IndInfravit, a unit of Indian conglomerate Larsen & Toubro, listed India’s third InvIT last week. It opted for a private placement that skipped high net worth investors in favour of a direct sale to institutional accounts.
The issuer had good reasons for doing so. Wealthy investors are no longer keen on InvITs as the asset class continues to underperform. At the time of writing, IRB InvIT Fund and India Grid Trust, the only listed infrastructure trusts, were still trading below their IPO prices.
That prompted IndInfravit and bookrunners Citi and ICICI Securities to take a different approach. Instead of a regular public bookbuild, they sold a majority of the units to Germany’s Allianz Capital Partners and Canada Pension Plan Investment Board, which became anchor investors for 55% of the flotation.
But while IndInfravit achieved its fundraising goals, the use of the private placement is clearly no silver bullet for the InvIT market.
Not a single unit was traded on IndInfravit’s debut last Wednesday, and activity remained thin in the days that followed. This was, of course, the expected result, since the units were placed only with long-term investors. The lack of any retail accounts in the book led to the sharp drop-off in liquidity.
As a yield instrument, it could be argued that InvITs should trade like fixed income rather than equity. But to have daily turnover of less than 1%, as has been the case with IndInfravit, seems untenable. The regulator may need to rethink its position of barring retail investors from participating in InvITs.
The Securities and Exchange Board of India has its own reasons for locking out mom-and-pop investors from the market, but as long as this is the case, the long-term development of InvITs will be hampered and they will struggle to gain wider acceptance.
If InvITs remain illiquid instruments with prices that barely budge, then they are no better than private market transactions and might as well have stayed private. Calling them “listings” is an oxymoron.
The current model works if issuers want to be “one-and-done” trades, a term for companies that raise funds at the point of listing and never tap the market again.
But this is a pity considering India’s vast infrastructure funding needs, and the ability of listings to provide an additional channel of financing to shift financial risk — and burden — away from the banking sector, bond investors and the government. It is a tremendous missed opportunity.
The trajectory of India’s nascent InvITs have been troubled so far, but it does not have to stay that way. Their potential stretches father than the country’s highways. But the fundraising model needs retooling. It is time to take another look.