Of late, there has been growing traction in investments from global sovereign wealth funds (SWFs) in the Indian power sector. In one of the latest deals, Qatar’s sovereign wealth fund QIA bought a 25.1 per cent stake in private power distribution company Adani Electricity Mumbai Limited (AEML). This marked the first investment by a foreign investor in the Indian distribution segment. There have been some notable SWF deals in the power transmission and renewable energy segments as well, such as the investment by private equity major KKR and Singapore’s wealth fund General Insurance Corporation (GIC) in Sterlite Power-sponsored India Grid Trust (IndiGrid). Another deal was the equity investment by GIC and the Abu Dhabi Investment Authority (ADIA) in renewable energy major Greenko. Notably, the transmission and renewable energy segments offer significant opportunities for investments from SWFs in view of their huge scope for expansion and growing private participation.
While every SWF has its own unique features, the essence of an SWF is that it is state owned and mandated to invest the public funds under its charge. The focus on investing is what differentiates an SWF from a central bank. Central banks hold foreign exchange reserves, essentially to implement exchange rate policy. They also have other functions such as supervising the financial system. An SWF by contrast is primarily an investment management entity enjoined to grow its assets under management (AUM).
SWFs invest in a wide range of asset classes such as bonds, listed equity, real estate, private equity and infrastructure. SWFs find infrastructure investments attractive as they offer low volatility and inflation-adjusted steady income streams. The geographical spread of SWFs’ investments has also evolved. SWFs have increased their exposure in emerging markets over time as these markets opened up, as their potential long-term returns are viewed to be higher than those of the developed markets.
In India, SWFs hold about $29 billion of assets under custody (AUC) as of December 2019. Between 2008 and 2018, the global AUM of SWFs grew at a CAGR of 10 per cent with Asia garnering the highest share of 42 per cent.
In December 2019, Adani Transmission Limited (ATL), AEML and a subsidiary of QIA signed definitive agreements for the sale of 25.1 per cent stake in AEML to QIA and for a shareholder subordinated debt investment by QIA in AEML. The total investment by QIA as a part of the deal is estimated at Rs 32 billion. QIA will invest Rs 12 billion in AEML to buy a quarter of the company’s common equity. It will provide Rs 20 billion as staple shareholder loan or subordinated debt (preferred equity), valuing the business at Rs 168 billion, inclusive of its debt. As a part of the deal, ATL and QIA have agreed to definitive plans to ensure that over 30 per cent of the electricity supplied by AEML is sourced from solar and wind power plants by 2023. They have also agreed on several other green initiatives. The deal was approved by the Competition Commission of India in end 2019 and is expected to be completed in 2020, subject to regulatory approvals and customary conditions precedent. This deal has triggered hope for more such deals in the power distribution segment.
India’s own SWF, the National Investment and Infrastructure Fund (NIIF) is also helping seed the country’s infrastructure sector. The NIIF was set up by the government to help plug the infrastructure finance gap through long-term, stable equity capital. It is backed by four of India’s largest financial institutions (the HDFC Group, ICICI Bank, Kotak Mahindra Life and Axis Bank) and international investors such as ADIA – its first anchor, AustralianSuper, Singapore’s Temasek, Canada’s Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board (CPPIB). Notably, in October 2019, the NIIF and EESL announced a joint venture, IntelliSmart Infrastructure Private Limited, to implement, finance and operate the smart meter roll-out programme of power distribution companies. EESL has been spearheading the smart meter deployment in India. This partnership between the NIIF and EESL will give a fillip to the smart metering programme in the country.
Recent trends show that global SWFs are investing more aggressively in the transmission segment. SWFs have invested through investment platforms or JVs with developers or funds.
