Post on 09-Apr-2018
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Since Infrastructure is today recognized as the enabler for Indias economicgrowth, ASSOCHAM along with the Venture Capital Association of India
(VCAI) has made the effort in mobilizing the Financial Sector and in particular
the Private Equity and Venture Capital Companies to come together at this
Conclave for creating a road map for investment in Infrastructure.
We do acknowledge the role of Ernst & Young in preparing the
Background Paper along with the team from ASSOCHAM.
ASSOCHAM along with Venture Capital Association of India (VCAI) will
strive to mobilize the Private Equity and the Venture Capital companies
for making our economy more vibrant and robust in the future.
D S Rawat
Secretary General
ASSOCHAM
Message from the Chairman
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The recent global financial crisis has resulted in investors taking a long hardlook at their portfolio asset allocations and setting the wheels in motion for the
change. In this process infrastructure has emerged as an asset class with long
term growth providing relatively stable returns. Interestingly, even private equity
(PE) players have also been attracted to this space and have invested close
to USD2,694 million in infrastructure in India over the last three years.
We have reached out to some of the leading Private Equity players who are investing
in the infrastructure space in India and sought their view on the various issues such
as key drivers, challenges, opportunities, regulatory norms and returns and payback
periods. This report also carries finding of the survey along with the industry insights.
We hope you find this report interesting and insightful.
Kuljit Singh
Partner and Head Transaction Advisory Services
Infrastructure, Real Estate and Government services group
Ernst & Young Pvt. Ltd., India
Foreword
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The opportunity framework Private Equity in Indian infrastructure
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Executive summarySector overview and PE investments 1
The Ernst & Young PE survey: key objectives 15
Results and analysis 16
1. India versus other economies 16
2. Drivers for PE funds to invest in Indian infrastructure 17
3. The PE advantage 19
4. Infrastructure and the credit crisis 20
5. Challenges faced by PE firms 22
6. Expectations of PE investors 25
Outlook 27
References 28
Contents
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It is well recognized that infrastructure development has a multiplier effect on the economicactivity of any country. Since India is characterized by an underdeveloped and an under-
capitalized infrastructure set up, it needs significant impetus to accelerate its growth. The
government has identified this need and has already adopted an action plan, which calls
for substantial infrastructure investment and heightened private sector participation in the
coming years.
Our survey of PE investors echoes the same sentiment, as the majority of respondents
believe in the significant investment potential offered by the infrastructure sector in India.
With several reforms and policy measures undertaken by the government, the sector
has witnessed substantial growth over the past few years. Looking ahead, power, roads
and highways along with ports are likely to witness significant investment interest and
opportunities. Interestingly, the survey also highlighted that the global economic crisis has
not dampened the investor confidence in the sector. The majority of respondents cited thatlast years crisis had a limited or short-term impact on PE investments, and activity in the
sector is likely to pick up over the next 812 months.
In addition to funding, the ability of PE fund houses to add value to the portfolio company
through strengthening corporate governance practices and augmenting market reputation
was cited as an important contribution that PE houses propose to bring to their
investee companies.
Looking ahead, numerous policy measures by the government coupled with significant
capacity additions are expected to catalyze the investment potential of the sector. As
more private players enter the arena, the sector is expected to evolve further and create
attractive investment and exit opportunities for PE investors.
Executivesummary
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The opportunity framework Private Equity in Indian infrastructure 1
Recent years have witnessed a strong thrust by the government towards the countrys
infrastructure development and growth of avenues for private participation. Driven by the
huge potential offered by the sector, several PE houses have joined the bandwagon, with the
infrastructure sector witnessing PE investments of USD2,694 million since the period
2006-1H091. Average deal size was close to USD 53.9 million for the deals which had
announced deal values. 2008 was the peak year that saw investments worth USD955 million.
1 India: private equity investments, The Asian Venture Capital Journal, AVCJ Research, 20061H09
Sector overview and PE investments 1
PE investment in infrastructure
Source: India: private equity investments, The Asian Venture Capital Journal, AVCJ Research,20061H09 and Ernst & Young research
639774
955
327
1615
18
6
0
200
400
600
800
1000
1200
2006 2007 2008 1H09
PEinvestments(USDm)
0
2
4
6
8
10
12
14
1618
20
Numberofdeals
PE investments (USD m) Number of deals
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Segment-wise PE investment in infrastructure (20061H09)
Source: India: private equity investments, The Asian Venture Capital Journal, AVCJ Research,
20061H09 and Ernst & Young research
During the period from 2006 to 1H09, PE investors typically opted for power, which
has a 36% share, and roads and highways with a 19.7% share. Notably, another set of
infrastructure players who have diversified across segments and have a portfolio of projects
in hand have attracted PE interest as a source of growth capital. This segment includes
conglomerates such as L&T IDPL.
