India may just be starting its journey but it is already in the fast lane. The IPOs of its first two infrastructure trusts were met with strong investor demand this spring, achieving 8.5 times and 1.35 times oversubscription rates respectively.
The two offerings, successively sponsored by local road developer IRB Infrastructure and electricity transmission company Sterlite Power, raised more than 72 billion rupees ($1.1 billion; €1 billion) in total from both institutional and individual investors in the country’s equity capital market.
TWO YEARS IN THE MAKING
Infrastructure investment trusts, which India dubs InvITs, are not unique to the country. In recent years, similar vehicles have been listed on stock exchanges in Japan, Hong Kong, Singapore and Australia, among others. But they are a new concept in India.
Through the InvIT structure, developers can spin off a portfolio of operating assets in return for fresh capital from investors, which they can use to repay debt and fund new projects. Under India’s regulatory regime, InvITs are required to distribute at least 90 percent of all cash available from the operating assets to shareholders, providing stable yield in a manner similar to Real Estate Investment Trusts.
“When the infrastructure trust regulations were launched by the Securities and Exchange Board of India in September 2014, it was not attractive to investors and developers,” says Karun Cariappa, a Singapore-based of counsel at law firm Simmons & Simmons.
“After extensive consultations with industry stakeholders, the regulations were amended in 2016. That’s when corporates started to think about structuring their projects and settling trusts and engaging with investment banks and potential investors.”
One key contribution to the success of the two listings, given their oversubscription levels, was the relaxation of regulations early this year, which allowed domestic mutual funds and insurance companies to invest in InvITs, Cariappa believes.
These two groups of investors contributed a significant portion of the capital raised in the offerings, alongside banks and foreign institutions, according to IDFC Bank’s investment banking unit, one of IRB Trust’s bookrunners. In contrast, the team points out that local banks were permitted to invest in InvITs just three to four days before the launch, as a result of which few of them managed to get internal approvals to change their policies to invest in the products.
Market conditions have been very favourable for such offerings, with adequate liquidity and interest from both domestic and international investors, according to the team. “We also saw a significant amount of interest from high-net-worth individual investors,” says Venkatraghavan S., managing director of equity capital markets at IDFC Bank.
The bankers also remark that InvITs, fundamentally, are designed for long-term investments. Investors who back them are usually of the buy-and-hold type, though the IDFC team notes they can decide to adapt their strategy if the yields generated change materially or if the vehicles post capital gains. “If the interest rate increases for some reason, the external leverage of these trusts will decide the impact on their yield. Otherwise, the existing listed trusts will become more interesting for the investors as interest rates drop,” its managing director says.
International investors have been keen on these products, owing to their familiarity with Singapore-listed trusts. But they would also like to see more domestic investor participation, as this would help foster a better mix of local and overseas liquidity, says David Neuville, a Hong Kong-based partner at Simmons & Simmons.
A LIQUID WAY TO INVEST
“We are a long-term investor. When we assess investment products like InvITs, it is a long-term calculation of the attractiveness in terms of valuation and prospect of the company,” says Joseph Lai, a portfolio manager at Platinum Asset Management who runs the firm’s Asia fund business.
The Australian investment firm, which has invested more than A$5 billion ($3.8 billion; €3.4 billion) in Asia, is one of IRB InvIT’s anchor investors. It also holds a stake in IRB Infrastructure, the sponsoring developer company.
IRB Trust aims to provide an IRR of 12.4 percent to institutional investors, based on a 5.5 percent traffic growth assumption for the road assets that underpin it, according to Lai. “A 12 percent return, by any standard, is very attractive,” he says, adding that this compares favourably to the 6.5 percent yield currently generated by Indian government bonds.
InvITs do not bear any construction and development risk, since they manage only operating assets. They offer a high-yielding, lower-risk profile compared to investing in stocks of infrastructure companies, Lai says.
Looking at the Indian macroeconomic picture, he notes that the road sector is currently being supported by the Modi administration’s efforts to promote economic growth through vast infrastructure spending.
“As an economy picks up its momentum, it is not uncommon to see road traffic growth reach 10 percent, or even 15 percent in some cases. A 5.5 percent assumption is quite conservative for us,” says Lai.
“With improved governance at the top, supportive policies and great demand for new infrastructure, investing in Indian infrastructure is an interesting proposition, and InvITs offer a liquid way to invest in the asset class,” he adds.
Infrastructure construction is a capital-intensive business, notes the Sydney-based manager. “Infrastructure trusts could be a funding vehicle which facilitates capital recycling for the developers,” Lai argues.
Through listing the assets, infrastructure companies can use the proceeds to repay debt and reduce leverage. With a better-looking balance sheet, they can enjoy a lower cost of funding for the development of future projects. For investors, there is another upside: the trust’s ability to grow by acquiring additional assets from its sponsors.
Creating a trust for operating assets provides a consistent channel to access future funding, as the company can continue to inject new operational assets into the vehicle, says Harsh Shah, chief financial officer at Sterlite Power Transmission. A more advantageous tax regime and public markets’ higher efficiency explain why the company favoured establishing the India Grid Trust over selling the assets in the private market, he explains.
In the headline of its report on the IRB Infrastructure stock, Macquarie’s research team said that IRB’s InvIT launch marked the “beginning of a new era”. The trust is seen as a sustainable model for the likes of IRB to develop new projects and recycling assets two to three years after commencing operations. “This will help to upfront returns from the road projects and would remove dilution concerns on the listed entity,” Amit Sinha and Inderjeet Singh Bhatia, analysts at Macquarie Capital Securities India, wrote in the note.
Both the government and infrastructure companies are keen to see InvITs become successful in the Indian market, observe lawyers at Simmons & Simmons. However, given the reduced number of private infrastructure companies and the limited availability of quality assets, the growth of the InvIT market will likely be slow and steady, adds Meghana Pandit, director of infrastructure coverage at IDFC Bank.
Investors should also keep in mind business, tax and liquidity-related risks, suggests the Simmons & Simmons team – in India, as elsewhere, new products are not always insulated from old-fashioned risks.