India’s sovereign fund rewrites business model

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Aden - Yasmin Abdel Azim - An under-construction metro station in Kolkata. India will actually need close to $5 trillion to fulfil basic infrastructure needs, according to a report by Global Infrastructure Hub and Oxford Economics. Image Credit: AP

Abu Dhabi: India’s audacious aim to attract investments of $1.5 trillion (Dh5.5 trillion) into its capital-starved infrastructure sector over the next five years can only be realised through unique experiments in public money and private investments from countries like the UAE.

That’s according to the chief head of the country’s first sovereign wealth fund.

“In India, you have a deficit of equity capital — that’s been the case for the a long time,” Sujoy Bose, Managing Director and CEO of the National Investment and Infrastructure Fund (NIIF), told Al Khaleej Today. “The savings rate in India is pretty good but most of it goes to the debt market.

“At the same time, India needs large investments in infrastructure and the government’s objective now is to bring $1.5 trillion over the next five years. It’s very clear that the way to achieve that goal is through a combination of public sector money and private sector funds.”

Yawning deficit

Although India is one of the world’s fastest-growing emerging markets, it faces a massive infrastructure gap. According to a report by Global Infrastructure Hub and Oxford Economics, the country is expected to invest $3.9 trillion in infrastructure by 2040 under current trends, but will actually need close to $5 trillion to fulfil basic infrastructure needs.

That critical lack of capital in infrastructure is what the NIIF — arguably India’s boldest gamble to boost the sector — sees as lucrative opportunity.

“When the NIIF was set up in 2015, the idea was to create a vehicle to combine government, domestic and international capitals and attract more equity investments — which has always been the big gap,” said Bose.

“That’s the purpose and mission of NIIF: to become a channel for supporting public-private capital, domestic-international capital and then channel it to the infrastructure sector through a commercial mindset. At the end of the day, not only are we getting capital for infrastructure, but that capital is also giving our investors healthy commercial returns.”

Anchor investor

NIIF is hard to pigeonhole: a sovereign-backed, independently managed fund seeking to leverage commercial institutional capital for investments in India’s infrastructure. With a seed investment of $3 billion by the Indian government, the NIIF counts the Abu Dhabi Investment Authority (Adia) as an anchor investor, along with Temasek, AustralianSuper, Ontario Teachers’ Pension Plan, Axis Bank, HDFC Group and Kotak Mahindra Life Insurance among its wide range of investors for the three funds it manages.

The Canada Pension Plan Investment Board (CPPIB) joined that list announcing plans to invest up to $600 million in NIIF. And the NIIF is also a name that cropped up during bids to revive India’s now-defunct Jet Airways, as well as during the recently-concluded IPO as a potential sovereign investor.

“I haven’t come across too many other situations where an institution has been created with government capital and that’s been able to attract capital so quickly from sovereign wealth funds, foreign institutional investors and pension funds,” the CEO added. “If we achieve our objectives — which is to take the $3 billion and then be catalytic to multiplying that in a commercial platform, then I think we would have created a unique model for a problem that many countries are trying to solve.”

That model is also the reason why Bose was recently in Abu Dhabi.


“Several African countries have created similar vehicles, but not too many of them have been able to attract international institutional capital into those vehicles,” Bose said. “I have come here on the invitation of Adia to join the Africa Investment Summit and describe what we have done with NIIF in India, so that it can be replicated elsewhere.” Replicating the model such might prove to be difficult though, given its eclectic range of interests and investments. In the past couple of years, it has acquired a 500MW renewables platform, created a joint venture for smart meters, secured a stake in Mumbai International Airport’s operator, invested in the affordable housing sector and bought 89 per cent in an NBFC (non-banking financial company), which is actually an infrastructure debt fund.

That last one piques Bose’s interest the most. “Because this will allow us to play a key role in the debt space for infrastructure, where right now there’s a gap and it’s a great opportunity.

