Global funds eyeing infra assets, betting on govt push for growth

Mumbai: Infrastructure assets, many of which have been on the block for a while, are starting to lure buyers, as foreign funds bet on the government’s efforts to push infrastructure growth in the country and ease the operating environment for such projects.

Global funds, such as Macquarie Infrastructure and Real Assets (MIRA), I Squared Capital and, more recently, Brookfield Asset Management Inc. have all acquired road construction and power projects.

Investment bankers advising on these deals said a number of global investors, including pension funds and sovereign wealth funds, are keen to pick up a stake in infrastructure projects, particularly operational projects in the road and port sectors.

“Recent policy changes by the government have resulted in greater investor confidence and more funds are open to looking at India now,” said Rahul Mody, managing director, Ambit Corporate Finance Pte Ltd. Mody added that most of the funds are looking to invest with at least a ten-year horizon and are seeking returns in the mid-teens.

Among the more active funds this year has been global infrastructure investment manager I Squared Capital, which has closed two deals in India. The firm recently raised a $3 billion fund called ISQ Global Infrastructure Fund. From this fund, I Squared in February invested in Cube Highways and Logistics, a firm focused on transportation infrastructure. On 24 August, it closed its second deal by investing in Amplus Energy Solutions Pvt. Ltd. While the fund did not disclose the size of the investment, Mint reported that it was a $150 million deal.

“We like segments of Indian infrastructure, where growth is underpinned by fundamental consumer demand, rising disposable incomes and where, on a comparative basis, India offers better risk-adjusted return than other countries,” said Gautam Bhandari, partner at I Squared Capital.

Bhandari added that the fund is targeting 15-20% gross returns for its investors but is focused on risk-adjusted returns.

“It’s important to note that as global infrastructure specialists, we are not focused on returns but risk-adjusted returns. Some sectors of the Indian infrastructure market have well-developed legal and contractual frameworks, such as road concessions by NHAI (National Highways Authority of India),” he said.

Most of the investments taking place in the current cycle are going towards the operational projects, where implementation risk is eliminated. Funds are also preferring to take a controlling stake or a complete buyout of these assets.

“On a risk-adjusted basis, these dedicated infrastructure funds are looking for nearly 15-18% returns where underlying assets are stable and operational,” said Vivek Pandit, director at Mckinsey India. He added that deals this time around are being closed at more reasonable valuations compared to the 2007-08 period when highly priced deals had made it difficult for funds to secure profitable exits from their investments.

A fund manager, who requested anonymity, said that return expectations of long-term infrastructure funds are lower than those of domestic private equity funds, which has allowed them to close deals.

The large foreign funds are also willing to pick up an entire portfolio of assets, like in the case of a deal between Gammon Infrastructure Projects Ltd and BIF India Holdings Pte Ltd. On 28 August, BIF India Holdings acquired six road and three power projects from Gammon Infrastructure.

BIF India Holdings is controlled by Canada-based Brookfield Asset Management and Core Infrastructure India Fund Pte Ltd (CIIF), which is managed by Kotak Mahindra (UK) Ltd.

“In the transportation sector, we are primarily investing in operating assets. This approach eliminates construction risks. Renewable power plants are less complex to implement and, in that segment, we can take on some development and construction risk,” said Suman Saha, head, infrastructure funds advisory group, at Kotak Investment Advisors Ltd. MIRA and Brookfield declined comment.

On the part of promoters, the urgency to sell comes not only from the need to reduce debt, but also the idea to build capacity to bid for upcoming projects.

This is particularly true in the case of the road sector, where developers have been allowed to exit their holding in any project that has been operational for more than two years.

The easy exit option will release Rs.4,000 crore in capital for developers which can be used for other infrastructure projects or to retire debt, said India Ratings and Research in a report on Monday.

“There is pressure on several of the contractors whose assets are stuck. These firms will want to exit some of these projects so that they can focus on their other projects and can also become active in the new opportunities that are coming up,” said Vishwas Udgirkar, senior director at consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd.

Udgirkar, however, added that it remains a buyer’s market which means that developers should not expect high valuation for their assets.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.