The year 2020 has been an exceptional year with new set of challenges and learnings. In between the COVID-19 pandemic, US Presidential elections, India-China skirmishes, sharp GDP cuts and the pursuant upgrades - global capital markets have gyrated from down-circuits to record highs. The only constant in 2020 has been the volatility. And one of the key learnings of 2020 has been portfolio diversification!
Portfolio diversification is a strategy that has held wise investors in good stead in uncertain times, by not putting all eggs in one basket – be it pure debt, pure equity, gold or other risky assets. Innovative investment options like Alternate Investment Funds (AIF), Municipal Bonds, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have emerged as rewarding investment alternatives for today’s uncertain times beset with high volatility given their steady returns and favourable risk-reward.
Diversification is important not only from a risk perspective but also from a return and growth perspective. In a scenario where fixed deposit and savings deposit rates have plummeted to 4-6 percent, investors need to look away from conventional portfolio to alternatives like InvITs/REITs (expected yield 7-11 percent) to consistently beat inflation and grow their portfolio.
InvITs, especially which have annuity-like business models for their underlying projects, have been a blessing in the current volatile scenario. InvITs are designed to mitigate the under-construction risks in the infrastructure sector (atleast 80 percent investment in operational projects) and provide steady predictable cash flows as 90 percent of the net distributable cash flows gets distributed to the investors. In addition to the stable cash flows, such platforms also provide an opportunity to grow by adding more operating projects and increase the yield. These InvITs are listed on stock exchanges in India and thereby providing the ability to sell these units without any lock-in unlike traditional stable products like fixed deposits or close-ended funds. Hence, InvITs while no different from its pure-play corporate peers, stand out due to:
1. Limited execution risk: 80 percent of the investment has to be in operational, revenue-generating projects
2. Stronger corporate governance framework: 50 percent of the Board to be independent, assets to be held by an indepedent trustee, etc
3. Tighter regulations on leverage: Unitholders approval and AAA credit rating necessary to increase leverage beyond 25 percent
4. Better protection of minority rights: Unitholders approval required on matters related to sponsor change, change in investment strategy, material related party transactions, etc
5. Steady risk-adjusted returns: Atleast 90 percent of the net distributable cash flow to be distributed to unitholders
InvITs offer a win-win situation for all as because of their pass-through status, InvIT units offer tax-efficient returns and are well-suited for long-term investors. InvITs are inherently highly regulated, low-risk products that adhere to robust corporate governance norms prescribed by SEBI. InvITs provide a better way in which private developers could monetise their investments in infrastructure projects, to enable them to raise cash for new project development, thus freeing up the much-needed capital to spur infrastructure growth. Thus, InvITs facilitate the creation of infrastructure assets by providing better financing and ownership opportunity while generating healthy returns.
From the first InvIT listing three years ago, the product has quickly gained popularity. The market has grown quickly to 7 InvITs and 2 REITs across infrastructure assets like roads, power transmission, commercial estate, and gas pipelines with a market capitalization of $18 billion. These InvITs and REITs put together garnered over INR 2 lakh crore worth of assets under management with over Rs 40,000 crore equity raised from domestic and global investors like GIC, KKR, CPPIB, Brookfield, Blackstone, OMERs, Allianz, IFC, etc.
While InvITs has taken off better than expectations -there is still significant market upside for Indian InvITs as they currently form just 0.7 percent of the Market cap/GDP ratio as compared to 20 percent in Singapore and 7 percent in HK. While the future trajectory of InvITs in India would depend on the quality of management, accessibility to investors and stability of the policy framework; there are several InvITs (Power Grid, NHAI, Tata Power, etc) already in the pipeline. Global rating agency CRISIL believes that InvITs-REITs have enormous potential of Rs 8 lakh crore in India over the next 4-6 years.
ICRA believes that InvITs are likely to gain significant traction in the next few years and have the potential of channelising significant long-term capital (like pension and insurance funds) into the infrastructure sector. They estimate that InvITs alone can acquire over Rs 4 lakh crore of infrastructure assets in five years. Experts see InvITs as the preferred route of infrastructure investment for long-term investors going forward, given the stable regulations but say that a supportive taxation regime and a conducive macro environment will be required to support investors' appetite.
(The author is Harsh Shah, CEO, IndiGrid Trust)
Disclaimer: Views expressed are personal
(Edited by : Pranati Deva)