Crossing Paths Between Infrastructure Investment Trust (Invits) and Alternate Investment Funds (Aifs)

Infrastructure Investment Trusts (InvITs) and Alternative Investment Funds (AIFs) are both financial instruments that cater to distinct but overlapping segments within the investment landscape.

InvITs primarily focus on infrastructure assets such as roads, power transmission, and renewable energy projects. They enable investors to participate in these sectors by pooling funds, which are then invested in operational infrastructure projects that generate steady cash flows. Investors in InvITs receive returns in the form of dividends from these projects, offering a predictable income stream akin to real estate investment trusts (REITs).

On the other hand, Alternative Investment Funds (AIFs) encompass a broader category that includes private equity, hedge funds, Infrastructure, venture capital, and other alternative investment strategies. AIFs are structured as private pools of capital managed by professional fund managers. They cater to sophisticated investors seeking higher returns through diversified portfolios that may include investments in unlisted companies, distressed assets, real estate development, or infrastructure projects not suitable for public markets.

Infrastructure Investment Trusts (InvITs)

Investment Restrictions in InvITs must invest in infrastructure projects directly or through special purpose vehicles (SPVs).1 A minimum of 80% of the value of the InvIT’s assets should be invested in completed and revenue-generating infrastructure projects.

InvITs can be either public (listed on stock exchanges) or private (unlisted). Public InvITs have to adhere to more stringent disclosure and compliance requirements. Distribution Policy InvITs are required to distribute at least 90% of their net distributable cash flows to the unit holders. Leverage InvITs are allowed to raise debt, but the leverage (debt-to-asset value ratio) must not exceed 49%.

The RBI has reported that March this year witnessed the listing of an InvIT, which raised Rs 2,500 crore through a public issue, attracting substantial interest from foreign investors. "India has been a late adopter of real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). However, the market is flourishing - REITs and InvITs have mobilised Rs 1.3 lakh crore since 2019-20 (up to March 2024)," said an article on 'State of Economy' published in the RBI's April Bulletin.2

Alternate Investment Funds (AIFs)

These funds usually operate in 3 categories;

Categories of AIFs

• Category I AIF: These funds invest in start-ups, early-stage ventures, social ventures, SMEs, infrastructure, or other sectors considered socially or economically desirable. This category includes venture capital funds, SME funds, social venture funds, and infrastructure funds.
• Category II AIF: These funds do not fall under Category I or III and can invest in various asset classes without any specific focus on a particular sector. This category includes private equity funds, debt funds, and funds for distressed assets.3
• Category III AIF: These funds employ diverse or complex trading strategies and may invest in listed or unlisted derivatives. They include hedge funds and other funds with similar strategies.4

Let’s refer the following chart as reported by the SEBI (Cumulative net figures as at the end of the quarter ending March 31st, 2024) to understand the scope of progress made by AIFs in their respective categories5:

Our major focus is on the Category I type of investment here since it talks about investment through Infrastructure funds, which can be seen a parallel opportunity to invest and earn hefty profits from the Infrastructure Sector, similar to those of InvITs.

Despite their differences, InvITs and AIFs share certain characteristics. Both are regulated by the Securities and Exchange Board of India (SEBI) and require registration and compliance with stringent regulatory norms. They offer institutional and high-net-worth individual investors opportunities to diversify their portfolios beyond traditional asset classes like stocks and bonds. Additionally, both InvITs and certain categories of AIFs provide tax benefits to investors, enhancing their attractiveness as investment vehicles.

Where they differ significantly lies in their investment focus and operational structure. InvITs are specifically designed for investing in revenue-generating infrastructure assets with stable cash flows, offering relatively lower risk compared to certain categories of AIFs that may invest in higher-risk, higher-reward opportunities.6 AIFs also have more flexibility in their investment strategies and asset classes, accommodating a wider range of risk appetites and return expectations among investors.

In summary, while InvITs and AIFs serve distinct purposes within India's financial markets, they intersect in providing alternative investment opportunities beyond traditional avenues. Their regulation ensures investor protection while fostering capital formation in critical sectors such as infrastructure, contributing to the overall economic growth and development of the country.

Authored by:

Diviay Chadha, Partner and Nitish Mawkin, Principal Associate at Singhania & Co.