Indian infrastructure investors seek new strategies

In a country whose infrastructure investment landscape is dominated by large industrial conglomerates, Infrastructure India, a newly listed UK infrastructure fund, is finding ways to limit its exposure to them by investing in project-specific investment vehicles.

Infrastructure India, a UK listed infrastructure fund that recently raised £36.7 million (€42.5 million; $54.0 million) in its IPO, is aiming to pioneer a new style of investing in the Indian infrastructure sector.

Rather than taking stakes in holding companies for projects being sponsored by the country’s large industrial conglomerates like the Ambani Group or the Adani

We are very keen that we are investing only in projects where the risk is related solely to the project.

Gary Neville

Group, it is targeting special purpose vehicles (SPVs) focused on specific projects.

Companies like Ambani and Adani typically are  awarded large-scale infrastructure construction contracts, invite investors to participate in an equity tranche in a holding company that owns the projects and also handle their construction. Consequently, opportunities to invest in SPVs for individual projects are relatively scarce.

“We are very keen that we are investing only in projects where the risk is related solely to the project,” Gary Neville, the fund’s advisor, told InfrastructureInvestor. 

He added that his aim is to “build up a portfolio of assets with very discrete, very clearly defined risk profiles” in smaller projects that fall outside the radar of investors seeking investments in the hundreds of millions or billions. Holding companies that own homogeneous assets are also a possibility, he said.

Madhya Pradesh
hydro project:only
project specific risk

Earlier this year, for example, Infrastructure India purchased an Rs1.1 billion (€15 million; $19 million) stake in a 400 megawatt hydroelectric power project in the state of Madhya Pradesh. A 7 percent (on a diluted basis) shareholder in the project’s SPV, it only bears project-specific risk rather than supply chain risks across various power projects in India.

“We’re not interested in taking risk on the supply of coal to a power station, for example,” Neville said.

UK-listed infrastructure investor 3i Infrastructure, which also has exposure to India as a limited partner in private equity firm 3i’s $1.2 billion India Infrastructure Fund, invests in a mix of holding company and specific projects in India.

Michael Queen, managing partner at 3i who advises 3i Infrastructure, said that investing alongside project sponsors on a holding company level has its benefits.  

“To ensure alignment with the project sponsor, it is often better to invest in the sponsor directly rather than the underlying projects,” Queen said.

He added that since large-scale project sponsors are so prevalent in the Indian infrastructure market, it is important to keep a good relationship with them.

Neville cautioned that investing alongside project sponsors may lead to conflicts of interest because if construction runs into delays or difficulties, one has to seek redress with a member of one’s equity group. That is another reason why he prefers to invest in SPVs.

More opportunities to do so may be on the horizon. “I suspect that over time, as the Indian market grows and matures, the ability to invest in individual projects will grow,” Queen said.

Infrastructure India raised £36.7 million (€42.5 million; $54.0 million) on the London Stock Exchange in June. It invests the proceeds in transport and energy infrastructure assets in India and is advised by Bloomsbury Asset Management Advisors, which Neville founded.

Besides the hydroelectric project, the firm recently purchased a 26 percent stake in a toll road in Central India. The two investments total £24.8 million, or 75 percent of IPO proceeds.