The newly listed PowerGrid InvIT (Infrastructure Investment Trust) recently completed its initial public offer of around Rs 7,800 crore. Next in line is NHAI, with an estimated Rs 5000 crore plus being raised through an InvIT structure.
High networth investors are getting attracted to InvITs. Though not new investment avenues, InvITs are still in their nascent stages. Since the launch of the first InvIT about five years ago, there are now eight such issues with assets under management of Rs 1.2-1.5 lakh crore.
A CRISIL Ratings analysis suggests that there is a potential to garner around Rs 8 lakh crore of capital through InvITs for investing in India’s infrastructure assets over the next five years. If this picture is accurate, we are looking at a manifold increase the monetization of infrastructure assets via such instruments. Raising money from high networth individuals through unlisted, privately or publicly listed InvITs is likely to see growth.
Before the choice gets overwhelming you should know how best to filter through the InvIT options to find the one that suits you the best.
What do get with an InvIT?
InvITs operate as trusts, structured to own and manage infrastructure assets such as roads, ports, power plants, warehouses. The idea behind creating the structure is to give investors – individual, corporate and institutional – access to large infrastructure assets and the income generated from those. Typically, the income is distributed in the form of interest or dividend.
Investors who subscribe to the InvIT get units with a market price. Technically, they qualify as equity assets, with expectations of capital gains, along with steady income through business cash flows. Regulations require InvITs to pay out 90 percent of their distributable cashflows to investors.
Investors in turn expect regular long-term income through interest or dividends. Infrastructure projects are capable of generating income or cash flows over 10-15 years at least. For example, the transmission service agreements of PowerGrid have an average tenure of 32 years.
Given the nature of infrastructure assets, even long-term income from an InvIT is reasonably predictable. An InvIT’s stock price reflects the discounted value of those cash flows.
Only when the expectation around these regular cashflows changes, will the stock price get meaningfully impacted.
Hence dividends/distributable income and capital gains during initial listing are sources of gains for investors. The pre-tax return from an InvIT can be 8-10 percent a year through this distributable income.
This compares favourably with other fixed income options. Plus, if things continue as expected, one can expect steady growth in the price of units too.
Do InvITs carry any risks?
Although InvITs look like a bond in an equity structure, they are not simple products such as a fixed deposit.
Returns are not guaranteed: The lure is definitely the stable payout each year. However, stable returns through surplus cashflows do not translate into assured returns.
Each InvIT is unique as operational and credit risks vary across underlying assets and businesses.
For example, regular income through power distribution is considered to be more stable in the long run, as compared to collections through tolls on national highways. Both businesses are long-term in nature and the companies operating in these businesses have raised funds through the InvIT route.
Operational and credit risks: The underlying businesses could face operational and credit risks, which in turn could affect the ability of the InvIT to generate regular and healthy cashflows.
Risks related to future capital raising: Additionally, there can be risks related to capital raising and acquiring new assets to sustain cashflows in the long run. These risks will not only impact the distributable surplus, but also the capital value negatively. The quality of new assets added to an InvIT, for example, can impact cashflows and the stock price.
Ideally, investors should not rely on capital gains too much and instead evaluate InvITs from a perspective of their ability to generate and payout surplus cashflows.
Also, in debt instruments, there is some sort of recourse if your investment defaults on its committed interest payout, or even the principal. That is not the case with InvIT units, as they are essentially equity investments.
Should you invest in an InvIT?
You may assume that InvIT is an instrument that generates a steady long-term income. In reality, you need to understand its ability to generate cashflows over the long run, and the risks of the underlying projects. The InvIT’s ability to also continuously raise capital via equity or debt fund will also determine how new assets get added and what surpluses are generated for distribution.
InvITs add an interesting, and a relatively low-risk flavour to a large diversified portfolio. But you should invest in an InvIT only to get an added diversification flavour. Don’t over-invest in it. Ensure that you do your research or talk to your financial advisor about how well you are diversified with your existing investments.
Also, InvITs may run the risks of under-delivery and eat into your capital too.