As large institutional investors with operational capacities plough money into Indian infrastructure, it is important that we also keep an eye on attracting the relatively small, non-operating investors as well. Mobilising capital from a variety of sources will be important for India to bridge the infrastructure gap.
Institutional entities investing in infrastructure broadly fall into two categories: One, large institutional investors with significant operational capacity and, two, relatively smaller investors with available capital but not the operational capacity or mandate.
For example, a large investor might be willing to not just invest in a wind farm but also have the capacity to run the business. A smaller player may be interested in being a financial investor, but without the capacity or mandate to operate the asset.
To attract both types of investors, the government must create a policy and investment climate that is conducive for infrastructure investments.
According to a global survey by Preqin among institutional investors in the “Preqin Investor Outlook: Alternative Assets H1 2017”, the current and target allocations to infrastructure for those surveyed was on average at 3.9 per cent and 5.2 per cent of assets under management, respectively. About 63 per cent of investors surveyed were below their target allocation to infrastructure.
Global institutions, it seems, are under-invested in infrastructure, a clear opportunity for India to attract global capital. The country needs to create a regulatory environment that can attract a significant portion of the additional capital that will flow into infrastructure, especially from the relatively smaller investors.
Another interesting statistic: There has been a significant increase in direct infrastructure investments (as a percentage of the total pool of investable capital) by institutional investors over the last five years, but the proportion of investors doing direct investments has decreased.
The important takeaway is that though larger operating investors have increased their investments, a significant number of smaller investors have capital that they need to allocate through non-direct route which does not involve an operating role with respect to managing the asset. For operational or other reasons, these relatively smaller investors prefer non-direct investments with direct investing being done by large investors with significant in-house operational capacity.
In the survey by Preqin, 62 percent of investors had assets less than $10 billion under management. It is imperative that policymakers look at how this pool of capital can be mobilised and used to build infrastructure.
The next question is: Just how big is the pool of capital available globally beyond the very large investors? A ranking by Investment & Pensions Europe (IPE) released in September-October 2017 and ranked the largest global institutional investors in infrastructure threw up some interesting statistics.
While the top 10 investors had approximately $170 billion allocated to infrastructure, they had approximately $3.9 trillion under management. The investors from the 20th to the 60th positions in the ranking had $95 billion allocated to infrastructure while total assets under management was approximately $3.8 trillion.
What this shows is the significant capital pool that the relatively smaller investors have — and the challenges that exist in attracting that pool of capital due to fragmentation.
In a global economy with asset price volatility and shrinking central bank balance sheets, attracting global capital will be more challenging than usual. India, given the size of its population, a young demographic and obvious infrastructure investment opportunities, is an investment destination on investors’ minds, but we need to make sure that we build on our strengths.
Large, operationally-savvy investors are extremely important, but so are the non-operating financial investors. A stable and efficient regulatory environment, along with efficient investment vehicles, will be the key to attract more global capital for Indian infrastructure.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted at [email protected] or @Taponeel on Twitter)