Segment PE investment
(USD m)
Deal
count
Deal count
(Deals with
announced
deal value)
Average deal
size (based on
announced deal
value) (USD m)
Power 971 14 13 74.7
Diversified
infrastructure
developers
782 18 16 48.9
Roads and highways 530 15 14 37.9
Ports and logistics 321 5 4 80.2Railways 85 2 2 42.4
Airports 5 1 1 5.1
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3
Breakup of PE investment in infrastructure (20061H09) (in percentage)
Source: India: private equity investments, The Asian Venture Capital Journal, AVCJ Research,20061H09 and Ernst & Young research
0.2
29.0
11.936.0
3.1
19.7
AirportDiversified Ports and logistics Power Railways Roads and highways
The opportunity framework Private Equity in Indian infrastructure
The following section provides a snapshot of the current status, key trends and PE activity
in the sub-sectors of Indian infrastructure, which include power, roads and highways,
ports and logistics, railways, airports and other diversified infrastructure players.
Power: creating
new investmentopportunities2
Indias power generation capacity2 stands at a total of 151.1GW as on 31 July 2009.3
The total power generated in the country has increased from 531.4 billion units in
FY03 to 723.6 billion units in FY09, recording a CAGR of 5.3% in the last six years.The current inter-regional (national grid) power transmission capacity in the country
stands at 20.75GW (March 2009), recording a CAGR of 21.3% in the last two years.
2 Indian electricity scenario, Performance & achievements, Ministry of Power website, www.powermin.nic.in,
accessed 24 August 2009.
3 Highlights of power sector, Central Electricity Authority website, http://cea.nic.in/power_sec_reports/
executive_summary/2009_07/1-2.pdf, accessed 28 August 2009
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The opportunity framework Private Equity in Indian infrastructure4
During 20061H09, power has emerged as the most active sector in terms of
PE deal activity with announced PE investments of USD971 million in a total
of 14 deals and an average deal size of USD74.7 million. Several global PE
houses, including the 3i Group and Citigroup Venture Capital have been betting
high on the increasing private sector participation opportunities and have
picked up stakes in power sector companies during the past few years.
Power supply position (Peak MW)
12.211.2 11.7
12.313.8
16.6
12
0
2
4
6
8
10
12
14
16
18
FY03 FY04 FY05 FY06 FY07 FY08 FY09
(inpercentage)
Shortage (in percentage)
Source: Ministry of Power
However, the increase in power generation capacity and transmission networks has not kept
pace with the growth in demand, leading to a shortage in power supply.
By recognizing the need to bridge the supply deficit, the government has initiated a phased
investment program to increase generation, transmission and distribution capacities over
the course of the Eleventh Five Year Period (20072012). It aims to increase generation
capacity by 79GW and inter-regional power transmission capacity by about 21GW during the
period.4 This will help the government work toward achieving its vision of Power for all
by 2012.
The Planning Commission has estimated the investment in the power sector during theEleventh Five Year Plan to be around USD166.6 billion, of which 28% will be contributed by
the private sector.
PE in power
4 Power: Annual review, May 2008, CRIS INFAC
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The opportunity framework Private Equity in Indian infrastructure 5
From the above table, it is evident that power in India presents a wide sphere of
opportunities from emerging segments such as renewable energy and the maturing
conventional fuel based power segment. Further, unlike most other sectors, where the
global economic crisis is evident, the economics of the power sector is almost entirely driven
by the domestic market and the attractive demand supply dynamics. However, the power
sector opportunities are characterized by a large quantum of greenfield projects most of
which are under various stages of planning.
Roads and highways:picking up speed
India has the second-largest road network in the world; with a total length of 3.3 million km.
Roads are the most preferred mode of transportation in the country and account for 85%
of the passenger traffic and 65% of the freight traffic. National highways, which account for
only 2% of the countrys total road length, bear about 40% of the total traffic. According to
the estimates of the Committee on Infrastructure, the annual growth of passenger and cargo
traffic is projected to be between 1215% and 1518%, respectively.5
Top five PE deals in the power sector (20061H09)
Date Target PE Investor Value
(USD m)
Stake
(%)
February-08 Sophia
Power
Farallon Capital Management and
LNM Internet Ventures
404 38
October-07 Adani Power 3i Group 230 8
June-07 Ind-Barath
Power Infra
Citigroup Venture Capital
International and UTI Venture Funds
72 30
March-09 Essar Power IDFC Project Equity 68 2
November-08 Orient Green
Power
Bessemer Venture Partners,
Olympus Capital Holdings andShriram EPC
55 -
Source: India: private equity investments, The Asian Venture Capital Journal, AVCJ Research,
20061H09 and Ernst & Young research
5 Sector focus- Roads & bridges, India Infrastructure, November 2008, p 32-33
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The opportunity framework Private Equity in Indian infrastructure 7
PE investments in roads and highways have seen an upward trend over the past few years.As discussed above, it is evident that substantial investment is needed to improve and
develop the over-congested road network of the country. Since 2006, companies in the
roads and highways segment have attracted PE investments worth USD530 million in a
total of 15 deals. The average deal size for disclosed deals was close to USD37.9 million.
