Renewable Energy generation are looking at InvITs as a possible investment vehicle and there is expectation of more multi-sector InvITs going forward.