In a key deal, in May 2019, KKR and GIC invested Rs 10.84 billion and Rs 9.8 billion respectively in IndiGrid to collectively own 42 per cent of IndiGrid’s outstanding units. KKR has also applied to become a sponsor of IndiGrid and plans to acquire an additional 15 per cent of IndiGrid’s total units from Sterlite Power. Following the closing of the transactions, KKR and GIC will collectively own approximately 57 per cent of IndiGrid’s outstanding units. Sterlite Power established IndiGrid in 2016 and is its sponsor and project manager. With the capital infusion provided by the new unit issuance, IndiGrid aims to purchase five electricity transmission assets worth Rs 115 billion from Sterlite Power. Currently, IndiGrid’s asset portfolio comprises nine transmission projects, with a total network of 20 transmission lines spanning over 5,800 ckt. km across 13 states.
The Indian renewable energy segment has been of interest for SWFs, given its rapid expansion plans for the coming years. In one of the key SWF deals in the renewable energy segment in the past one year or so, Greenko signed definitive agreements in July 2019 to raise primary equity of $495 million towards IREP Projects equity commitment, from an affiliate of GIC and by ADIA, the world’s third biggest SWF. Post the investment, GIC is the majority shareholder of Greenko. Greenko is one of India’s leading renewable energy companies with an operational capacity of over 4.2 GW diversified across wind, solar and hydropower projects. The equity commitment secured by the company is for two storage projects with a total capacity of 2.4 GW (1.2 GW in Pinnapuram and 1.2 GW in Saundatti). These projects are expected to be completed and operational in 2022. They will have an overall capital outlay of $2 billion.
Pension fund deals
Apart from SWFs, long-term institutional investors such as pension funds have been bullish about the Indian power sector. According to estimates, while SWFs manage assets of over $6 trillion globally, public sector pension funds (PPFs) manage funds almost triple this figure worldwide.
In 2018, Caisse de dépôt et placement du Québec (CDPQ) acquired a 40 per cent stake in CLP India for a cash consideration of Rs 26.4 billion. CDPQ is a long-term institutional investor that manages funds primarily for public and para-public pension and insurance plans. As of December 31, 2019, it held CA$340.1 billion in net assets. CLP and CDPQ together aim to expand CLP India investments in low-carbon-growth areas including renewable energy projects as well as non-generation business opportunities in transmission, distribution and other customer-focused businesses. In line with this, CLP India acquired three transmission assets from Kalpataru Power Transmission Limited in 2019. In another development, in March 2020, CDPQ increased its share in Azure Power Global Limited by acquiring an additional 717,701 shares. CDPQ now owns 24.25 million shares in the company. With this, CDPQ is the majority shareholder with a stake of 50.9 per cent.
Further, in May 2019, Piramal Enterprises Limited (PEL) signed an MoU with CPPIB, Canada’s biggest pension fund manager, to co-sponsor a renewable energy-focused infrastructure investment trust (InvIT). With an initial corpus of $600 million and the option to scale up further, the InvIT will seek to acquire up to 1.5-2 GW of stable and cash-generating renewable assets on a hold-to-maturity basis, with a firm focus on the diversification of both asset type as well as offtaker profile. Both PEL and CPPIB will act as co-sponsors of the proposed InvIT and hold up to 75 per cent of the units (with CPPIB committing $360 million and holding up to 60 per cent, and PEL committing $90 million and holding 15 per cent), and seek to raise capital from other like-minded investors for the remaining 25 per cent.
Meanwhile, reportedly, CPPIB is planning to pick up an additional 24 per cent equity stake in another renewable energy major, ReNew Power, from the Goldman Sachs Group. Goldman Sachs remains the largest shareholder in ReNew Power, holding a 48 per cent ownership stake. CPPIB is already an investor in ReNew Power, owning a 16 per cent stake. ADIA also owns a 16 per cent stake in ReNew Power.
The increased interest of SWFs in the Indian power sector is driven by the country’s strong growth potential, positive demographics and continued economic development. This augurs well for the sector and is expected to open up more financing options for project developers. Besides, this class of investors helps in monetising big-ticket investments and thereby freeing up capital that can be used for other infrastructure projects. In a key development, in order to boost investments from this source, the Union Budget 2020-21 announced 100 per cent tax exemption for SWFs for investments in the infrastructure sector. This is expected to further amplify the SWF sentiment in the Indian infrastructure sector.