India’s NIIF: A poster child for development finance

When Sujoy Bose joined India’s National Investment and Infrastructure Fund (NIIF) in October 2016 he was the first employee at the fledgling sovereign development fund (SDF) that still didn’t have money or funding in place. Set up to catalyse domestic investment and growth, NIIF had a clear structure and firm backing from India’s Ministry of Finance, but things were far from settled. Bose’s first priority was to secure initial expense funding to pay salaries for the organization’s first staffers who joined in January 2017.

Today NIIF has around $4.3 billion under management across three funds comprising infrastructure, fund of funds and growth equity (just like the assets found in any resource-rich country’s sovereign wealth fund) and strategy is overseen in an innovative, collaborative model between the government and commercially minded investors hunting returns in India’s fast-growing market.

All three funds have performed well and are among the largest among their peers in India. The growth equity fund recently announced the first successful exit of one of its investments and NIIF plays an important role in providing informal advisory support to the government around asset monetization and creating investor-friendly policies in sectors such as airports and smart meters.  Recently it announced plans for a new India-Japan Fund focused on green investing which will take AUM to almost $5 billion.

But it is NIIF’s role as a poster child for development finance, an area many governments have been trying for decades, without much success, to formulate the right approach about which he is most excited. After nearly seven hectic years, Bose recently announced his decision to leave NIIF.  He hopes his contribution to building a collaborative investment model that mobilizes equity capital at scale to invest in priority areas in a public private format that also delivers investor returns will be replicated in other countries and sectors.

“It is very encouraging that the success of NIIF has spurred similar initiatives in other countries,” he says. “Those countries are taking aspects of what makes NIIF a solid, well-structured entity and are building on that and adapting and improving the structure.  It is possible that the NIIF model can be used in many development areas – infrastructure, climate, healthcare, education and others.”

key pillars in Getting started

Early, important decisions included withstanding pressure to invest until key pillars were in place.  State-owned investment banks had identified a small pipeline of potential investments, but Bose wouldn’t be rushed. The government had approved a $3 billion investment in the fund subject to conditions but the drawdown process and timing wasn’t settled.

Building the ownership model has been another vital element.  NIIF Ltd, the manager of all NIIF funds is 49 per cent owned by the government, 3 per cent by domestic commercial shareholders and 48 per cent by international institutions.  This ensures Indian-ownership and control – but that it is also majority controlled by non-government shareholders. “It’s the perfect combination of sovereign comfort for investors seeking Indian exposure alongside the discipline required to enable the platform to operate as a fully commercial asset manager.”

International institutions include Abu Dhabi Investment Authority, AustralianSuper, Temasek, Canada’s Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board, who are also anchor LPs in NIIF’s infrastructure fund. They entrust capital in a “blind pool” to NIIF’s management team, which invests the capital based on an agreed investment strategy.  It ensures alignment of interest between investors and NIIF, while clearly defining boundaries and a risk-return balance.

NIIF can operate without interference from investor LPs, as long as it operates within the pre-defined criteria. In NIIF’s case, the funds are trusts and the manager is a limited liability company, he continues.

“This enables some investors to become shareholders of the manager, without taking on partnership-related liabilities, which was crucial as it achieved the objective of minority government shareholding”.

Elsewhere the government’s contribution provides instant scale – something that’s always been a challenge in the Indian and emerging markets asset management industries.  “Scale would bring cost efficiency, something that is key to most institutions globally, and attract high quality talent, thereby creating a virtuous cycle over time as NIIF’s track record builds up.”

Bose uses the final close of NIIF’s $2.3 billion infrastructure fund to illustrate these key structural themes in action. Commitments included highly reputed Indian and international institutions alongside the government’s 49 per cent contribution. Investors comprised two SWFs, four international pension funds, two life insurance companies, a DFI, three Indian private banks and a large Indian AMC. “It was an ideal mix for an infrastructure fund,” he says.

Indeed, he believes that NIIF’s approach to infrastructure investment has been notably different to the strategies of most Indian infrastructure funds. NIIF invests primarily via control or co-control platforms, and is reluctant to invest in passive financial stakes alongside EPC contractors or developers, which Bose says mostly leads to misalignment of interest and has a poor track record.

So far NIIF’s infrastructure fund has already invested in six platforms, across ports and logistics, roads, renewable energy, data centers, and airports. In addition, NIIF has also developed India’s fastest growing infrastructure debt financing company, which currently has a loan book of $4 billion, with not a single non-performing asset.

Governance clarity

Bose says that one of the most critical aspects to get right has been management of expectations. Namely balancing the need to generate a return for investors alongside keeping the government happy by investing in economic development at scale.

“Managing expectations and keeping key people in the loop on every step was key,” he says.  “At the same time, it was always important to ensure that the team did not feel any pressure to pursue objectives beyond an appropriate risk-return balance.  Getting all these aspects right enabled NIIF to operate independently and confidently.”

The board of NIIF Ltd has nine directors, two of which are nominated by the government, four by investors, two independents, and the CEO. Key board committees have either a majority of investor-directors or independents which ensures the collaborative approach to the governance of NIIF, without giving control to any one investor or the government.  NIIF also has a governing council, which is chaired by the finance minister.

“The GC is an influential part of the governance of NIIF, however it does not have decision-making power – it provides strategic guidance to NIIF management,” he says, continuing. “It keeps NIIF management connected to senior levels of the political and bureaucratic leadership of the government.”

Finally, the investment committees overseeing the funds are made up of professionals with incentives aligned to the performance of the funds – there are no representatives of either the government or investors on the IC. “The combination of the construct of NIIF Ltd. board, the GC and the IC make for a balanced, arms-length and strong governance structure of NIIF with the right alignment of incentives.”

However, it’s a governance framework that Bose advises might not suit every aspiring sovereign development fund.

“Would a public-private approach work with all the requisite governance and arms-length requirements? If not, governments should just create a state-owned development bank,” he advises.

As to what he is going to do now, he says he’s sifting through a raft of ideas and offers. “I will take my time to consider opportunities and commit once something with the right credentials presents itself,” he concludes.