Companies in this space have successfully raised growth capital to fund their existing
projects as well as other expansion plans. There are a large number of opportunities
relating to construction companies, highway holding companies and individual road
SPVs. However, the PE interest in such opportunities is the most in construction
companies and the least in individual road SPVs (possibly due to exit concerns and
higher risk perception due to lack of diversified asset base). The interest in road holding
companies has been better than single asset SPVs but even here the supply of Holding
companies in the market far exceeds the demand for such companies from PE players.
Top five PE deals in roads and highways (20061H09)
Date Target PE investor Value
(USD m)
Stake
(%)
February-08 Ashoka Buildcon IDFC Private Equity 180 16
April-07 IRB
Infrastructure
Deutsche Bank, Goldman Sachs
and Merrill Lynch Corporate
Principal Investments Group
65 12
April-09 Ashoka Buildcon IDFC Project Equity 50 -
January-08 FuturaInfraprojects
Frontline Ventures 40 10
December-07 B. Seenaiah
& Company
Amansa Capital, IDFC, L&T
Capital, L&T Infrastructure
Finance and Lehman Brothers
38 7
Source: India: private equity investments, The Asian Venture Capital Journal, AVCJ Research,
20061H09 and Ernst & Young research
PE in roads andhighways
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The opportunity framework Private Equity in Indian infrastructure8
India has 12 major and about 200 non-major ports, accounting for 95% of the countrystotal trade in terms of volume and approximately 70% in terms of value. In FY08, major
ports accounted for approximately 72% of the total cargo traffic while the remaining was
handled by the non-major ports.8
Even though the demand for cargo has been adversely impacted by the global slowdown,
the cargo traffic at Indian ports has increased at a CAGR of 9.1% during the past four years.
Most Indian ports have almost 100% capacity utilization levels and are unable to receive
larger vessels due to draught constraints. This has resulted in substantial gaps between the
Indian ports and their global counterparts. This increasing disparity can also be attributed to
numerous other challenges, including complex regulatory approvals and high costs due to
taxation norms.
To meet the increasing traffic requirements and address the above issues, the government
has launched the National Maritime Development Programme (NMDP), which aims to
enhance private investment and improve service quality in the maritime sector. Under this,
as per the Planning Commission estimates, the investment
Total cargo traffic (in million tonnes)
738.13722.85649.9
569.11521.58
0
200400
600
800
1000
2004-05 2005-06 2006-07 2007-08 2008-09
Cargo traffic
Source: Sector focus- Ports and shipping, India Infrastructure, June 2009
Ports andlogistics: sailing
opportunities ahead
8 Sector focus- Ports and shipping, India Infrastructure, June 2009, p.26
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The opportunity framework Private Equity in Indian infrastructure 9
in the ports sector during the Eleventh Five Year Plan is expected to be around USD22billion, of which around 62% will be contributed by the private sector.9
Another area of specific emphasis is the need to increase the container capacity of ports.
Container traffic has increased at a CAGR of 13.5% during 19992009 and is further
expected to increase from the current 7.7 million twenty foot equivalent units (TEUs) to 20
million TEUs by 2020.10
Several new projects involving 600 million tonnes of cargo handling capacity are expected
to commence in 2009. Additionally, new projects are on the anvil at the major ports of
Chennai, Cochin, Ennore, Mumbai, Paradip and Vizag.
On the logistics front, warehousing activities account for about 20% of the logistics industry
in India. At present, inefficient infrastructure is the single-most critical issue faced by this
sector. Despite Indias impressive economic growth, its dilapidated roads, congested ports,inadequate power and complex state regulations impede the development of the logistics
and warehousing sector.
To address the above issues, the government has provided incentives to the private sector
for developing logistics parks and free-trade warehousing zones. The warehousing market
segment is estimated to grow from USD20 billion in FY08 to about USD55 billion by FY11.11
With the increasing need to augment port handling capacities and develop more greenfield
sites in the country, the ports and logistics sector requires large-scale investments. PE
players have identified this growth potential and have begun to invest in the sector. Since
2006, the sector has witnessed investments totaling USD321 million in five deals, with
an average deal size of USD80.2 million. Gujarat Pipavav was the first port in India that
received PE funding to the tune of USD29 million from IDFC PEs India Development Fund in
200512. Subsequently, the inflow of PE investments began in other ports. 3is investment in
Mundra Port and Krishnapatnam Port and the Warburg Pincus investment in Gangavaram
Port are few other PE deals in the ports sector.
