Private equity in Infrastructure

Experts say infrastructure development in India is still at a nascent stage and there is much more room for growth. Infrastructure cannot be imported and needs to be developed in the country....for this sector India will need $470 billion over the next five years.

Businessworld
Piya Singh

In march 2003, IDFC private equity closed its first infrastructure-dedicated fund of about $200 million. "At the time, it was quite a coup considering very few people believed in infrastructure," recalls IDFC Private Equity’s President and CEO Luis Miranda. Soon, Miranda had promoters lining up with proposals at his office. Some offers were dubious while others were full of execution risks. It took IDFC a year to make its first commitment. The fund also had little experience in the sector. "We invested Rs 100 crore in GMR Energy’s power businesses as I was very impressed with the promoter’s execution skills," says Miranda. "But we didn’t have experts in the power sector and getting approvals and NoCs from banks was difficult. Even though we signed the term sheet with GMR Energy in August 2003, the deal was closed only in March of the next year."


Five years later, Miranda is amazed that significantly larger deals are closed in just a few weeks and investors are even compromising on basics like the due diligence process. "There are entrepreneurs telling me to make up my mind quickly as they have three other potential investors waiting in queue," he adds. Miranda has a point. Last year, according to data collated by global accounting firm Grant Thornton, six PE deals of more than $500 million were struck out of which four were in the infrastructure sector including telecom infrastructure and real estate (Tata Realty & Infrastructure investing in logistics and GTL Infrastructure shared telecom towers).

This year, deals only promise to get bigger led by the infrastructure sector. For instance, Essar Power that plans to set up three power plants with a combined capacity of 3,600 MW is in talks with several large funds to raise $600 million out of a total capital outlay of $4 billion. Sterlite Power is reportedly looking at raising $1 billion from PE players and financial investors in a pre-IPO placement. The company plans to put up 10,000 MW of capacity across India at a total investment of Rs 40,000 crore. GMR Energy is also learnt to be in talks with funds for some proposed ventures even as the holding company GMR Infrastructure recently raised a billion dollars from a clutch of PE players. Telecom infrastructure also witnessed several large deals last year and this momentum is expected to continue this year.

Temasek, Goldman Sachs, Macquarie along with some other PE funds invested a billion dollars in the tower business of telecom provider Bharti last year while the infrastructure unit of Reliance Communications raised $337 million. This year, Tata Teleservices, which also plans to hive off its tower business into a separate entity like Reliance and Bharti, is also expected to raise funds from PE players for its telecom infrastructure business.

This ‘power and tower story’ may also be responsible for inflating valuations, say bankers. "There is a lot of hype around infrastructure and there’s too much money chasing deals. People seem to have forgotten that PE investments in infrastructure can be risky with delays in execution, court case, accidents — all of these have financial implications," says Miranda. Ernst & Young’s National Director for Transaction Services Jayesh Desai agrees. "While valuations need to be looked at on a case-to-case basis, in some infrastructure deals, the valuations are unbelievably high".


However, despite high valuations, PE’s interest in Indian infrastructure is unlikely to wane. A lot of the momentum is supply-led. PE funds under pressure in home markets such as the US have been focusing on the sub-continent where deals are smaller and so is the amount of debt raised in most transactions. "I expect PE funds to invest much more in India’s infrastructure. Out of a total $50 billion of PE funds that I expect to flow into India in the next five years, a substantial portion may be invested in the sector," says JM Financial’s Executive Director for Investment Banking, Bhavesh Shah.

However, the momentum in PE is part of that in the entire financial system. According to a recent report by Morgan Stanley’s Managing Director, Ridham Desai, called India Strategy — The future of our business continues to be sparkling, the country’s structural liquidity story is intact and gets reinforced with the passage of time. The report states that it expects savings into equities over the next 10 years to accumulate ten fold over the previous decade’s total to $350 billion at the current exchange rate. "The structural liquidity story is also likely to support capital market businesses of investment banking, broking, fund management and investments as we roll into 2008," the report adds. "By 2017, equity mutual funds could be managing $500 billion in assets, the market may be trading over $14 billion in securities, brokerage firms may be generating revenues of $9 billion and investment banks may have $500 billion in cumulative equity issuances."

Despite the big numbers, PE funds may be forced to keep a close watch on returns. It may serve them well to keep their expectations in check even though early movers like Miranda claim to have made seven times their investment in companies like GMR Energy.

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