Pension & Sovereign Funds Eyeing Infrastructure Sector in India

For the last two years, India has been on high radar of the global pension and sovereign funds. This isn’t surprising given that India has several economic factors going strong in its favour – it currently ranks sixth in the list of eight great powers, is the seventh largest economy and is the seventh wealthiest country in the world. What is more, it is expected to be the second biggest economy by 2050 in the world. The World Bank predicts that the Indian economy is poised to grow at more than 7% in the coming years.
The investment growth story of Indian is going to get bigger and better, and there is no doubt the pension and sovereign funds from Canada, Russia, Singapore and Qatar, among a few others want to ride on the bandwagon. In fact, data reveals that sovereign wealth funds hold about Rs2 trillion in Indian equities and about Rs33. billion worth of Indian debt.

But, Infrastructure Sector Takes the Cake

While these foreign portfolio investors have been actively scouting opportunities in the different asset classes in India, it is the infrastructure sector that has caught their eye. A recent report highlighted that the global pension funds and sovereign wealth funds may invest up to $50 billion in India’s infrastructure sector over the period of the next five years. This will give a tremendous boost to the Indian infrastructure sector, which has already grabbed a few major deals from various sovereign wealth and pension funds so far.

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> Canada Pension Plan Investment Board (CPPIB) – L&T IDPL, Bharti Infratel
CPPIB has been investing in India since 2010 and has already committed Rs2000 crores and Rs2000 crores in L&T Infrastructure Development Projects and Bharti Infratel respectively. It has even formed a strategic alliance with the Shapoorji Pallonji Group to acquire stabilized office buildings in the major metropolitan cities of India.

> PSP Investments – Reliance Infra Power Distribution
PSP Investments, the second Canadian pension fund after CPPIB to expand its roots in India, took a 49 % stake worth Rs3500 crores in Reliance Infra Power Distribution in November 2015. A year later, it claimed ownership of four Indian toll roads totalling 710km as part of a global transaction with Spanish infrastructure company Grupo Isolux Corsan. The deal which is assumed to be around Rs15,000 crores comprises 291km road from Panipat to Jalandhar in Haryana and Punjab, a 94km project from Kishangarh to Beawar in Rajasthan, a 133km project from the Maharashtra-Gujarat border to Hazira in Gujarat and a 192km project from Varanasi in Uttar Pradesh to Aurangabad in Bihar.

> Caisse de Dépôt et Placement du Québec (CDPQ) – Renewable Assets
CDPQ, the second-largest pension fund in Canada (after CPPIB) made the Indian infrastructure sector do a happy dance when it announced in March 2016 that it will invest more than Rs1000 crore in the renewable assets such as hydro, solar and geothermal power. In October 2016, CDPQ made another breakthrough deal by entering into a long-term partnership with Edelweiss Financial Service Ltd to invest Rs5000 crores in stressed assets and specialized corporate credit in India. Close on the heels of this announcement, CDPQ shook hands with with Tata Power International Pte. Ltd, ICICI Venture, Kuwait Investment Authority (KIA) and State General Reserve Fund (SGRF) of the Sultanate of Oman, to facilitate investment in the India power projects with an initial capital of up to $850 million.
Since infrastructure and power generation sectors are highly interdependent, such a vast infusion of funds will reduce the dependency on bank credit and help allocate resources judiciously.

> APG Asset Management – Retail Assets
The Dutch fund marked its foray into the Indian infrastructure space in 2012 with investment in the hotel chain Lemon Tree. A few months later, it entered into a joint venture with Godrej Properties to construct residential apartments. In November 2016, it made Rs2600 crores ($450 million) investment in retail assets, with the investment firm The Xander Group as the co-investor. Together, they have purchased three shopping centres across India for $300 million. They will use the balance $150 million to buy or construct new retail real estate assets and lifestyle destinations in top-tier cities.
Others Funds Marking Their Footprint Too
Several other sovereign and pension funds have either pumped the funds into the sector or are in the preliminary discussions.

> Brookfield Asset Management Inc., Canada’s largest alternative asset manager has plans to invest $2 billion over the next two to three years. It has already announced a joint venture worth Rs7000 crores with State Bank of India (SBI) to purchase distressed assets. Before that, it acquired AIG Global’s real estate in India, Unitech Corporate Park, six roads & three power projects from Gammon Infrastructure Projects, office & real estate assets from Hiranandani Developers (Rs6700 crores) and a majority stake in R Com telecom power company (Rs11,000 crores). It has also invested $20 million in Kotak Mahindra Bank’s Infrastructure Fund.

> Russian Direct Investment Fund (RDIF) had earlier in 2014 invested in $1 billion in power projects with the Indian infrastructure investor IDFC. Now, it is expected to share its expertise in infrastructure in setting up of infrastructure related funds and joint projects.

