The infrastructure sector has seen much M&A and private equity activity in recent years. While some sub-sectors have contracted due to the pandemic with a consequent slowdown in M&As, others such as renewable energy have continued to show considerable M&A activity even over the past 12 months.
A structure that has gained traction in M&A transactions in infrastructure is the Infrastructure Investment Trust (InvIT). The Securities and Exchange Board of India (SEBI) devised this vehicle in 2014, with an aim of facilitating investments in stable and revenue-generating infrastructure assets. Simply put, InvITs are designed to do for infrastructure assets what real estate investment trusts tend to do for completed real estate assets. The real boost to the use of InviTs has come in the last three years after the tax laws were amended to provide a tax pass through mechanisms and other preferential treatment that made InvITs more efficient.
Under the Securities and Exchange Board of India (Infrastructure Investment Trust) Regulations, 2014 (InvIT regulations), InvITs are established as trusts and can be set up with units publicly offered and listed (public listed InvITs), with units privately placed and listed (private listed InvITs) or with privately placed and unlisted units (unlisted InvITs). The first InvITs to be implemented were the public listed InvITs, but there is an increased focus on private listed InvITs and unlisted InvITs now. The SEBI has proactively engaged with the sponsors of such InvITs and their advisers, and has assisted them with timely guidance and clarification. The SEBI has regularly examined the InvIT regulations, introduced amendments to clarify certain situations and filled gaps that were identified by the industry.
The adoption of InvITs as investment structures has also flourished as investments in InvITs by non-residents have been permitted under the foreign direct investment regulations, without prior governmental approval. This has allowed international strategic and financial investors to make investments in the infrastructure space through these vehicles.
Infrastructure developers have always used special purpose vehicles (SPVs) to house individual infrastructure projects. This has the benefit of segregating risk and reward in individual projects and has helped with project financing. However, this creates multilayered corporate structures, with one company holding all the SPVs. Developers have had to face regulatory aspects around such holding companies, and have found it inefficient to upstream coupons and maximise returns from exits due to inherent inefficiencies and cash traps. However, InvITs are efficient alternatives as holding vehicles for such SPVs once the projects are completed, as they largely minimise these inefficiencies.
InvITs as investment structures would also interest the limited partner (LP) community. Long term global and local LPs invest in offshore blind pool fund structures or onshore alternative investment fund structures to access the infrastructure sector. They now have the additional option to invest directly, especially in public or private listed InvITs. The InvIT regulations require that stable and risk-free assets are included in the InvIT, a transparent corporate governance regime is in place and there is sufficient information about the assets, including their performance, held by the InvIT. These investments hence have the benefit of enhanced efficiency of returns, transparency and liquidity inherent in these investments. As a result, several relatively inactive LPs and especially, sovereign wealth funds have now entered this market and invested in InvITs.
General partners (GPs) of private equity funds may well use InvITs to invest in completed infrastructure projects, either as club deals for standalone investments or as platform vehicles for ongoing investments. At the other end of the life cycle of the investment, GPs could use InvITs to partially or fully exit investments in completed projects. The GPs would have the added benefit of continuing to act as the investment manager for the InvIT, even after their original investment positions have been partially or fully liquidated.
The InvIT regulations need further amendment and refinement as we go along, such as being able to access the full range of onshore and offshore borrowing options. However, with nine InvITs already operating across a broad section of sub-sectors and several more in the pipeline, the InvIT is a vehicle that is finding increasing favour with investors and developers for infrastructure M&A.
Jay Gandhi is a partner and Abhishek Parekh is a principal associate at Shardul Amarchand Mangaldas & Co
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