Private equity bets on core sector projects

India's infrastructure sectors, for long shunned by investors due to long gestation periods and hazy policies, have finally become attractive.

And the seal of approval has come from none other than private equity, which typically places long-term bets.

Global financial giants such as Blackstone, Citigroup, and 3i and India's own Infrastructure Development Finance Company (IDFC), India Infrastructure Finance Company (IIFC) and Infrastructure Leasing & Financial Services (IL&FS) are coming together under various consortiums to put money into the country's infrastructure. 

Top PE Investments in Engineering & Construction in 2007*
Company	Amount ($ million)	Month	Investors
Patil Infrastructure	56	Apr	JP Morgan
Quipo Infrastructure	34	Feb	GIC, IDFC PE
Indu Projects	33	Jan	Citigroup
IL&FS Transportation	30	Jan	Trikona, Goldman Sachs
Ramky Infrastructure	28	Jan	Sabre-Abraaj Capital, IIML
* Up to May                                                                    Source: Venture Intelligence

They are putting money into roads, ports, railways, airports and power projects with a vigour not seen before.

Engineering and construction companies attracted 23 investments worth almost $600 million during 2006, compared with just five worth about $90 million during 2005, according to data from Venture Intelligence, a research service.

It is estimated that 11 such deals worth $290 million have been struck between January and May 2007.

Much scope remains. Estimates say as much as $320 billion is needed to develop India's infrastructure to the desired levels.

So why are they rushing in? For one, many feel interest rates have plateaued. But there has also been a change of heart triggered by the good old business sense. There is money to be made in the sector and the PE firms look convinced that policies, which have improved dramatically, will remain favourable.

"While the gestation periods remain long, investors have been attracted by the government's increasing focus and spending on infrastructure. These sectors also provide a much-needed diversification from the gyrating capital markets," said Arun Natarajan, founder & CEO of Venture Intelligence.

Besides, Citi says it is excited by the opportunity to make an impact in infrastructure creation and Blackstone sees an opportunity to make a meaningful contribution.

To tackle the long gestation periods, companies are being encouraged to put several project-specific vehicles under one company. Traditionally, financing was through 70 per cent of debt and 30 per cent of equity, which was structured like debt as the returns expectation was low.

The new model facilitates faster exits and potentially higher returns as a company with a portfolio of assets, whether operational or under development, is more likely to generate investor interest in public markets than one with a single project.

For instance, IDFC PE, while making its initial investment in an arm of the GMR Group at a time when it was seeking to raise funds for its third power plant, pushed the group to aggregate all its power plants into one company, GMR Energy.