PE in portsand logistics
9 Development of Infrastructure: Eleventh Five Year Plan- volume I, chapter 12, Planning Commission website,
www.planningcommission.gov.in, accessed 24 August 2009
10 Sector focus- Ports and shipping, India Infrastructure, June 2009, p.2711 Abhishek Gupta, Warehousing without walls A perspective of the warehousing industry and the way ahead, EY
CBK, August 2008, via RAD
12 Private equity firms are looking at investing in Indian ports, Business India, 22 March 2009, via ISI Emerging
Markets
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The opportunity framework Private Equity in Indian infrastructure10
Going forward, given the continuous rise of overall traffic at Indian ports and the stronggovernment thrust toward various port development projects and policies, ports are
expected to present significant investment opportunities to the PE community.
With a total network of 63,332 km spread across 8,000 stations, the Indian Railways (IR)
forms the second-largest14 rail network in the world under a single management. IR is
involved in a number of activities, including freight and passenger operations, infrastructure
development, manufacturing and other ancillary businesses such as catering and tourism. The
freight segment accounts for about 70% of the overall revenues. IR carries approximately 40%
of the freight traffic and 20% of the passenger traffic of the country.
Top PE deals in ports and logistics (20061H09)
Date Target PE investor Value
(USD m)
Stake (%)
February-09 Krishnapatnam Port 3i India 161 24
July-06 Mundra Port & SEZ 3i India and GIC
Real Estate
100 -
September-08 Gangavaram Port Warburg Pincus 34 30
September-07 Sical Infra Assets Old Lane 26 26
Source: India: private equity investments, The Asian Venture Capital Journal, AVCJ Research,
20061H09 and Ernst & Young research
Railways witnessed aspeedy turnaround13
Freight and passenger traffic movement
Particulars 200506 200607 200708 200809*
Revenue-earning freight traffic(million tones)
666.51a 727.75a 793.89a 832.1
Passenger traffic (million)c 5,725.0 6,219.0 6,524.0b 6,971.0ba Excluding Konkan Railways Corporation Limited Loading
b April-February (estimated)
c Excludes Metro Kokatta
* Excludes 1.21 MT for 2007-08 and 1.12 MT for 2008-09 for Konkan Railway Loading
Source: Ministry of Railways
13 Sector focus- Railways, India Infrastructure, April 2009, p.30 -54
14 Evolution, Ministry of Railways website, http://www.indianrailways.gov.in/evolution/rail-network.htm,
accessed 28 August 2009
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The opportunity framework Private Equity in Indian infrastructure 11
Over the past few years, the growth of the rail network has not kept pace with the
increasing traffic requirements. For instance, between FY01 and FY07, the goods traffic
increased at a CAGR of 8.3% while the rail network increased only at a CAGR of 0.08%.
Further, numerous issues such as capacity constraints, increasing freight rates and a
lack of modern freight terminals continued to impact the rail sector. These infrastructure
bottlenecks coupled with poor customer orientation resulted in transit delays of both
passengers and goods, resulting in an increased customer preference toward roads.15
Rail projects in India have generally been a part of the public sector domain. However,
based on the success of PPP in other infrastructure sectors such as highways, IR has begun
to take small measures to explore the PPP route. The Planning Commission estimates
the investment in the railways sector during the Eleventh Five Year Plan to be around
USD65.5 billion, of which close to 19% will be contributed by the private sector.16
15 Roads and highways: Industry statistics, June 2008, CRIS INFAC; Operations of Indian Railways, Economicsurvey 2008-09, Government of India: Union budget and economic survey, www.indiabudget.nic.in, accessed
24 August 2009
16 Development of Infrastructure: Eleventh Five Year Plan- volume I, chapter 12,Planning Commission website,
www.planningcommission.gov.in, accessed 24 August 2009
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The opportunity framework Private Equity in Indian infrastructure 13
Freight volumes (in thousand tonnes)
Source: Airport Authority of India
DomesticInternational
1149.41146.71022.7920.1823.7
693.2547.9568.2529.6483.8456.9376.4
0
500
1000
1500
FY04 FY05 FY06 FY07 FY08 FY09
Airports in India are currently facing numerous issues, including airport congestion,
consistent hike in air fares, capacity constraints and complicated handling guidelines and
procedures. The need to upgrade and modernize airports to address these issues and meet
increasing traffic requirements has become even more critical in the current scenario.
According to the Planning Commission, the investment in the airports sector during the
Eleventh Five Year Plan is estimated to be around USD7.7 billion, of which approximately
70% will be contributed by the private sector.19
The government has opened up avenues for private investment by taking several initiatives,
including the provision of 100% tax exemption for airport projects for a period of 10 years.
