PE firms bullish on Indian Infra

New Delhi: Putting political risks aside, global private equity (PE) funds looking for high return on investments are going to target Indian infrastructure companies in the coming years, says a report by research agency Preqin.

India is attracting the highest number of unlisted, closed-end funds that focus on a single country, making it the most preferred choice among emerging markets, according to the study, released late last week.

“In terms of opportunities, emerging markets are becoming more popular with global investors after the global financial crisis, and India is at the centre of this,” said analyst Elliot Bradbrook, who has authored the report.

India, the world’s second-fastest growing major economy after China, will need $1 trillion (Rs45.1 trillion) worth of infrastructure investment over the next five years, according to the researcher.

The government is encouraging infrastructure investment, and plans to issue infrastructure bonds worth Rs30,000 crore in the year starting 1 April, finance minister Pranab Mukherjee said in his annual Union budget speech on 28 February.

Currently, there are 38 overseas infrastructure investors, all of them PE funds, with a preference for assets in India, says the Preqin report. Of these, 25 have raised an aggregate $9.5 billion, while the rest are scouting for another $7.3 billion.

In addition, nine India-focused funds will be launched in 2011, the report said.

Macquarie State Bank of India Infrastructure Fund, the largest India-focused overseas PE fund, has already closed two large transactions this year and is currently seeking another $2 billion.

Overseas PE funds invested about $2 billion across 28 deals in India’s infrastructure sector in 2010 compared with $333.3 million across 18 deals in the previous year, according to VCCircle, a research firm.

Global infrastructure investors may have to overlook political risks to invest in India.

“The greatest risks are political stability and lack of existing infrastructure in India,” said Bradbrook. “This means that despite the huge demand for development, investors will need to take on a lot of risk if they are to invest in India.”

What is attracting them is the promise of higher returns and the opportunity for diversification.

“India offers exposure to a variety of core sectors, as opposed to those in the developed Western markets,” said Bradbrook.

Infrastructure PE funds investing in India can choose from sub-sectors such as power, telecom, roads and ports, while those investing in the West are usually limited because those countries are past their growth stage.

The Preqin report says 74% of India-focused funds will invest in greenfield projects, 84% in brownfield assets, and 42% will buy out the stakes of other PE funds.

Greenfield projects are built from scratch, while brownfield assets are abandoned projects that are up for redevelopment.

Raja Parthasarathy, managing director of IDFC Private Equity Co., said global infrastructure funds tend to invest in single, reasonably mature operating assets where no capital expenditure is required. But things are a little different in India.

“There are few mature operating infrastructure assets and where they exist, the appropriate framework for transfer of ownership of these assets to allow for private investment isn’t fully in place,” Parthasarathy said. “The truth is that our infrastructure story is 10 years old and most high-quality infrastructure assets are just being built.”

But this has not been a deterrent. Even funds that have no previous experience of investing in infrastructure have done so in India, he said.

Funds are also attracted by the fact that growth in some infrastructure sub-sectors in India, such as roads, is localized rather than hinged upon global factors.

“Within weeks of the Delhi-Gurgaon expressway opening,” Parthasarathy said, “it exceeded traffic forecasts a few years ahead of schedule, based on the fact that in a short time Gurgaon had become such a large city in its own right.”

Infrastructure funds also offer a hedge against inflation, said Bradbrook. “For example, an Lp (limited partner, or an investor in a number of PE funds) could invest in a low risk-return secondary stage fund for a stable long-term return, or it could alternatively invest in a high risk greenfield fund investing in emerging markets, which could potentially return significantly higher,” he said.

Vikram Utamsingh, head of PE advisory services at the consulting firm KPMG, said he expects power to be the real attraction in the infrastructure sector.

“In a power asset, it is possible to make returns from the asset itself of about 14-16%,” he said. “What PE firms look for is a collection of assets at different stages of development, which can ultimately be listed once a few of the assets become operational.”

Graphics by Sandeep Bhatnagar/Mint