Recent Spurt: NIIF increases its role in infrastructure financing at a fast pace

NIIF increases its role in infrastructure financing at a fast pace

Registered in December 2015, the National Investment and Infrastructure Fund (NIIF) was created by the government on the concept of a sovereign wealth fund. The fund showed caution in its first year of operations. Activity was kick-started in the second half of 2017. Thereafter, the NIIF was able to raise funds from global institutional investors, including the Abu Dhabi Investment Authority (ADIA) and Temasek Holdings, and made a slew of investments in the infrastructure sector. Going forward, if activity gathers pace, the fund has the potential of becoming a crucial investor anchoring infrastructure financing in the country.

About the fund

The NIIF is structured as a Category II Alternative Investment Fund registered with the Securities and Exchange Board of India. It is targeting a corpus of Rs 400 billion, of which the government will contribute 49 per cent and the rest will be raised from strategic investors, both foreign and domestic. The fund has been created to provide equity and quasi-equity support to non-banking financial companies (NBFCs) and financial institutions engaged in infrastructure financing. These institutions will be able to leverage this equity support and provide debt to commercially viable greenfield, brownfield and stalled projects. The NIIF can also invest either directly in infrastructure projects/companies or create sub-funds under it. It is envisioned as a mother fund with several sectoral feeder funds.

The NIIF currently has a total committed capital of over $3 billion across three funds – the Master Fund, the Fund of Funds (FoF) and the Strategic Fund – each with its own distinctive investment mandate. The Master Fund is an infrastructure fund investing primarily in operational assets in core infrastructure sectors such as roads, ports, airports and power. It is likely to follow a strategy of establishing sector-specific operating companies and aggregate assets to build a strong diversified portfolio. The FoF seeks to partner with experienced fund managers who have a strong track record and have demonstrated their ability to successfully execute their investment strategy. It invests across infrastructure services and allied sectors (traditional infrastructure, green energy, social infrastructure, manufacturing and services), product strategies (equity, mezzanine and debt) and investment styles (early stage, growth and control). The Strategic Fund is aimed at growth and development stage investments in projects/ companies in a broad range of sectors that are of economic and commercial importance and are likely to benefit from the country’s growth over the medium to long term.

The government has already approved its contribution of Rs 200 billion to the NIIF with the same amount being raised by the fund from institutional investors. Of the government allocation of Rs 200 billion, only Rs 10 billion was budgeted for 2017-18, down from the budget estimate of Rs 40 billion for 2016-17. The reduction in budgetary allocation for 2017-18 was mainly in light of the fact that the NIIF could not attract any foreign or domestic fund/ company during 2016-17. The government was therefore not required to contribute anything either. The 2017-18 budgetary support of Rs 10 billion will be leveraged to raise Rs 80 billion from various sources to fund projects worth Rs 160 billion.

Developments so far

During calendar year 2016, the NIIF only signed a couple of MoUs with foreign governments and investors without actually making any investments or raising funds. After almost a year’s wait, the fund achieved a significant milestone by closing its first major deal with ADIA in October 2017. Under the deal, ADIA agreed to invest $1 billion in the NIIF’s Master Fund, thereby becoming the latter’s first institutional investor with contributions from four domestic investors – the HDFC Group, ICICI Bank, Kotak Mahindra Life Insurance Company Limited and Axis Bank.

With regard to investments, the NIIF, in January 2018, announced the creation of its first investment platform, in partnership with Dubai-based port operator DP World Private Limited, to invest up to $3 billion in ports, terminals, transport and logistics businesses in the country. The joint venture, Hindustan Infralog Private Limited, acquired a 90 per cent stake in Continental Warehousing Corporation (Nhava Seva) Limited, a multimodal logistics company, in March 2018. Prior to that, in February 2018, the NIIF initiated activity in its FoF by launching the Green Growth Equity Fund (GGEF). The NIIF and the UK government committed £120 million each for the fund, which will be managed by EverSource Capital. The GGEF aims to raise £500 million from global institutional investors to invest in areas such as renewable energy, clean transportation, water, sanitation, waste management and emerging technologies in India which offer significant investment opportunities and have the potential for attractive returns. Besides the UK government, multilateral development bank Asian Infrastructure Investment Bank (AIIB) also approved an equity investment of $100 million, in June 2018, in the NIIF’s FoF as Phase I of the fund’s initial closing. The AIIB is considering a further investment of $100 million as a part of Phase II for the final closing, which would bring the bank’s total commitment to $200 million.

Fundraising activity continued with the NIIF securing the second closure of its Master Fund in September 2018. Singapore state investment firm Temasek Holdings committed an investment of up to $400 million in the Master Fund. Temasek’s commitment may include potential co-investments with the government-anchored fund.

The NIIF forayed into the housing space by infusing Rs 6.6 billion ($90 million) in the second affordable housing fund of HDFC Capital Advisors Limited in October 2018. It joined ADIA as a limited partner in the HDFC Capital Affordable Real Estate – 2 fund, which provides mezzanine finance to developers of mid-income and affordable urban housing projects. This marks the second investment by the NIIF’s FoF.

In its latest move, the NIIF announced the first investment from its Strategic Fund, which was also its first control transaction. In October 2018, it agreed to acquire a majority stake in IDFC Infrastructure Finance Limited (IDFC-IFL), an NBFC which manages a debt fund. This will enable the NIIF to provide private debt funding to infrastructure projects. This investment demonstrates the NIIF’s ability to make commercially attractive countercyclical investments, as this comes at a time when the NBFC segment is facing some temporary headwinds.

In sum

Although there has been an uptick in activity by the NIIF this year, the initial inertia in its operations reflects its overly conservative stance. That said, the NIIF must continue the momentum in investment activity to support the infrastructure sector amidst a scenario of decelerating bank credit, liquidity concerns of the NBFC segment, the mounting problem of non-performing assets, and slower-than-anticipated progress exhibited by alternative funding instruments such as infrastructure investment trusts and infrastructure debt funds. With trillions in investment required for the infrastructure sector over the next two decades, the NIIF must gear up to take the responsibility of routing long-term capital towards the sector.

Ishita Gupta