12.1 NIIF structure

FIGURE 12.1

NIIF structure • niiF Limited would be majority owned by nongovernment, commercially focused investors, with a board constituted with majority representation by nongovernment investors and independent directors. niiF Limited would be able to recruit its staff and executives without government involvement.

to fill a large equity financing gap for indian infrastructure, niiF aims to attract investors willing to consider large exposures and long tenors. By providing local access and expertise, niiF aims to position itself as a beachhead for international capital looking to invest in indian infrastructure through a collaborative investment approach. according to the niiF ceO, the niiF structure is partly inspired by the collaborative investment model (monk, Sharma, and Sinclair 2017), whereby institutional investors join forces to establish collaborative platforms for cost-sharing on deal sourcing, due diligence, and other stages of the investment process. niiF master Fund investors are also shareholders in the investment manager, thereby leading to an investor-owned fund management platform.

FUND STRUCTURE

niiF Limited is the entity in charge of managing the three funds (figure 12.1). it was intentionally set up by the government as a company (not as a statecontrolled development agency) to emphasize its role as a manager of commercial investments and the independence of investment decisions from policy objectives. investors in the master Fund receive an equity stake in niiF Limited

Equity stake and board seats

Government

NIIF Ltd. Manages all three funds 49%

Master Fund 49% 49%

Fund of Funds Strategic Opportunities Fund

Equity stake and board seatsa ADIA Australian Super Ontario Teachers Temasek Domestic financial institutions

Others (to come) AIIB

Others (to come)

Fund Fund investor Fund management company

Source: World Bank elaboration. Note: ADIA = Abu Dhabi Investment Authority; AIIB = Asian Infrastructure Investment Bank; NIIF = National Investment and Infrastructure Fund; Ontario Teachers = Ontario Teachers’ Pension Plan. a. Only for Master Fund investors. Allocation of board seat subject to contributing at least 10 percent of Master Fund capital.

and, above a certain investment size (see details in the governance subsection) also receive board seats. NIIF Limited earns fund management fees. Because the government’s stake in the Master Fund and NIIF Limited is 49 percent, the government remains the largest investor and equity holder in NIIF with a substantial minority position (considering nongovernment investors as a single pool). as an independent, commercial entity, NIIF has no formal right to any infrastructure project that the government may consider divesting, nor obligations to invest in policy-driven projects. NIIF does nevertheless engage in proactive discussions with central and local government authorities to steer new infrastructure development to commercial models, if it makes sense. a team within NIIF, the Strategy and Policy Group, comprising PPP and investment experts, works with these authorities when it sees the opportunity to set up a PPP project instead of building infrastructure through public finance means. all three NIIF funds are aIF Category II funds under India’s alternative investment funds (aIF) regulations and do not have any special dispensations under the law. NIIF funds are unit trusts under the common law model, which are set up to mimic the classic private equity GP/LP structure. Specifically, under Regulation 2(1) (b) of the Securities and Exchange Board of India (SEBI) (alternative Investment Funds) Regulations, 2012, an aIF is any privately pooled investment fund, whether from Indian or foreign sources, in the form of a trust, company, body corporate, or limited liability partnership. Private equity funds are generally classified as Category II aIFs, which are closed-end funds, with long tenures determined at the time of setup.1

NIIF funds are designed with the explicit purpose of mobilizing commercial capital in a fund format. With the government’s commitment of US$3 billion and its 49 percent stake, the NIIF funds are anticipated to have total commitments of just over US$6 billion. Note that fund economics are denominated in Indian rupees (US dollar amounts in this case study are based on an exchange rate of US$1.00 = Rs 70.00).

The three NIIF funds are at different stages of development, in line with the envisaged evolution of commercial infrastructure investing in India. NIIF deems direct investments in brownfield, operating infrastructure to be the likely entry point for commercial investors over the short to medium term, especially international ones that may not be very familiar with the Indian investment environment. as a result, NIIF prioritized the launch of the Master Fund, which focuses on brownfield infrastructure projects (see the investment strategy subsection). The Master Fund’s fundraising is well advanced at the time of writing, with total capital commitments (including the government portion) of US$1.8 billion out of a target of just over US$2 billion.2 NIIF subsequently focused on mobilizing commercial capital for the Funds of Funds, which focuses on indirect investments via existing or new infrastructure funds; the Fund of Funds received the first capital commitment in March 2019 and made its first investments in the green infrastructure and affordable and mid-income housing sectors. The Strategic Opportunities Fund began investing in the fourth quarter of 2018, using only capital committed by the government; at the time of writing, it has not yet mobilized commercial capital. The Strategic Opportunities Fund targets a broader range of investment strategies, including greenfield investments with a long investment horizon of 20–25 years, and investments in noncore infrastructure sectors. It made its first investment in October 2018, when it acquired IdFC Infrastructure Finance Limited, a nonbanking finance company that lends to operating infrastructure projects, with a loan book of US$643 million equivalent (NIIF 2018b).