Several metro and non-metro airports are now being developed through the PPP route.20
While the government has outlined ambitious plans to modernize the countrys airports, the
sector still requires substantial investments to be able to handle the growth in passenger
and cargo traffic. The Centre for Asia Pacific Aviation (CAPA) has estimated that Indian
airports will have to handle over 100 million passengers, including 60 million domestic
passengers and around 3.4 million tonnes of cargo per annum by 2020.21
19 Development of Infrastructure: Eleventh Five Year Plan- volume I, chapter 12,Planning Commission website,www.planningcommission.gov.in, accessed 24 August 2009
20 Airports, Public Private Partnerships in India website, www.pppinindia.com/sector-airports.asp, accessed 24
21 The Statesman (India): Career: SOAR HIGH, The Statesman, 13 April 2008, via Dow Jones Factiva, 2008 The
Financial Times Limited. Asia Africa Intelligence Wire
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The opportunity framework Private Equity in Indian infrastructure14
Similar to the trend in the railways sector, Indian airports too have not witnessed much PEaction. The only deal announced in airports was in January 2006 where IDFC PE picked up
an 8%22 stake in the Delhi airport modernization project that was awarded to the GMR Group.
Currently, there is a strong need to modernize the existing airport infrastructure in the
country as high growth in air traffic is straining aviation infrastructure, resulting in delays
and traffic congestions at major airports. Keeping in mind significant fund requirements in
the sector, PE can play a pivotal role in providing finance for greenfield projects as well as
the modernization of existing airports in the country. Here, the large opportunity likely for
PE players may be the Navi Mumbai airport or an investment into the existing projects such
as Bangalore Airport.
PE players investing in Indian infrastructure have expressed keen interest in playerswith a diversified project portfolio. This segment of the infrastructure sector, which has
seen PE investments to the tune of more than USD782 million in 18 deals, accounted for
approximately 29% of the PE investments during 20061H09. Players such as L&T IDPL,
which have interests in several infrastructure projects, have raised PE funding in the past
few years. Evidently, as diversified projects are less risky in nature, this can be cited as one
of the reasons for heightened interest by the PE community in this space.
Top five PE deals of companies involved in diversified infrastructure projects
(20061H09)
Date Target PE investor Value
(USD m)
Stake
(%)
April-06 L&T IDPL IDFC Private Equity and JPMorgan Partners Advisers
122 22
November-07 Soma Enterprise 3i Group 103 -
December-06 Indiabulls
Infrastructure
Development
Farallon Capital
Management, and Karrick
100 13
August-06 IL&FS Trikona
Infrastructure
Infrastructure Leasing
& Financial Services
and TCK Advisers
100 100
July- 07 Subhash Projects
& Marketing
Citigroup Venture
Capital International
61 20
Source: India: private equity investments, The Asian Venture Capital Journal, AVCJ Research,20061H09 and Ernst & Young research
PE in airports
Companieswith diversified
infrastructureprojects
22 India: private equity investments, The Asian Venture Capital Journal, AVCJ Research, 20061H09
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The opportunity framework Private Equity in Indian infrastructure16
1. India versusother economies
Emerging market opportunities and shorter lead times
Around 80% of the respondents perceive China as an equally attractive destination as
is India in terms of the PE opportunity for investing in Indian infrastructure. In addition,
around 50% and 80% of the respondents cited North America and Europe as less
attractive destinations when compared to India vis--vis PE investments, respectively.
Please note that the values cannot be added to an aggregate of 100% since the respondents were given
the option to select more than one parameter
Attractiveness of India vis--vis other geographies
30
50
80
50
80
60
40
0
2020
0 0
10
20
00
10
20
30
40
50
60
70
80
90
Percentageofrespondents
Less attractive
China Brazil Russia Europe North America
Equally attractive More attractive
Results and analysis3
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The opportunity framework Private Equity in Indian infrastructure 17
Emerging nations such as China and Brazil along with India now have a resonant fervorwith the PE community. Besides extending attractive investment opportunities, they
have been relatively insulated from the recent economic slowdown. Further, PE funds
have a relatively shorter time frame to invest in the infrastructure sector in India,
as compared to investments in developed nations such as the US and Europe.
With increased government focus on encouraging private sector participation,
the infrastructure sector in India is set to offer vast investment opportunities
for PE players. The PE players today view strong growth potential as the
most important factor that drives investments towards the sector.
Please note that the values cannot be added to an aggregate of 100% since the respondents were given
the option to select more than one parameter
Infrastructure projects are typically characterized by less volatile cash flows, attributed to
their underlying long-term assets. Therefore, the ability of infrastructure assets to provide
stable and predictable cash flows is yet another attractive component for PE players toinvest in this space.
Factors influencing infrastructure investment decisions for PE funds
62
69
87
0 10 20 30 40 50 60 70 80 90 100
Portfoliodiversification
Low valuations
Exit options
Predictable
cash flows
Strong growthpotential
Percentage of respondents
58
35
2. Drivers for PEfunds to invest in
Indian infrastructure
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The opportunity framework Private Equity in Indian infrastructure18
Numerous growth opportunities for PE investorsPE funds operating in India display a fair degree of preference for the power sector. Today,
there is a significant demand-supply imbalance in the power sector and bridging this gap
would require increased government spending and private sector involvement. Reforms
such as improved tariff norms, open access to transmission networks and unbundling
of state utilities are aimed at attracting greater private investments and participation.
