Equity financing typically meets about a fourth of the cost of an infrastructure project. It primarily comes through project promoters or private equity (PE) investors. Though equity does not form a very large part of a project’s funds, it is still impacted by a number of factors such as economic growth and activity in the capital market. Moreover, growth in equity financing acts as a barometer to gauge investor sentiment towards the sector.
In 2015-16, equity financing in the infrastructure sector increased significantly over the preceding year. Economic growth in the country, which proved resilient to global headwinds, improved investor perception towards a number of sectors, including infrastructure. The year witnessed a large number of PE firms exiting their past investments, which further boosted investor confidence. Better valuations as well as operational assets on offer by debt-ridden companies also fuelled deal activity. In the current fiscal year too, PE activity in the infrastructure space seems encouraging. However, so far, it has not matched the levels witnessed in 2015-16.
Indian Infrastructure analyses the trend in equity financing in the infrastructure sector during the past year…
PE deals
Fund-raising by infrastructure companies through PE deals has surged in recent years. During 2015-16, 27 deals worth Rs 262 billion were witnessed, a significant improvement in value terms from the 26 deals worth over
Rs 107 billion that took place during 2014-15. In 2016-17 (till November 2016), 14 deals worth over Rs 141 billion were finalised. Buoyed by improved investor sentiment and with just a few months remaining in the current fiscal year, PE activity in 2016-17 is expected to be comparable to that in 2015-16. In total, over Rs 510 billion worth of transactions have been witnessed during April 2015-November 2016.
With respect to the type of deals during the period under consideration, about 48 per cent of the investment (translating to about Rs 245 billion) came through investment of PE in unlisted companies (PEUC) transactions. This was followed by 41 per cent (Rs 208 billion) by private investment in public companies (PIPE) and 11 per cent (Rs 58 billion) from project equity (ProE) transactions.
Considering the sector-wise scenario, during 2015-16, 44 per cent of the PE investments were in the renewable energy space. With better policies and a promising outlook, the sector emerged as the most favoured. This was followed by telecom and oil and gas (12 per cent share each), roads (9 per cent) and aviation (8 per cent). Other sectors that received funds through PE deals include infrastructure finance, logistics, conventional power and water and waste management.
In 2016-17 so far, the biggest transaction was the recent deal between Reliance Communications (RCOM) and Canada’s Brookfield Asset Management, Inc. for a consideration of Rs 110 billion (signed in October, finalised in December). The funds will be used by RCOM to pare debt. It is the second biggest PE transaction ever in the country, after Temasek’s $2 billion investment in Bharti Telecom in 2007. While this is the only deal in the telecom sector so far, interest in the renewable sector is intact. Deals worth over Rs 25 billion were witnessed during the period in this space.
A major factor that has supported growth in PE activity is the improvement in valuations. The revival in the PE space continues with the Indian stock markets outperforming those of other emerging economies such as Brazil. This is on the back of the fact that investors remain hopeful about economic reforms being undertaken by the government. Another discernible trend is that PE firms, which in the past were willing to invest in greenfield and under-construction projects, are now looking to pick up stake only in projects that are fully operational and have predictable cash flows. This is reflected in the fact that interest in ProE investments tripled from about Rs 13 billion in 2014-15 to Rs 39 billion in 2015-16.
PE exits
After experiencing a significant exit overhang till 2013, PE investors finally exited a number of past investments thereafter. During 2015-16, a total of 12 PE exits took place, mirroring the trend witnessed in the preceding year. Most of these were partial exits and gave moderate to fair returns to the investors. Most of the transactions were through open market operations. In 2016-17, the trend continued, as 10 exits were seen till November. With regard to returns, there was a mixed trend – some took a haircut while others reaped fair returns.
FDI equity flows
India has been an important recipient of equity through the foreign direct investment (FDI) route. Factors such as untapped market opportunities, robust economic growth, the announcement of enabling policy measures, and bankable projects have been some of the key factors that have attracted funds through this route. However, in line with the trend witnessed in other emerging economies, equity investments in the country’s infrastructure sector through the FDI route registered a slowdown in 2015-16. During the year, equity investment through this route amounted to $3,923 million, a significant decline from the $5,646 million witnessed in 2014-15. However, this is expected to correct in the current fiscal year, as during the first half, FDI to the tune of over $4,100 million has been received. Thus, the year is expected to close at a much higher figure.
The way forward
While a host of factors will shape the final investment decisions of PE firms, a key aspect stands out – as debt-ridden infrastructure companies are adopting an asset-light approach to pare their outstanding debt, a number of operational projects are expected to receive interest from PE firms that seem more comfortable in parking their funds in such assets. This, in turn, is likely to drive deal activity in the space. However, much will depend on the return expectations and investment horizons.
Sector-wise, the renewable energy space is likely to continue to elicit the maximum interest as the sector is replete with new projects and ranks high on the government’s development agenda. Issues in project implementation and regulatory bottlenecks, of course, need attention. Net, net, bankable projects, active capital markets, supportive policies and a stable macroeconomic environment are some of the key drivers for PE in the country’s infrastructure space.