Sovereign wealth funds have been quietly making moves to India as the value of assets in more established markets elsewhere in the world have fallen.
Why is India of interest to sovereign wealth funds (SWFs)?
The country has for long been on the radar of many SWFs, but it has only recently opened up more to institutional investors who picked up on India's growth story.
"Traditionally SWFs have not invested huge amounts of money in India because of its volatility and relatively low ability to absorb dollars but have had their focus in Europe instead," says Raj Bhatt, the chairman of Elara Capital, based in Mumbai.
"But because of changes in the global economy and growth opportunities presented in India, the funds have started to look this way."
India's story has become so important that GIC, a Singapore-run sovereign wealth fund, recently opened an office in India.
"Strategically, India is an important developing country in the Asian region and globally, and the next level of healthy growth is expected to happen in India, thanks to its robust consumption story," says Amar Ranu, a senior manager of third party products research at Motilal Oswal Wealth Management.
"India also seems important from geographical diversification and is poised to share a big pie in the ring-fenced club of elite countries in the near future."
The stability of sovereign wealth funds enables them to engage in longer-term strategic opportunities, making them an ideal match for countries like India.
The Indian government has realised the importance of tapping into such capital pools.
"This matches well with India's needs for capital for building up its infrastructure, energy and healthcare sectors that require patient capital," says Richie Sancheti, a senior associate at the legal and tax specialist Nishith Desai Associates.
"These spaces should attract the SWF [sovereign wealth fund] attention as they have capacity for larger capital deployment opportunity matched with ability to generate higher returns."
Globally, there have been sensitivities around SWF participation in local markets because of political and strategic tensions.
"While certain jurisdictions are sensitive to which players to permit and how much leeway should be offered to SWFs, India seems to have taken a more liberal approach to SWFs at this point, as they could provide the necessary scale and quality of investments that the country needs for infrastructure and other sectors," says Mr Sancheti.
Investors across Indian asset classes have learnt their lessons over the years, the experts say.
"India became the growth story and investors woke up to it in 2006; the investment and political climate was very good," says Shobhit Agarwal, a joint managing director of capital markets at Jones Lang LaSalle India.
"Today, the attractiveness is still there because the fundamentals have not changed.
"But funds are more value-driven than they were then, and the second wave of money is much more value-conscious and has learnt from the first wave of investment."
So what kind of targets are the SWFs after in India?
Stakes in publicly listed companies are always a good long-term bet for those careful fund managers.
"There is no doubt that equity remains the top priority for any sovereign wealth funds investing in India as India stands cheaper in terms of valuation in comparison to other emerging countries," says Mr Bhatt.
Bricks and mortar is always a good bet, the experts note.
"In India, infrastructure needs a huge boost; so, in lieu of returns and future growth, SWFs have been investing in real estate directly or through real estate private equity funds.
"In a nutshell, they aim to diversify their portfolio geographically and also multiply their returns at a faster pace," says Mr Bhatt.
"Some of the SWFs have a mandate to diversify their portfolio geographically in emerging nations, and India better fits their portfolio, as India offers a strong growing opportunity among other emerging nations," says Mr Ranu.
On the debt instrument side, there are limitations, however. "The high interest rate scenario in India which leads to high interest rate arbitrage relative to developed countries also make one of the other options to invest into," Mr Bhatt notes.
"However, the government has set limited allocations to SWFs for investing into corporate bonds and the window opens as and when the government thinks it prudent."
The Indian government regards SWFs as important and made things a little easier last year when a takeover code was introduced by the Securities and Exchange Board of India (Sebi), the country's financial regulator.
It allows SWFs to acquire a much larger stake in a local public listed firm without having to launch an open offer for the rest of the company, giving a larger investment window to funds but at the same time allowing companies to retain their independence.
"These SWFs do not participate actively in day-to-day management activities and mainly act as passive investors, hence they refrain from taking higher exposure so as to invite Sebi's rule," says Mr Ranu.
twitter: Follow our breaking business news and retweet to your followers. Follow us
