How InvITs are catering to the nuanced needs of investors

Investors have traditionally reaped rich rewards through investment in Indian equities. However, over the last one year, markets have been volatile due to geopolitical tensions and rise in global inflation. On the other hand, fixed income investment avenues are now delivering negative real returns to investors. No wonder that investors are now looking to diversify their portfolios in investment avenues that offer superior risk adjusted returns.

Enter Infrastructure Investment Trusts or InvITs as they are popularly known as, which are slowly garnering interest from Indian investors.

As of January 2022, India had around 19 InvITs that are registered in India. These InvITs currently own over Rs 1.5 lakh crore worth of assets. While these products are still in their nascency in India, similar products have existed in developed markets for over a decade — a case in point being Yieldcos in the US. These vehicles act as an excellent conduit for the flow of long-term capital towards operating infrastructure projects. While InvITs may be publicly or privately listed, they are broadly segregated into 5 categories based on the type of assets they own — 1) Energy 2) Transportation 3) Communication 4) Social and commercial infrastructure and 5) Others.

Here are some key reasons that InvITs should be considered actively as a part of an investor’s asset allocation: –

Participation in the India story
Infrastructure is key to the development of any economy and InvITs provide an opportunity for investors to partake in India’s growth story through investments in operating infrastructure assets. InvITs aid in a seamless and transparent participation of investors by converting physical infrastructure assets into financial products. Most investors do not have the ability to acquire these assets entirely due to the sheer size and the lack of expertise required to manage them. Investment in InvITs also provides exposure to multiple such assets thus helping to diversify the risk.

Ability to deliver predictable returns
Operating infrastructure assets are often strategic in nature and not typically impacted by cyclicality or vagaries of demand and supply. Further, as per the SEBI regulations, InvITs are mandated to invest a minimum of 80% of their assets in projects that are completed and revenue-generating while limiting their exposure to under construction projects at 10%. This significantly lowers the risk for investors as it optimally addresses the biggest risk associated with the infrastructure sector, i.e., delay in completion.

These characteristics provide InvITs an ability to deliver predictable returns to its investors. This characteristic of the product was most visible during the pandemic, where the yields and valuations of InvITs were largely stable despite the economic turmoil witnessed. The low correlation of these instruments with public markets helps in better financial planning for investors.

An optimal hybrid product
InvITs are hybrid products i.e. they mimic both debt as well as equity. InvITs are mandated to distribute a minimum of 90% of their cash earnings to investors on a semi-annual basis. The long-term secured contractual nature of cash flows from underlying infrastructure projects makes these distributions both steady and predictable. Additionally, the InvIT also can acquire assets thereby bringing in the aspect of capital gains into play as well. This aspect has been adequately demonstrated by publicly listed InvITs. This makes the product a truly hybrid one with offering dual benefits — yields as well as capital gains, which very few products currently offer.

Power of compounding
InvITs invest in long-term strategic infrastructure assets. This makes them a great tool for wealth creation and provides benefits to investors that accrue from the power of compounding over the long term i.e. a better multiple of capital on their investment.

Equally important is the fact that these are liquid instruments that can easily be bought and sold on the exchanges at a minimal cost.

Regulated and transparent
InvITs have stringent regulatory requirements, including the independent trustees, board having 50% independent directors, distribution of 90% cash flows to investors, independent valuation of assets by third parties, mandatory rating, and cap on leverage. This helps enhance the governance and transparency for such products. Additionally, InvITs are traded on exchanges which provides complete transparency to investors.

While the above points underscore the value accretive nature of InvITs, it is necessary to be cognizant of the risks that these investments carry including operational and refinancing risks. Also, it is important to appreciate that the pricing for an InvIT is determined by the quality of the underlying assets i.e. their cash flows and counterparties, as well as the ability to grow. Further, it is important that all investment decisions are taken from a portfolio perspective and aligned with the investor’s overall risk return objective and time-frame for investments.