The inherent demand-supply imbalance, coupled with measures for higher private sector
participation are likely to be the key reasons for increased investments from the PE
community. This is also supported by historical data, which reveals that the power sector
witnessed the maximum number of PE deals from global and domestic PE houses during
20061H09.
Some of the survey responses also indicated that strong private sector impetus in the
sector, along with effectively planned and significantly large capacity additions necessitatecapex, which further creates investment opportunities.
Please note that the values cannot be added to an aggregate of 100% since the respondents were given
the option to select more than one parameter
Attractive sectors for future opportunities
35
43
45
68
72
83
0 10 20 30 40 50 60 70 80 90
Percentage of respondents
Shipping
Airports
Rail
Ports and logistics
Roads and highways
Power
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The opportunity framework Private Equity in Indian infrastructure 19
Roads and highways, as well as ports and logistics are considered as segments with stronggrowth potential. This is attributed to major investment plans announced by the government
for the development of these sectors.
Urban infrastructure
The popularity of urban infrastructure emerged as one of the interesting findings from
the survey. A large number of respondents stated that areas in urban infrastructure such
as water management, waste water management, sewerage system and solid waste
management are among the important segments offering strong growth potential.
With rapid urbanization and an exponential rise in population, it becomes imperative to
ensure adequate provision of such services. Jawaharlal Nehru National Urban Renewal
Mission (JNNURM) is the most ambitious project initiated by the government under
urban infrastructure development. The funding for this sector has primarily been sourced
from government budgetary allocations while there has been limited private sector
participation. However, several PPP projects in this segment are now on the anvil, with
states such as West Bengal, Maharashtra, Kerala and Gujarat adopting PPP policies
and West Bengal and Assam setting up various PPP cells. These initiatives provide a
significant impetus and opportunity for PE investors to invest in the sector. Further,
with JNNURM funding emerging as a strong enabler for municipal reforms and municipal
service quality improvement, these segments are likely to witness considerable capacity
augmentation with private sector participation over the next four to five years.
Corporate governance
Apart from providing the requisite funding, PE firms also help in strengthening corporate
governance practices in the investee company. This view was shared by a majority (77%) of
the PE houses surveyed.
Most Indian companies that are operated by promoters have a significant scope of
improvement for their corporate governance practices. To this end, PE can play a
pivotal role in improving corporate governance standards by further developing the
existing internal systems of information and control. PE involvement can also be
effective in bringing about relevant management changes to form an effective board,
focusing on frequency of board meetings and implementing strong audit standards.
3. The PE advantage
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The opportunity framework Private Equity in Indian infrastructure 21
No significant impact of the credit crisis
In another finding, respondents believed that the financial crisis has not significantly
dampened investor confidence for infrastructure investments in India. A substantial portion
(84%) of the respondents believe that last years crisis had a very limited/short-term impact
and the activity is expected to pick up in the next 12 months.
Is this the right time for fund raising? (in percentage)
Yes No Cant say
84.2
10.5
5.3
Impact of credit crisis on PE deal activity (in percentage)
Significant effect, and PE investors will be reducing their exposure to the sectorand hence less deal activity
Short term effect, activity likely to pick up in next 12 months
Very little effect, if any
84
511
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The opportunity framework Private Equity in Indian infrastructure22
Delays in getting approvals and complex regulatory environment impactPE investments
The majority of the respondents cited delays in getting approvals and a complex
regulatory environment as major factors hindering PE flows in the infrastructure sector.
Please note that the values cannot be added to an aggregate of 100% since the respondents were given
the option to select more than one parameter
Regulatory procedures and long payback periods
Infrastructure projects typically involve a long payback period, whereas the debt that is
available for financing infrastructure project matures in a period of 712 years. Meanwhile,
regulatory procedures, delays in project implementation and several unplanned cost
escalations create concerns regarding the financial viability of projects and disrupt the free
flow of investments by PE houses.
Further, respondents cited project or investment risks on account of contractual structures,
aggressive bidding or incomplete traffic estimates as some of the key issues faced by them
while investing in infrastructure projects.
Some of the respondents also viewed delays in completing land acquisitions as an additional
factor that hinders PE investments. The delay in land acquisition leads to execution delays,
and this in turn, results in escalation in project costs, impacting IRR from the investments.
Challenges faced by PE investors while investing in Indian infrastructure
45
53
58
58
68
73
0 10 20 30 40 50 60 70 80
Prevalence of single asset investments
Non-transparent bidding process
Long gestation period of theinfrastructure projects
Delay in financial closure of projects
Complex regulatory environment
Delay in getting approvals
Percentage of respondents
5. Challengesfaced by PE firms
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The opportunity framework Private Equity in Indian infrastructure 23
Exit time frames and regulatory hurdles sets investment in the infrastructure sectorapart from other sectors
Respondents largely believe that exit time frames and regulatory hurdles associated with
infrastructure projects are the characteristics that distinguish investment in this sector
from the rest.
