Three big funds launched two-three years ago post positive returns.
In the three years since three large private equity (PE) funds were launched to invest exclusively in Indian infrastructure, fund managers say they’re fairly satisfied with the returns.
A $1.2-billion India infrastructure fund was raised by UK-based 3i in 2007. The same year, a joint venture between India’a largest bank and an Australian major started SBI Macquarie Infrastructure Fund (MSIF), which raised $1.03 billion. IDFC Project Equity raised a $927-million Indian Infrastructure Fund (IIF) in 2008.
Injections
Some investments are showing signs of good returns. 3i invested $227 million (Rs 1,000 crore) in Adani Power in 2007, a year which came to known as the boom time after slowdown hit the economy next year.
While many deals done at that time became case studies of over-valuation, this one was an exception. The PE firm invested in Adani at Rs 60 a share. The company went for a public offer last year. Its shares have been trading around Rs 140 a share. At the current valuation, the investment is showing a return of around 50 per cent.
3i says it is not in a hurry to exit. “When we invested in Adani, the plan was to build 2,640 Mw capacity. It is almost 15,000 Mw. We will get the benefit of the company’s ability to re-invest its cash flows into newer projects and also that of subsequent fund-raising,” said Anil Ahuja, Head-Asia, 3i.
Holding on to investments makes sense, say experts. The returns are huge, especially for an infrastructure fund, where the average return is 15-18 per cent, as opposed to the average 25 per cent for PE firms. The tenure of investment is also longer, around seven years, as opposed to five years for a normal PE fund.
Similarly, IDFC’s IIF invested Rs 350 crore in Essar Power in 2009. The group went for an initial public offer for the power and oil and gas business and raised a massive $2.5 billion (Rs 11,250 crore) on the London Stock Exchange.
“If you look at the derivative value of Essar Power’s market capitalisation based on its listing overseas, our investment has done very well. I can’t reveal details but we will make at least 20 per cent returns,” said M K Sinha, president and CEO, IDFC Project Equity. This is more than the average target return of the fund, around 18 per cent.
IDFC’s strategy is to invest at the project level, with an ideal investment size of $50 million and an investment range of $30-70 million. The fund made 13 investments, in three power companies, a port, a gas distribution company and seven road projects, five of which are operational. “Two road projects we invested in have faced delays, but are operational now. We have distributed over five per cent yield this year on the average capital invested and there is more to come,” said Sinha.
SBI Macquarie has started investing actively. It invested $27 million (Rs 125 crore) in Adhunik Power and Natural Resources in June and another $304 million (Rs 1,360 crore) in Viom Networks, a telecom tower infrastructure company, in August. The company is also known to have committed $100 million (Rs 466 crore) to GMR’s airports’ business. However, that deal is yet to be announced.
Longer horizon
Vikram Uttam, a senior director at KPMG, says an infrastructure fund’s performance should be ascertained over a longer term, as the sector’s projects have long-gestation periods. “You have to see them over a period of five years and they have not been around for that long,” he said. Most of these funds are yet to finish investing the entire corpus.
These funds, like other PE firms, had to weather the dry investment period of 2009. IDFC’s IIF has committed 46 per cent of its $927-million fund till now. It plans to invest the entire amount in about two years, much ahead of its 2014 deadline. 3i is looking to invest $850 million of its $1.2-billion fund by the end of the financial year. It is also planning to raise another infrastructure fund of $1.5 billion.
The current market is challenging. The revival of capital markets last year has given a robust alternative to promoters, driving valuations through the roof.
Ahuja said the private market was trading at higher multiples than the public market, as many funds were chasing the same deal at any time. “We are able to get deals but these are in situations where the public market is not an appropriate place,” he said.
Delays in projects are also stretching the deal closing time. “A lot of infrastructure projects are delayed on account of land acquisition issues and environment clearances. So, right now, promoters do not need money and are negotiating with us. I think once the issues are sorted out, the pace of execution will be quicker. We will be patient and invest at a stage where the promoter also needs money and stops negotiating,” said Sinha.