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> GIC and Blackstone, Singapore’s two major sovereign wealth funds have also emerged as major players in the Indian infrastructure market with projects in hotels, shopping malls, office spaces and residential. Singapore’s another fund Temasek is also looking into tapping the market.

> The West Asian sovereign wealth funds have also shifted their focus from European markets to emerging markets, including India. For instance, Qatar Holding, the subsidiary of Qatar Investment Authority sovereign wealth fund, has recently announced an investment of $250 million in affordable housing across various cities of India. This is welcome news for developers who are looking at cheaper interest rates and tax exemptions. Abu Dhabi Investment Authority (ADIA) sovereign wealth fund, along with the Australian investment firm Macquarie is making significant investments in the Indian malls. Kuwait Investment Authority has invested $300 million in GMR Infrastructure.

> Australian Government Future Fund has also shown interest in investing in the Indian roads, clean energy and telecommunications.

Reasons Why Sovereign & Pensions Funds are Investing in the Indian Infrastructure Sector

By now, you must have realized the scope of current and future investment in the infrastructure sector of India by various sovereign and pension funds. But, is India as the fastest growing economy, bullish market and super power the only reasons? There is more to the tip of the iceberg than you can see. Here are key factors that are making the Indian infrastructure market a hotspot for these funds.

1.Indian infrastructure – key driver of the world infrastructure
According to a PwC report, the Indian infrastructure market is expected to grow by 7-8% annually over the next decade to over $53.6 trillion by 2025 and will represent nearly 60% of the world total! The driving triggers behind the increase in infrastructure spends would be the sectors like housing, healthcare, transportation, telecom and education. Also, the infrastructure investment contribution in India’s total investment has been on a steady rise, from 23.3% in 2007 to 32.5% in 2015.So, there is a major thrust on infrastructure development. This sector currently contributes to 6% of India’s GDP, which needs to be increased to 9%. Hence, sovereign wealth and pension funds can bring the big monies required.

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2. Friendly investment policies & initiatives
The ruling government has announced a target of Rs25 trillion (US$ 376.53 billion) investment in infrastructure over a period of three years. However, it still needs Rs 31 trillion (US$ 454.83 billion) to spend on infrastructure segments. Private equity firms, foreign portfolio investors as well as sovereign and pension funds can fulfil this shortfall since the outlook of the government looks quite positive owing to easing of investment restrictions.
Even the demonetization drive has created a positive impact on India as a fruitful infrastructure investment destination. The infrastructure sector in India is highly dependent on cash transactions and black money. Post demonetization, there has been the wipe out of ‘dirty’ money, which has increased the investor confidence of all foreign investors.
After the introduction of the new FPI regime by SEBI, there has been a significant increase in the foreign investor interest, including sovereign wealth and pension funds in India.

3. Setting up of National Investment and Infrastructure Fund (NIIF)
The government of India has launched NIIF, as a quasi-sovereign wealth fund with the corpus size of Rs40,000 crores (US$6 billion) to raise long term patient capital for infrastructure development. The government would invest 49%, or Rs.20,000 crores (US$3 billion), while the remaining amount be will be funded by long term international investors such as sovereign wealth funds, insurance and pension funds and endowments. NIIF has already identified the first eight projects, including a few road projects and a national power transmission project. NIIF has attracted several sovereign and pension funds, and though nothing has been officially announced yet, there has been news about NIIF signing MoUs with Qatar Investment Authority, Abu Dhabi Investment Authority and Russia’s RUSNANO.

4. Infrastructure status to housing
The Budget 2017 awarded infrastructure status to affordable housing. It will be regulated by the Real Estate Regulatory Authority (RERA) and is expected to bring reforms, structure and transparency to the real estate market. Players such as GIC, Blackstone, Qatar Holdings and Abu Dhabi Investment Authority have already forayed into this space, and others will follow soon.

5.Extended tenure of highway O&M contracts
The government is considering extending the tenure of highway Operation and Maintenance (O &M) from 9 years to 29 years. Since the sovereign wealth and pension funds have a long term horizon and get a better yield on long term projects, they have a keen interest in investing in the domestic roads and highway infrastructure.

However, India Needs to Identify Red Flags

While the sovereign wealth and pension funds will usher the Indian infrastructure sectors into a new era, there is a strong need for the government to keep a tab on any negative developments that may hamper their interest. The withdrawal of the world’s largest sovereign wealth fund from more than 69 Indian companies, including some biggies, due to violations in human rights, environmental and climate impact is an indication of how things can go against India. Hence, India needs to show that is has a responsible government, if it wants to lure global sovereign and pension funds into its infrastructure nest.
Sovereign wealth and pension funds are looking for suitable business climate and long-term returns, which currently work very well in the favour of the Indian infrastructure. It’s time for India to count on them!