Please note that the values cannot be added to an aggregate of 100% since the respondents were given
the option to select more than one parameter
Absence of the vibrant bond market: a handicap
Respondents primarily believe that an underdeveloped bond market in India impacts
the financing of infrastructure projects. Unlike other developed nations, where a
vibrant bond market serves as an alternative avenue for financing/refinancing, the
bond market in India has not grown substantially. Thus, the underdevelopment of bond
markets in the country poses hurdles in accessing funds for the sector. PE investors
cited concerns such as the unavailability of long-term fixed rate financing over a long-
term concession period as one of the impeding factors in infrastructure financing.
Factor differentiating PE investments in infrastructure vis--vis other sectors
60
74
79
88
89
0 10 20 30 40 50 60 70 80 90 100
Returns or pay off
Due diligence
Risk
Regulatory hurdles
Exit time frame
Percentage of respondents
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The opportunity framework Private Equity in Indian infrastructure24
However, a set of respondents believe that there is sufficient liquidity in domestic banking
and government initiatives in infrastructure financing ease the financing pressures for
infrastructure projects.
Promoter concerns
A significant majority (91%) of the respondents surveyed believe that the main
concern for promoters raising PE funding is a mismatch in valuation expectations.
Please note that the values cannot be added to an aggregate of 100% since the respondents were given
the option to select more than one parameter
Impact of underdeveloped bond market
37
47
16
0 10 20 30 40 50
A substantialproblem
One of the obstacles
Not a problem at all
Percentage of repondents
Promoter concerns
65
91
58
0 10 20 30 40 50 60 70 80 90 100
Outside intervention in day today functioning of the company
Valuation concerns
Unwillingness to sell stake infamily owned business
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The opportunity framework Private Equity in Indian infrastructure 25
Optimistic returns and IPO exitsDespite the credit crisis, PE investors remained positive about the returns expected from
their investments in infrastructure projects. Around 50% of our respondents expect to
achieve a targeted 2025% IRR from their investments in infrastructure projects.
Notably, another 31% of the respondents target more than 25% IRR on their investments.
The fundamental driver for high-return expectations is the underinvestment in the sector,
which calls for a rapid development in the infrastructure landscape, and hence, higher
returns. In addition, infrastructure assets are characterized with low-operating costs
coupled with predictable cash flows, which provides for a relatively high and stable return
on investment.
Preferred exit options among PE players
Further, IPO stands out as the most preferred exit option for PE investors, as 82% of the
respondents are likely to opt for this route for exits from their investments. Another 9% of
the respondents indicate the strategic buyout as their preferred exit route.
Return expectations
19
50
31
0 10 20 30 40 50 60
15-20% IRR
20-25% IRR
More than 25% IRR
Percentage of repondents
6. Expectationsof PE investors
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The opportunity framework Private Equity in Indian infrastructure26
One of the survey results indicated that IPOs are perhaps the most preferred exit option at
this stage. However, with a large number of funds operational in future, this could change
and the secondary sale or strategic buyout could become a more common exit option for
infrastructure projects as in developed countries.
Preferred exit options (in percentage)
82
5
59
IPO Secondary sale Strategic buyout Promoter buyback
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The opportunity framework Private Equity in Indian infrastructure 27
Outlook 4
A strong ongoing pipeline of infrastructure projects, increasing private sector participation
and the rise in infrastructure-focused PE funds in India collectively drive the appetite of
PE investors toward the countrys core sector. The perception was also supported by PE
investors that participated in our survey, as the majority of the respondents opined that
increasing government thrust on infrastructure spending, coupled with initiatives for
encouraging private sector participation are the major catalysts that boost the investment
outlook for the sector.
However, there are still several bottlenecks, including the delay in getting approvals, an
underdeveloped corporate debt market and a complex regulatory environment that PE
investors are faced with while investing in the countrys infrastructure sector.
Looking forward, as the infrastructure sector in India continues to evolve and mature over
the next 510 years, it will pave the way for increasing opportunities for various sub-
segments requiring large capital commitments. Having said this, synergies between PE
investors and the infrastructure industry in India are expected to further strengthen, as PE
funding is expected to emerge as a vital source of financing to meet major capex plans of
infrastructure companies.
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The opportunity framework Private Equity in Indian infrastructure28
Vyvyan Tenorio and Christine Idzelis, Can private equity play the infrastructuregame?, The Deal.com website,http://www.thedeal.com/newsweekly/features/
can-private-equity-play-the-infrastructure-game.php, 3 April 2009
India: private equity investments, The Asian Venture
Capital Journal, AVCJ Research, 20061H09
Indian electricity scenario, Performance & achievements, Ministry of
Power website, www.powermin.nic.in, accessed 24 August 2009.
