Deals in infrastructure lead PE rally in H1

Investments in Indian infrastructure have led the flood of private equity (PE) inflows that took place during the first six months of 2011. The PE investments in infrastructure so far have already went up about 15 per cent over the same period last year.

The PE industry has witnessed about 241 deals worth $5.7 billion in the first six months, against 187 deals worth $3.7 billion during the same period of 2010, an increase of 54 per cent, according to data from VCCedge, a financial research firm. There were 28 deals worth $1.3 billion in infrastructure in the first six months of 2011, against 20 deals worth $1.1 billion during the same period a year ago. In the whole of 2010, 44 deals worth $2.8 billion took place in this space.

Gopal Agrawal, partner, Singhi Advisors, Mumbai-based boutique investment bank, said: “Infrastructure is the biggest gainer amongst the industries, due to the larger size of projects. Infrastructure companies have not only been able to attract interest of global as well local PE investors but have also led to increased deal sizes compared to the past.”

Over the last five years, PE funds have invested approximately $13 billion into the infrastructure sector. This is equivalent to one-fourth of the total capital inflows into India.

According to Vikram Utamsingh, head, private equity advisory, KPMG India, the country will witness an extension of investments into areas of infrastructure other than power. “Last year saw investments worth $4 billion in power. This year, we are seeing PE funds extend to other components of infrastructure like airports and roads and mines,” he said.

A recent report from Bain & Company said, “The government expects that private participation in the creation and operation of infrastructure assets will see further major increases. The Thirteenth Five-Year Plan (2012-17) forecasts that infrastructure outlays will double to about $1 trillion, with the private sector accounting for 40-50 per cent of the total.

However, higher deal sizes and regulatory hurdles in the infrastructure sector raise concerns over the return to investors. Utamsingh said, “There is some question if PE firms would be able to generate the 25 per cent plus returns that they expect from such infrastructure investments where it is more common to expect returns in the range of 15-18 per cent. However, there are a few other opportunities to deploy substantial amounts of capital in a single deal other than in infrastructure.”

The central government’s initiative in expanding the infrastructure space with private participation has brought a sense of euphoria for the PE sector. Investments in infrastructure averaged between 3 and 5 per cent of the gross domestic product (GDP) during 1980 to 2007. The government aims to increase the figure to nine per cent of GDP by 2012.