CPPIB in 2014 committed a `2,000 crore investment in Larsen and Toubro Ltd’s subsidiary L&T IDPL. PSP Investments in November said it would buy a 49% stake in Anil Ambani-led Reliance Infrastructure Ltd’s electricity generation, transmission and distribution business in Mumbai and adjoining areas.
CPPIB in 2014 committed a `2,000 crore investment in Larsen and Toubro Ltd’s subsidiary L&T IDPL. PSP Investments in November said it would buy a 49% stake in Anil Ambani-led Reliance Infrastructure Ltd’s electricity generation, transmission and distribution business in Mumbai and adjoining areas.

Global pension, sovereign wealth funds to invest $50 bn in infra

Indian infrastructure firms are trying to sell assets since they have to service long-dated liabilities, say analysts

Mumbai: Global pension funds and sovereign wealth funds may invest up to $50 billion in India’s infrastructure sector over the next five years, a report by investment bank Ambit Corporate Finance and the UK’s City of London said.

The estimate comes at a time when long-term global investors are looking to invest in new geographies and promoters of many infrastructure companies are looking to sell assets.

To put things in perspective, infrastructure attracted a meagre $3.7 billion of investment, both domestic and foreign, in 2015, according to data from Equirus Capital Pvt. Ltd, another investment bank.

Indian infrastructure firms are trying to sell assets since they have to service long-dated liabilities, said Ambit managing director Rahul Mody.

“With the infrastructure asset supply becoming scarce in Western markets, there is a significant opportunity to attract meaningful investments for India from these investors," he said.

India has attracted the attention of sovereign wealth funds, global pension funds and insurance firms looking for a majority stake in operational infrastructure assets. Such investors could come to the rescue of Indian firms struggling with huge debts and a liquidity crunch.

Canadian pension funds such as the Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ) and PSP Investments are already setting up investment offices in India and carrying out due diligence on assets in roads, renewable energy and power transmission and distribution. Other funds from North America, the Middle East, Australia and Asian countries such as Japan, Korea and China are also looking at investment opportunities in the sector.

As more projects start operating, more deals will happen, Mody said. He expects increased deals in the roads, renewable energy and power transmission and distribution segments. This is because the business dynamics and cash flow profile of these assets match investor expectations, said Mody.

CPPIB in 2014 committed a 2,000 crore investment in Larsen and Toubro Ltd’s subsidiary L&T IDPL. PSP Investments in November said it would buy a 49% stake in Anil Ambani-led Reliance Infrastructure Ltd’s electricity generation, transmission and distribution business in Mumbai and adjoining areas. CDPQ on 9 March pledged an investment of $150 million in the renewable energy sector.

According to Ashish Agarwal, director, infrastructure at Equirus Capital, after testing waters over two years ago, global pension funds today are increasingly becoming active on transactions.

With the government looking to increase infrastructure spending, the global funds could invest in the sector indirectly or even look to buy operational assets such as the ones auctioned by the National Highways Authority of India, Agarwal added. “There is no doubt that there will be huge sums of pension funds money coming directly and indirectly in the infrastructure sector," he said.

According to data from Equirus Capital, Indian infrastructure companies in 2015 raised about $3.7 billion from 36 transactions through mergers and acquisitions, initial public offerings, qualified institutional placements and private equity investments. This was 27% higher than the $2.9 billion raised across 23 transactions in 2014.

Still, $50 billion could be an aggressive estimate given these investors are particular about investing in low-risk and stable assets. Several private equity investors who invested in the sector in the last decade have not been able to sell their investments, as factors such as delays in land acquisition and environmental approvals cropped up.

Pension and sovereign funds, however, may fare better as they have a longer time horizon for their investments. Unlike private equity investors, who look to exit investments every few years, large pension funds seek long-term investments and come with a deep pool of capital. They typically look for a 14-15% yield from their investments in India.

Availability of assets in India with steady cash flows is now becoming aligned with the return expectations of the investors such as the Canadian pension funds, said Manish Agarwal, partner and leader-infrastructure at PwC India.

India has the capacity to absorb big infrastructure investments to the tune of $50 billion, said R. Venkataraman, senior director at Alvarez and Marsal.

“Pension funds typically look at long-term investments. Indian infrastructure story fits the bill perfectly to that extent because infrastructure investments take a long time to start giving yields," he said.

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