Falling global interest rates may boost global fund investments in Indian infrastructure, says Rothschild & Co’s Aalok Shah

Aalok Shah, Managing Director and Co-Head India, Rothschild & Co

India’s infrastructure sector is poised for growth as global dynamics shift, with increased investment expected from global funds in clean energy, roads, and transportation. In an interaction with Moneycontrol, Aalok Shah, Managing Director and Co-Head of India at Rothschild & Co., talks about how existing players are raising larger pools for India, while new entrants explore opportunities. Shah mentions that clean energy dominates deal activity, supported by Asian strategic investors and global platforms. Emerging sectors like data centers, EV infrastructure, and green hydrogen show potential but face challenges like high competition and cost pressures. Expanding asset classes, InvITs, and REITs signal further monetization opportunities.

Edited excerpts

Q: How do you see the infrastructure sector evolving, given the current global economic factors ?

A: Infrastructure in India is inherently domestic. As interest rates start to fall globally, we expect a significant uptick in investment interest from global funds, especially in Indian infrastructure. Over the last few years, global infrastructure funds, pension funds, and sovereign funds opted for OECD markets for their risk-adjusted returns. Now, with shifting global dynamics, India is becoming increasingly attractive. We anticipate more funds flowing into Indian infrastructure, especially in clean energy, roads, transportation, and other categories.

Q: We already have many big players in the market. Do you expect new entrants, or will existing players simply increase their investments?

A: It’ll be a mix of both. Existing funds are raising larger pools, with increased allocations specifically for India. Previously, India may have had a 30-40% share, but now it’s closer to 60-75%. This increased allocation will translate into more investments from existing funds. Additionally, funds without a physical presence in India are increasingly looking to invest here. In some of our current transactions, we’re engaging with capital providers looking at their first or second investments in India.

Q: Are these investors primarily looking for long-term yield, or do they also expect valuation bumps for eventual exits?

A: For many of them, it’s an India-entry strategy—they feel they missed out a few years back and now need to establish a presence here. Some investors, like pension or sovereign funds, plan to hold their investments long-term. However, global strategics entering the market are looking to scale these assets and might consider exits through structures like InvITs or other monetization avenues.

Q: So, there’s demand for both mature, long-term assets and earlier-stage projects. Is there enough supply to meet this demand?

A: Yes, there is sufficient supply across sub-sectors. In renewables, for instance, there are many ongoing processes, although deal closures now take longer. Diligence requirements are stricter, making deals take nine to twelve months instead of the earlier six to nine. In roads, platforms created by large infra funds are expanding through new acquisitions, with steady bid activity and new players entering. In other sectors, like digital infrastructure and transmission, we’re seeing active development, especially in greenfield projects.

Q: Is there early-stage capital available for these greenfield projects, especially in areas like data centers?

A: Data centers are a prominent theme. Numerous platforms are emerging, such as NIIF’s Digital Edge platform near Mumbai, and others backed by DLF, Everstone, and Adani. While there’s significant capacity development, the key challenge is securing demand from hyperscalers. The major cost driver is power, so these companies are seeking partnerships with clean energy providers to secure lower-cost, green power.

Q: Are corporates likely to explore monetization strategies, such as sale-and-leaseback models, to unlock capital?

A: It depends on the corporate’s strategic needs. Companies may opt for sale-and-leaseback if the asset isn’t core to their earnings or if they want to offload related debt. This approach is selective, though.

Q: The new energy space has seen major announcements. Are these translating into earnings, or are they still in early stages?

A: Announcements are there, but these large-scale projects take time to materialize, and they’re highly competitive. Companies aim to bring down the cost of energy units, especially with targets like $2 per unit for green hydrogen, which is still out of reach. Progress is gradual, as these companies strive to find optimal cost structures across renewables.

Q: But we haven’t seen external capital flow into many of these green energy projects yet. Are there notable investments?

A: Yes, we’ve seen significant investments. AM Green, for instance, attracted $1.3 billion from PETRONAS, along with additional minority investments from GIC and ADIA in their ammonia vertical. The critical factor for green hydrogen and ammonia projects is securing long-term offtake agreements, which provides capital providers with price visibility.

Q: In your role as an investment banker, where are you seeing the most deal activity?

A: Clean energy remains dominant within infra, accounting for the bulk of investment and deal activity. There’s strong interest from Asian strategics, with Japanese companies increasingly exploring clean energy investments in India. While they may start small, the mandate from the Japanese government to invest in India’s clean energy sector indicates they’ll eventually pursue larger deals. Additionally, platforms created by investment firms like Actis, KKR, and Brookfield are driving consolidation as they divest from mature assets to create new platforms. We’ll focus more on global markets. Indian firms already have good access to local banks and NBFCs. Our value-add lies in facilitating access to global markets, particularly for refinancing as interest rates drop, making global bonds and debt options attractive for Indian companies looking to replace expensive Indian debt.

Q: Are new asset classes, outside traditional infrastructure sectors, gaining traction?

A: We’re seeing expanded definitions of infrastructure from global infrastructure funds who are now open to sectors like semiconductors. Roads and energy remain steady, while ports are fairly consolidated. In airports, activity will depend on upcoming government bids. Existing players like Zurich Airport are expanding, and new bidders, especially those previously unsuccessful, are also expected to participate.

Q: What about the electric vehicle (EV) sector? Are capital providers showing interest?

A: EVs are a high-interest area, but investors remain cautious, especially around returns from these investments. Companies with proven track records, like Tata, Mahindra, and Ather, are attracting capital, while newer entrants face challenges. Organized capital is focusing on four-wheelers and supporting infrastructure, such as charging stations, which receive less interest due to high competition in the two-wheeler market and dependency on subsidies.

Q: Is there investment in EV infrastructure?

A: Yes, charging infrastructure is vital, but opportunities are limited. Tata, for example, houses its EV infrastructure under Tata Renewables, which has secured capital from Mubadala and BlackRock. BluSmart, which combines charging infrastructure with ride-hailing, is another active player raising capital and could seek a larger investment in the future.

Q: The two-wheeler EV market seems crowded. Is this affecting capital inflow?

A: Yes, it’s highly competitive. Traditional players have strong infrastructure and dealership networks, making it challenging for new EV entrants to sustain long-term. Subsidy dependence also poses a challenge, especially as these subsidies are not guaranteed, making it difficult for new players to establish profitable models.

Q: Do you expect an increase in the supply of InvITs and REITs as assets mature?

A: Absolutely. Many platforms, like Edelweiss’s Sekura, are actively exploring InvITs for their transmission and renewable assets. This trend has already taken off in roads and transmission, although renewables have seen only a few InvITs so far.