Betting Big: PE, sovereign wealth and pension funds up their infrastructure game

PE, sovereign wealth and pension funds up their infrastructure game

Private equity (PE) firms have been playing a crucial role in financing infrastructure companies and projects. Their journey in the Indian market has been interesting, evolving from providing growth capital to making control investments. The country’s infrastructure sector has numerous investment opportunities for PE firms. Brownfield assets across various sectors such as roads, transmission, gas and airports are lucrative bets. Further, the government’s as­set monetisation drive has created a stir among investors looking for operational assets with stable returns. PE funds will continue to be a critical part of India’s infrastructure growth story, given their strategic role in operating and managing assets.

Key trends

  • Investments in start-ups: The past two years have seen increased investments in tech-enabled start-ups operating in the infrastructure domain, particularly logistics. Venture capital (VC) funding in tech-focused logistics start-ups went up from Rs 6 billion in 2018 to Rs 23 billion in 2020, as per deals tracked by India Infrastructure Research. The overall demand for logistics has risen considerably, driven by the e-commerce boom and supportive policy moves such as the goods and servi­ces tax. The sector’s resilience during the Covid-19 pandemic has further bolstered in­vestor confidence. Logistics start-ups such as Xpressbees, LetsTransport, BlackBuck and Shiprocket are some of the companies that have successfully raised funds from VCs.
  • Participation in new structures: The introduction of models such as toll-operate-transfer (TOT) and infrastructure investment trusts (InvITs) has augured well for infrastructure fin­ancing. A total of Rs 170 billion has been ra­i­s­ed thus far through the offer of three TOT bu­ndles, while around Rs 770 billion capital has been mopped up through private placements and public listing of InvIT units. These numbers point to the potential of innovative finan­cing structures and the positive market res­po­nse to these. In fact, sovereign wealth funds (SWFs) and pension funds have been participating in the infrastructure sector through InvIT transactions. For instance, Singapore-ba­sed GIC announced an investment of $621 million (Rs 44 billion) in IRB InvIT, and Cana­dian pension fund Ontario Municipal Employ­ees’ Retirement System invested $121 million (Rs 8.7 billion) for a 22.4 per cent stake in IndInfravit Trust.
  • Platform investments: More recently, there has been a surge in collaborations between SWFs/pension funds and PE players/developers for the creation of sector-specific platfo­rms. Some instances of these are Virescent In­fra­structure (backed by KKR), O2 Power (ba­cked by Temasek and Sweden’s EQT), and Hindustan Infralog (NIIF-DP World joint venture). Such platforms have been mostly prominent in the logistics, conventional power and renewable energy sectors. Besides, the country’s quasi-SWF, the NIIF has garnered investments from multiple investors, including the Abu Dhabi Investment Authority (ADIA), the Canadian Pension Plan Investment Board (CPPIB), the Ontario Teachers’ Pension Plan and the Asian Development Bank.
  • Sectors of focus: Investors have been looking at sectors other than roads and power for superior returns. Renewable energy is high on their radar due to the strong government push to clean energy and the abundance of operational solar assets. Large renewable energy de­velopers such as Greenko, ReNew Power and Azure Power were recipients of big-ticket fu­nding from foreign investors. Warehousing facilities, telecom tower assets, and data centres are other emerging areas of interest.
  • Exits through initial public offerings (IPOs): Many initial challenges of investing in tech firms, such as exits through IPOs and secondary deals, are being more than adequately ad­d­ressed. The recent IPOs of online aggregators such as Zomato, Nykaa and Policybazaar are also convincing PE funds and other public market investors that they have a stable exit path down the road and do not have to rely on a rare acquisition deal. The buoyancy in the IPO market has further boosted investor confidence to tap this route for exiting.

Snapshot of 2021

During 2021, around Rs 520 billion worth of PE in­vestments were seen across 48 deals. In ter­ms of number of deals, logistics topped with 22 PE/VC transactions worth Rs 135 billion. However, in terms of deal value, renewable en­ergy ranked first with Rs 180 billion worth of in­vestments across 14 deals. This was followed by roads (Rs 106 billion and seven deals) and tele­communications (Rs 76 billion and two deals). There were five deals worth over Rs 40 billion in the telecom, road, logistics and re­ne­w­able energy sectors. An investment of around Rs 53 billion by GIC and Cintra in IRB Infra­structure Developers needs special mention as it was the biggest equity fundraise by a listed road and highway firm. Another notable transaction during the year was a fundraise of $62 million (Rs 4.6 billion) by the Virescent Renewable Energy Trust, India’s first renewable energy InvIT, from a group of investors led by the Alberta Investme­nt Management Corpora­tion. The much-awaited NHAI InvIT also witnessed strong demand from investors. CPPIB and the Ontario Teach­ers’ Pension Plan acquir­ed 25 per cent each of NHAI InvIT units as anchor investors.

Opportunities for monetisation

In a bid to invite private investment in infrastructure, the government has laid out a roadmap for the monetisation of revenue yielding assets. It aims to do so via InvITs and public-private partnerships (PPPs). Gas pipelines, toll road assets, power transmission assets and warehouses are proposed to be housed under InvITs, while railway stations, brownfield airports and major port projects would be privatised through PPPs. The maturing InvIT market and success of past InvIT stories will attract investors to this product.

SWFs and pension funds are stepping up investments in India’s infrastructure space due to the favourable risk-return matrix across ass­et classes, especially in roads, renewable energy, and telecom tower and fibre assets. Con­ducive policies such as tax exemption to notified SWFs and pension funds for their ear­nings from infrastructure investments in India are big boosters.

Net, net, the opportunity for PE players, SWFs and pension funds in the country’s infrastructure space is huge, given the robust asset monetisation pipeline and the government’s massive National Infrastructure Pipeline.