This enables firms to raise funds without diluting any stake at the parent level.
Private equity (PE) funds are gearing up for a new set of opportunities in the road sector. Infrastructure companies are looking to raise equity by selling minor stakes at the project level, an opportunity PE players are chasing aggressively.
Investment bankers which are trying to strike deals in the segment say a number of companies with highway projects are looking for investors. The projects involved are at various stages of development. Some assets are operational too, they say.
“There’s a reasonable history in the sector and there are many assets in the project life cycle where development and construction risks are finished,” said Arvind Mahajan, executive director, KPMG.
This enables companies raise funds without diluting any stake at the parent level. While a number of companies are looking for deals here, industry insiders say some are bundling and selling partial equity of a number of projects as one deal.
“There are five-six such big deals where companies are bundling projects and trying to make deals. The average size of such deals is $70-125 million,” said a PE firm which is in negotiations with some companies.
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PE firms say such deals interest them. “Project-level investments are self-liquidating. We are open to these investments and are looking at a bunch of these projects,” said Rahul Bhasin, managing partner at Baring Private Equity.
Analysts say investors in such deals can model cash flows accurately as details of the operational performance are available. Traffic growth is the only variable that one has to calculate. Also, the capitalisation of road projects would start immediately and add to the returns.
Anil Ahuja, Head-Asia, 3i, said they would look at projects that had received all approvals and clearances. “The execution risk may be pending along with the physical act of construction and that is where we will come in,” said Ahuja.
However, there is likely to be competition for good assets, as there are far too many buyers chasing very few assets. Canadian pension funds, which are traditionally risk-averse, will be joining investors in race for projects with steady cash flows.
Apart from funds, infrastructure companies which plan to build a portfolio may also be contenders. But they would like to own projects completely. A top official of a company getting proposals said foreign infrastructure companies which were looking to enter India were also in talks with the local ones for stake purchases.
“We would like to retain majority stakes in the project. Hence, we will sell only a part of the equity. The extent of dilution will depend on the valuation we get,” said a company which is in talks with investors.