Infrastructure Investment Trusts, brand-new vehicles that allow investors to pool money to buy into a portfolio of readymade infrastructure assets, seem to have got off to a flying start. The maiden InvIT offer from IRB Infrastructure has closed with an over-subscription of 8.5 times and Sterlite’s India Grid InvIT is reporting strong response from anchor investors. Given that InvITs are hybrid pooling vehicles with no assured returns, open only to high networth investors (minimum application ₹10 lakh), the runaway response is surprising. Declining interest rates, the dearth of long-term debt instruments and the high ‘yields’ being showcased on these InvITs, all seem to be contributing to the subscription numbers.

It is not difficult to explain why players in the capital-intensive infrastructure business are keen to float InvITs. For them, this presents a good route to unlock capital from older assets, de-leverage balance sheets and receive upfront cash to deploy in upcoming projects. Once the InvIT is operational, the sponsor also gains flexibility to monetise all future projects by transferring them to this vehicle. For affluent investors, InvITs offer the means to lock into a long-term vehicle with a higher return potential than conventional debt. To protect their interests, SEBI has multiple safeguards in place. InvITs are required to have a three-tier structure with an independent trustee and valuer looking out for investor interests. For skin in the game, sponsors are required to hold a minimum 15 per cent of InvIT units for three years. Cash-flow leakages have been plugged by requiring InvITs to distribute 90 per cent of net cash-flows to investors. A 49 per cent cap on debt prevents over-leveraging. However, more than these features, it appears to be the attractive ‘yield’ projections being peddled by market intermediaries that have drawn many investors to recent InvITs. Based on traffic and offtake assumptions, a ‘yield’ of about 12.5 per cent has been estimated for the IRB InvIT and 11 per cent for IndiaGrid InvIT. But investors need to realise that this ‘yield’, unlike the interest on a bond, is not cast in stone. Cash flows from road projects can be subject to traffic fluctuation and regulatory risks and power transmission lines can suffer downtime; yields can also change as the InvIT acquires new assets. Liquidity isn’t a given either, with a minimum trade size of ₹5 lakh. Investors mustn’t ignore these risks inherent in InvITs, in their chase for high returns.

From a macroeconomic perspective, InvITs may provide only a limited push to the stalled investment cycle. It must be kept in mind that the InvIT route can only be tapped by infrastructure developers with readymade, cash-flow generating projects. Such projects can, in any case, find buyers even outside the InvIT structure. Estimates from rating agencies suggest that InvITs readying for launch this year may raise ₹13,000 crore-₹18,000 crore. Compared to that, India is said to need over ₹90 lakh crore for its infrastructure build-out over the next decade.