PE in Indian Infrastructure

8/8/2019 PE in Indian Infrastructure

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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)


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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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 -



5 Sector focus- Roads & bridges, India Infrastructure, November 2008, p 32-33


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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



PE in roads andhighways


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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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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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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)


(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



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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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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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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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)


(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


PE in airports

Companieswith diversified

infrastructureprojects

22 India: private equity investments, The Asian Venture Capital Journal, AVCJ Research, 20061H09


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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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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.



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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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.



Attractive sectors for future opportunities

35

43

45

68

72

83

0 10 20 30 40 50 60 70 80 90


Shipping

Airports

Rail

Ports and logistics

Roads and highways

Power


25/40


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


26/40


27/40


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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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.



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


5. Challengesfaced by PE firms


29/40


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.



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



30/40


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.



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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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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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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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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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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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: [email protected]

Website: www.assocham.org


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157 PE in infra.indd (India). Artwork by Swati Singh.

PE in Indian Infrastructure

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