Yield assets are an asset class that offer investors stable cash flow streams over long periods of time. Historically, yield assets were considered as part of the wider alternative investment asset class but have recently come into their own because of their low volatility and longterm nature. Typically, yield assets operate through investment vehicles that rely on cash flows from assets such as infrastructure (roads, renewable energy etc) and real estate (IT parks, warehouses etc). In India yield assets are structured through REITs and InvITs that ensure liquidity for investors and efficient cash distribution. While India started late, as per the latest RBI report, REITs and InvITs have already raised 1.3 lakh crore up to March 2024.

Understanding the Phases of Asset Risk

Assets go through 3 phases of risk. A development stage (concept to 1 year post commissioning of an asset), a stabilization period (1-3 yrs) and then operations lasting till the life of the asset (3-35 yrs). Yield assets typically refer to assets that are in their operations phase. At this stage the cashflow profiles are mature and the contractual risk metrics are well established. Naturally, for developers and hence for India as a country as a whole it makes sense to transfer the ownership of these assets to investors that have long term liabilities such as pension funds, insurance companies, family offices, endowment funds etc. The capital freed up can be redeployed towards building fresh assets.

The Diverse Landscape of Yield Investment

Every investment asset class will create opportunities for yield investors. The early leaders will continue to grow as there is significant capacity additions in roads, renewable, transmission, commercial real estate, warehousing etc. A substantial part of these assets will be held by yield investors. In addition, government-owned assets are likely to be offered (Toll Operate Transfer (TOT) assets, for example) to investors to mobilize capital for growth. The structural simplicity of the asset class also means that sectors such data centers, student housing, educational buildings, hospitals, hotel assets etc will use yield vehicles as exit options while building their investment cases. Eventually, even residential mortgages (average maturity of 7-10 years) can be offered to yield investors.

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Yield Asset Allocation: A Lucrative Strategy

For investors, allocating a certain percentage of portfolio to yield assets is attractive. Return profiles vary depending on the asset class but comprise cash yield and capital appreciation. Depending on the risk the overall return expectation ranges from 8-12%. Underlying cash flow profiles may have high predictability (transmission, annuity assets), fully contracted (energy), inflation linked (toll roads), contracted but with upsides/downsides (real estate) and investors have been pricing risks accordingly. With a strong regulatory regime (guidelines on ratings, leverage, governance etc), participation from both domestic and foreign investors has been robust so far. While initial successes have been more in a few sectors, creating a pool of assets that offer a reasonable dollar adjusted return is the key for higher participation of global investors.

Evolution of Yield Asset Management

The early adopters that have formed REITs and InvITs have been sponsors that have raised capital by setting up yield platforms. Over time independent investment managers and asset managers are expected to acquire and operate such assets. Asset managers play the role of protecting and enhancing revenue, keeping costs under control and enhancing asset integrity. Domain expertise ensures that specialized asset managers are able to bring in global best practices to real asset management in India.

Leveraging Technology in Asset Management

Adoption of technology is a key differentiator for asset managers to bring in a unified view of operations. At the asset level, IOT implementation and automation bring in immediate efficiency. At the portfolio level technology-led integrations of finance, operations and compliance helps deliver robust investment outcomes. Technology platforms will help deliver a seamless asset performance to investor reporting framework.

(By Srickant Rajagopal, Co-Founder, TruBoard Partners, a tech-enabled Asset Management Company providing bespoke asset management services to investors)

Disclaimer: Views and facts expressed above are those of the author. They do not necessarily reflect the views of financialexpress.com. Readers are advised to consult their financial planner before making any investment.