“We try to cater to a large group of international investors. Some of them have already discovered the benefits of investing — but we want many more international investors to discover it and literally make Indian infrastructure a regular asset class for these large institutional investors when they allocate capital.”

Bose’s journey

Indian Prime Minister Narendra Modi has launched a raft of reforms in recent years in a bid to attract global players to the nfrastructure market — and the NIIF was born out one such reform. In 2016, the government named Bose — who was then a director at the International Finance Corporation (IFC) — to lead NIIF. Within his 25 years at the IFC, Bose enjoyed a stint as chief investment officer of its $1 billion Africa, Latin America and Caribbean Fund.

But he has transitioned smoothly to a confident advocate for Indian infrastructure. “India is by far the friendliest market for infrastructure investors outside the OECD markets,” he asserts.

And the OECD itself, in its Economic Survey of India for 2019, acknowledged that the implementation of the reforms has helped put a break on inflation and fiscal deficits, although it noted with concern that construction activity has weakened considerably despite large housing and infrastructure needs, and that corporate investment as a share of GDP has failed to rebound.

Blips and bumps

Bose admits the challenges, but projects a smoother journey ahead. “The fundamentals of the Indian economy continue to be extremely strong. There’s a consumption — and aspiration driven growth which will continue, especially in the middle- and lower middle-class.

“More than 100 million people have come out of poverty. All this energy will continue to create growth. For the last few years we have been going through a reforms process where domestic investment has slowed down.

“Clearly the economy has softened, but I am not at all discouraged about the fundamentals of the Indian economy or its long-term growth prospects. When the consumption and investment cycles come together, then India becomes a very attractive proposition in terms of economic growth, and I’m hoping that happens soon — which will take us back to those high single-digit growth rates.”

Robust bankruptcy law

Some of the weakening construction activity has been exacerbated by a robust bankruptcy law — the Insolvency and Bankruptcy Code (IBC) — which has exposed distressed assets in several infrastructure sectors. But Bose sees yet another opportunity there.

“The IBC process is crucial because it gives investors the path to resolution,” he said. “Quite a bit of money was invested in infrastructure assets in the previous decades but without enough equity capital.

“Some of the distressed assets that you are talking about now is actually the deleveraging of those assets. This provides opportunity for fresh capital.

“There were operators looking at a short-time horizon whereas they were locked into long-term projects. As a result, many of these assets are now in the market — whether it be airports (Bengaluru airport is being sold; Delhi and Mumbai airports have transactions going on); road projects have had large number of assets that have changed hands. You will continue to see this and its very healthy.”

Short on capital

Bose said that India is in a unique situation “where we are opportunity long and capital short,” and the returns relative to the regulatory risks is extremely compensating. “The thing is this: if the regulatory risk of any investment goes to zero, then your returns will also be next to zero.

“In India, when you take these risks into account — when you take even a currency risk into account — the returns more than compensate for the risks you have taken.”

On the experience of managing three vehicles — a fund of funds; the Strategic Investment Fund, focused on growth opportunities; and the Master Fund to create joint platforms for core infrastructure investments — Bose said: “We have really been in business for three years — a very short period of time.

“At the end of the first year, we had our first close with four of the largest Indian financial institutions as well as Adia, which was a huge milestone for us. We are very grateful to ADIA for taking the step of being an anchor investor in NIIF.

“Then we separately started fund-raising for our second fund, in which the Asian Infrastructure Investment Bank (AIIB) became the key investor. Another important milestone was when we made our first investment in January 2018 — when we created the first operating platform under NIIF, focused on ports with DP World.”

Managing ‘sacred money’

Globally, pension funds such as Ontario Teachers and AustralianSuper are among the key investors of NIIF — and Bose remembers Modi’s caveat on handling such funds.

“When such funds came in, it was ample demonstration of the proof-of-concept of NIIF to the pension fund industry. But we also have to be very careful because we are managing public money as well as private funds.

“I remember sitting in a meeting with Prime Minister Modi where he said that managing pension funds is like managing sacred money. That’s a very important responsibility and we take it very seriously.”

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