Highlights of power sector, Central Electricity Authority website, http://cea.nic.in/
power_sec_reports/executive_summary/2009_07/1-2.pdf, accessed 28 August 2009
Power: Annual review, May 2008, CRIS INFAC
Sector focus- Roads & bridges, India Infrastructure, November 2008, p 32-33
Roads and highways: Industry statistics, June 2008, CRIS INFAC
Development of Infrastructure: Eleventh Five Year Plan- volume I, chapter 12, Planning
Commission website, www.planningcommission.gov.in, accessed 24 August 2009
Sector focus- Ports and shipping, India Infrastructure, June 2009, p.26-27
Abhishek Gupta, Warehousing without walls A perspective of the warehousing
industry and the way ahead, EY CBK, August 2008, via RAD
Private equity firms are looking at investing in Indian ports,
Business India, 22 March 2009, via ISI Emerging Markets
Sector focus- Railways, India Infrastructure, April 2009, p.30 -54
Evolution, Ministry of Railways website, http://www.indianrailways.
gov.in/evolution/rail-network.htm, accessed 28 August 2009
Operations of Indian Railways, Economic survey 2008-09, Government of India: Union
budget and economic survey, www.indiabudget.nic.in, accessed 24 August 2009
Conference on building infrastructure: challenges and opportunities, Committee on
Infrastructure, www.infrastructure.gov.in, Ministry of Civil Aviation, 7 October 2006
Airports, Public Private Partnerships in India website, www.pppinindia.
com/sector-airports.asp, accessed 24 August 2009
The Statesman (India): Career: SOAR HIGH, The Statesman, 13 April 2008, via Dow
Jones Factiva, 2008 The Financial Times Limited. Asia Africa Intelligence Wire
References
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Notes
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The opportunity framework Private Equity in Indian infrastructure 31
Notes
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About ASSOCHAMServing the Nation since 1920
The Associated Chambers of Commerce and Industry of India (ASSOCHAM), Indias premier
apex chamber covers a membership of over 300,000 companies and professionals across
the country. It was established in 1920 by promoter chambers (Bombay Chamber of
Commerce & Industry, Cochin Chamber of commerce & Industry, India Merchants Chamber,
Mumbai, The Madras Chamber of Commerce & Industry, PHD Chamber of Commerce
& Industry) representing all regions of India.
As an apex industry body, ASSOCHAM represents the interests of industry and trade,
interfaces with Government on policy issues and interacts with counterpart international
organizations to promote bilateral economic issues. ASSOCHAM is represented on allnational and local bodies and is, thus, able to pro-actively convey industry viewpoints, as
also communicate and debate issues relating to public-private partnerships for
economic development.
ASSOCHAM members represent the following sectors:
Trade (National and International)
Industry (Domestic and International)
Professionals (e.g. CAs, lawyers, consultants)
Trade and Industry Associations and other Chambers of Commerce
ASSOCHAM operates through 90 Expert Committees that provide an interactive platform
to Members for interaction and aid formulating Policy recommendations so as to facilitateEconomic, Industrial and Social Growth.
These encompass areas such as:
Domestic & International Trade, Commerce, Industry, Services, Agriculture, Education,
Food Processing, IT & BPO, Economic Affairs, TQM, Energy, Environment, Capital Market,
Banking & Finance, Direct & Indirect Taxation, WTO & IPR, Infrastructure, Pharma, Health,
Biotechnology & Nanotechnology, Tourism and Telecom.
In the recently concluded 87th Annual General Meeting we had the honour of welcoming
Shri Sajjan Jindal, Vice Chairman & Managing Director, JSW Steel Limited as our new
President, Dr. Swati Piramal, Director - Strategic Alliances & Communications as Sr. Vice
President &, Shri Dilip Modi, Vice Chairman,Spice Corp. as Vice President.
Leading Corporates like Aditya Birla Management Corporation Ltd., Boeing, DLF, RelianceCommunications, Reliance Indistries, TATA, Northrop Grumman, Cable & Wireless,
Warburg Pincus, SREI Infocom, Ernst & Young, Huawei Telecommunications, ZTE
Telecom, Qualcomm, Centurion Bank of Punjab Limited, Diageo India Pvt. Ltd., DSP Merrill
Lynch, Geojit Financial Services Ltd., GMR Infrastructure Ltd, ITC Limited, Jet Airways
(India) Private Limited, Kotak Mahindra Asset Management Co. Ltd, Microsoft, Spice
Communications Pvt. Ltd., Videocon Ltd. are Esteemed Members of ASSOCHAM.
D. S. Rawat
Secretary General
The Associated Chambers of Commerce and Industry of India
ASSOCHAM Corporate Office
1, Zamrudpur Community Centre, Kailash Colony, New Delhi-110048Tel: +91 11 4655 0555 (Hunting Line). Fax: 011 4653 6481/82, 4653 6497/98
Email: assocham@nic.in
Website: www.assocham.org
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157 PE in infra.indd (India). Artwork by Swati Singh.