Concerned about their investments in infrastructure companies, private equity (PE) fund managers are having sleepless nights. In the last seven years, PE funds have pumped in $16 billion in this space, the largest chunk in any sector. However, these companies have failed to create exits for their investors, returning merely $4 billion so far, a quarter of the capital invested.
Raja Parthasarathy, partner, IDFC Private Equity, said, “Given our requirements and the widening supply-demand gap, infrastructure remains the single largest investment opportunity in India. But the sector has burned many investors who were expecting rapidly-rising short-term valuations to sustain.”
In 2007, the sector saw the highest investment ($5.6 billion). Last year, the industry recorded six exits worth just $27 million. Investments are usually ripe for exits in about five to seven years. As far as returning money to PE investors is concerned, all other sectors performed well last year. According to an E&Y report, the disclosed PE exit value across all sectors in 2012 rose 50 per cent to $3.4 billion, compared with $2.3 billion in 2011.
But, Parthasarathy believes patience is the key. “It requires extraordinary patience to generate attractive returns from investing in infrastructure. Those who invest with discipline and are able to take a long-term view will be rewarded,” he said. Last year, fund managers made 21 investments worth $648 million, against 46 deals worth $2.3 billion in 2011, a fall of 70 per cent. Only two deals worth at least $100 million were recorded in the infrastructure sector, compared with nine in 2011. “The sector has weakened due to a multitude of issues, including policy breakdown and the consequent lack of government approval, low funding and corruption allegations,” said the E&Y report.
Anoop Seth, head of Asia (infrastructure) at AMP Capital, said, “India needs all the private capital it can get to build its stock of infra. Any pullback, or even weakening of investor sentiment, would have an adverse impact, financial closures will be delayed, bids will receive low interest, etc.”
Lack of resources and changing regulatory norms lead to hurdles in the infrastructure segment. Infrastructure projects worth Rs 1.5 lakh crore are stalled on account of land acquisition issues and delays in obtaining regulatory clearances. About 16 major highway projects worth Rs 15,000 crore have been stalled.
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Parthasarathy said, “Many infrastructure companies get stuck in a scale trap. The growth from Rs 500 crore of revenue to Rs 1,000 crore has been extremely challenging and very few have broken out of the Rs 1,000-crore glass ceiling. While some have had company-specific issues such as inadequate management bandwidth, others saw severe competition. A few have struggled with regulatory or environmental roadblocks.”
In India, exits through initial public offerings (IPOs) are tough for infra-focused PE investors. For instance, the largest IPO last year, of Bharti Infratel, wasn’t a good one for large investors such as Temasek, KKR, Goldman Sachs, AIF Capital and Citigroup, which invested $1.25 billion in the company by acquiring 14 per cent in the company in 2007 at Rs 220 a share. After five years, the stock is currently trading at about Rs 210 a share.
| TOP PE EXITS IN INFRASTRUCTURE SECTOR | ||||
| Year | Buyer | Target | Exit type | Deal value ($ mn) |
| 2005 | Warburg Pincus | Bharti Airtel | Open Market | 870 |
| 2005 | Warburg Pincus | Bharti Airtel | M&A | 848 |
| 2007 | Globeleq | Globeleq’s America assets | M&A | 542 |
| 2007 | Peepul Capital | Cibernet Corp. | M&A | 200 |
| 2011 | ChrysCapital | Idea Cellular | Open Market | 170 |
| Source: VCCEdge | ||||
Experts believe investors’ reluctance towards infrastructure stocks would have a negative impact on PE exits through IPOs. “Infra IPOs are looking somewhat unlikely, given the prevailing prices of listed infra stocks. Secondary sales should grow as a proportion of total exits, as old investors seek to sell to new ones,” said Seth.