A Brief Overview
Infrastructure Investment Trusts (or InvITs) have suddenly shot to popularity among investors with funds to spare who seek out assets that surpass the low yields that ordinary debt instruments deliver.
Keeping in mind the fact that over 90 percent of the income created needs to be distributed as per the regulations in place, advisors and wealth managers are directing their affluent clientele in the direction of InvITs as they offer the potential of returns amounting to 8 to 10 percent on a yearly basis.
Understanding the Scope of Infrastructure Investment Trusts
Infrastructure Investment Trusts are relatively new instruments that make it possible for companies to monetize their infrastructure assets that create revenue. These assets include but aren’t limited to power grids, bridges, and roads. Instead of ownership by virtue of investing their money in these assets, investors are entitled to a percentage of the money generated via each of these assets.
InvITs therefore can be understood to offer their investors a reliable and steady stream of income via infrastructure assets that have concise risks associated with operations, commissioning, and counterparties. This is owed to the fact that a large chunk of these assets have already been finished apart from being commissioned. Furthermore, in some instances, a section of the cash flow is allocated in the form of tax-free dividends making it even more enticing to would-be investors.
When examining the activities of publicly listed infrastructure investment trusts, the following becomes apparent.
- India Grid Trust – Returns generated and disseminated amounted to 56 percent.
- IRB InvIT – Returns generated and disseminated amounted to 83 percent.
- PowerGrid InvIT – Listed in May 2021, this generated and disseminated returns that amounted to over 20 percent thus far.
Currently, there are six additional InvITs that are privately listed
Power transmission infrastructure investment trusts are most popular among investors owing to the fact that they offer a pre-tax return amounting to 8 to 9.3 percent. These kinds of pre-tax returns are not available in debt markets even when the risk curve of AA / AA- segments are considered. As a result, investors are keen to get their hands on them. Quarterly distributions allay investor concerns as they provide them with the reassurance of cash flows. Furthermore, the assets have a high level of liquidity as they are traded on exchanges in the same way stocks are.
Other Pertinent Information
In order to create a stir in the market and garner support for InvITs, the government along with the support of regulators have offered up a range of incentives including tax benefits such that investors flock to them.
Following the government’s decision to launch InvITs for its power assets falling under Power Grid Corp, they have now sought to launch infrastructure investment trusts for road assets that are owned by the National Highways Authority of India.
A number of InvITs including but not limited to Roadstar, Virescent Renewable Energy, the Indian Highway Concessions Trust, Shrem, and MEP seek to list themselves on Indian financial exchanges in the near future.
InvITs offer a number of benefits that surpass portfolio diversification. Investors are able to derive a regular income from them apart from gaining visible cash flows. Traditional fixed income products fall short in all that they offer when compared to InvITs as the latter offers returns in the 8 to 10 percent range and yields surpass traditional fixed income products. That being said, this higher yield is owed to greater risks. The primary risk being that InvITs are tethered to operations and a sudden slowdown or fall in revenues is capable of affecting gains.
Infrastructure investment trusts along with real estate investment trusts have amassed a fan following in the past few years owing primarily to the fall in returns garnered from fixed income instruments. A large chunk of the leading fixed deposits only offer 4 to 5 percent annualized returns.
Those seeking to invest in infrastructure investment trusts must bear in mind that they aren’t suitable for investors that aren’t willing to spare three years on the same. This is owed to the fact that InvITs are vulnerable to short-term price fluctuations owed to variations in interest rates and anticipated yields.