The UK-based private equity firm 3i’s infrastructure fund in India is set to finish investing two-thirds of its $1.2 billion (Rs 5,460 crore) budget by the end of this financial year. It recently invested Rs 800 crore in GVK Energy. Having started operations in 2007, it already has four deals tucked away and is close to finishing two more. Anil Ahuja, the Asia head for 3i, discusses strategy with Katya B Naidu and Shivani Shinde. Edited excerpts:
3i recently invested $182 million (Rs 800 crore) in GVK Energy. What is the risk-return profile of that transaction?
GVK Energy is an extremely balanced portfolio. It has 900 Mw of operational capacity, 900 Mw under construction and yet another 2,220 Mw in early stages of development. It is balanced across operational, brownfield and greenfield capacities.
It is a solid business case because we are not buying something on pure hope. There is existing capacity and it is diversified, so the risk elements are much lower than in other transactions, where 80 per cent of projects are yet to be conceived.
The first investment by 3I, three years before, was in Adani Power. Is that close to maturity?
I do not think we are anywhere near maturity. It is a very good investment. The current price of the stock is Rs 135-140 per share and our cost was Rs 60 per share. The total plan is to add around 15,200 Mw. We are only at 10 per cent of the current capacity under development at Adani. It will reach 20 per cent in 90 days and so, we are anywhere close to maturity in the asset.
3i had made two investments (Adani and Soma Enterprises) in the boom time of 2007. Sceptics said these were made at very high valuations. Do you agree?
Both have turned well for us. Adani Power has developed very well and Soma has again grown very well as a company. Krishnapatnam has rapidly grown into becoming one of the largest ports in the East Coast, with seven berths which are operational.
The interesting thing is that though these deals were done at the peak of the market, they were not valued off the market. They were valued at what the company could become. The market is now back to where it was in 2007, but as far as our investment is concerned, it is up significantly. We need to remain focused on what our business is. It is to predict how the company will perform and to support it in any way you can, and not as to how the market will perform.
Are you looking at project-level investments or at a company level?
We have done project-level investments. Investment in an enterprise can give you 25 per cent return and in a project you are unlikely to get that, where returns could probably be in high teens. In power and roads, we have done enterprise-level and project-level investments.
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With more European countries coming under a financial crisis, will it be tougher to raise a new fund?
We will start the process definitely in less than 12 months. Before that, we think by the end of this year we will be past $850 million (Rs 3,870 crore) in terms of investing from our infrastructure fund. We will announce a few more deals before the year ends.
As for the European crisis, it is a concern and I think it will force people to choose very carefully. I don’t think money will disappear, it will just become selective. Raising a fund, will be a task but it should be manageable. Besides, our track record will help us in raising the required fund.
3i also has a growth fund, but we have not seen much activity from that side.
No one has done much activity on that side. We have looked at a couple of deals but valuations are very high.
We have invested more in the infrastructure story, as it is in a rising market and it is easier to do a deal where revenue is far-out.
These are companies where public markets are a benchmark but not a real option. But for growth companies, public markets are a real option and people are pricing off the public market, and that is a bit of a problem.
Are valuations in the private equity market very high?
That’s because 50-60 people are running after the same deal at any point. We have to understand what happened in 2007-08.
There was a lot of money raised and that had a three-four-year investment period. That is going to finish and deals have not been done. Since deals have not happened, there is a risk that they could run out of time and are unable to use that capital.
So, people are desperately trying to do deals.