Rising Confidence: PE investments in infrastructure reaching an all-time high

PE investments in infrastructure reaching an all-time high

The record level of private equity (PE) investments in 2017-18, as compared to the past five years, has continued in 2018-19 so far. Abuzz with activity, the ongoing fiscal year witnessed a number of landmark deals. PE players found comfort with yield-generating operating assets after having burnt their fingers with greenfield/under-construction projects. Sectors such as roads, transmission, renewable energy and logistics continued to attract funds. With economic growth in advanced economies decelerating, PE players are eyeing opportunities in emerging economies. India, as one of the fastest growing countries, has been a preferred investment destination on the back of policy support and infrastructure development at the forefront.

Surge in PE activity

From 2013-14 to 2018-19 (till November 2018), PE deals in the infrastructure sector have swelled in number and value. There were a total of 174 deals garnering an investment of over

Rs 1.4 trillion. A year-wise analysis shows that in terms of value, activity heightened in 2015-16, slowed down in 2016-17, and picked up pace in 2017-18, peaking in 2018-19. In terms of number, PE deals have remained consistently high between 2015-16 and 2018-19 so far.

The period April-November 2018-19 was replete with activity with 28 deals being witnessed, attracting funds to the tune of Rs 475 billion, as against 21 deals with an investment of around Rs 172 billion in the corresponding period of 2017-18. The surge of almost three times in value terms in the ongoing fiscal year is on account of big-ticket deals of over Rs 50 billion. These include Sekura Energy’s investment of Rs 60 billion in four transmission projects of Essel Infraprojects, Resurgent Power Ventures’ investment of Rs 60 billion in Prayagraj Power Generation Company, and the India Infrastructure Trust’s (sponsored by Brookfield Asset Management) investment of Rs 140 billion in Pipeline Infrastructure Private Limited (East-West Gas Pipeline of Reliance Industries Limited).

Renewables and logistics attractive bets

A sectoral analysis of the period from 2013-14 to 2018-19 (till November) shows that the logistics and renewable energy sectors were the new flavours witnessing the maximum deals. (The April-November period of 2018-19 too mirrored the same trend.) Within the logistics sector, things started moving in favour of the warehousing industry as initiatives such as Make in India gained ground and the long-awaited goods and services tax (GST) was implemented. However, the main catalyst has been the consumption push led by the e-commerce sector. A notable trend has been the interest of PE players in the supply chain side. Companies at the growth stage are raising funds from venture capitalists and through seed funding. In the past two-three years, there were multiple rounds of funding in companies such as Ecom Express, Delhivery, Blackbuck, Wow Express, etc. Recently, the National Investment and Infrastructure Fund joined forces with DP World for a $3 billion infrastructure platform for ports, terminals and the logistics industry. The joint venture company Hindustan Infralog in its first transaction has acquired a 90 per cent stake in Continental Warehousing.

The renewable energy sector too is high on the radar of PE players. One of the reasons for increased investor interest in the space is the ease of project implementation as there are fewer developmental issues (such as land acquisition) and the gestation period is short. Further, exit via initial public offerings seems to be a viable option since very few companies are listed in the renewable energy sector. Within the sector, PE activity is driven by the solar segment. Some reasonably high-value deals include Macquarie’s investment in operational solar assets of Hindustan Powerprojects ($600 million), investments by GIC and the Abu Dhabi Investment Authority in Greenko Energy ($447 million), and Caisse de dépôt et placement du Québec’s 40 per cent stake acquisition in CLP India ($365 million).

Reviving interest in roads

The road sector, infamous for a high number of stalled projects, arbitration issues and irregularities in toll collection, had kept investors at bay. However, hand-holding from the government helped investors regain confidence in the sector. The government has introduced business-friendly models such as hybrid annuity wherein it funds 40 per cent of the project cost.

Taking cognisance of the fact that investors are comfortable with de-risked operational assets, the government has identified 75 operational highways and offered to sell them through the toll, operate and transfer (TOT) mode. One of the largest foreign investments in public infrastructure was the winning of the first TOT bundle by the Macquarie Group for Rs 96.81 billion. Apart from this, many private developers have been offloading assets in a bid to become asset light and release equity. This has resulted in an uptick in asset sales. The Shrem Group’s buyout of Dilip Buildcon’s 24 road assets (Rs 16 billion) and Brookfield’s acquisition of Simhapuri Expressway Limited and Rayalaseema Expressway Limited (Rs 19 billion) are some other notable deals in the sector.

Another interesting development is the interest of long-term investors in road-focused platforms. The Abu Dhabi Investment Authority and a Mitsubishi Corporation-led Japanese consortium have recently acquired stakes in Cube Highways and Infrastructure. Besides, US-based PE firm Global Infrastructure Partners has struck a rare secondaries deal in India to buy the entire infrastructure portfolio of IDFC Alternatives.

PE exits

From 2013-14 to 2018-19 (till November 2018), there were a total of 66 PE exits in the infrastructure space. Secondary buyouts and strategic sales were the most common routes for exits. Open market transactions remained subdued on account of volatility in the stock markets. During the April-November period of 2018-19, seven exits were witnessed, a marginal increase from the six exits in the corresponding period of 2017-18. One of the largest exits in the ongoing fiscal year was Actis selling its stake in Ostro Energy to ReNew Power for $769 million. This was followed by SCI Asia (a joint fund of IL&FS PE and Standard Chartered PE) and IL&FS PE (through its Tara India Fund III) exiting the decade-old investment in Ramky Enviro Engineers for $530 million. The secondary buyout by KKR is the largest by a PE firm in the country’s environmental services sector.

In sum

Notwithstanding headwinds such as high oil prices, volatile currency and potential of global trade wars, PE activity in the country has continued its strong performance in 2018-19. Investments by pension and sovereign wealth funds have provided a significant impetus to PE funding in the infrastructure sector. In the past three-four years, most of the new capital invested in infrastructure has been in professionally managed platforms or large corporate groups. Going forward, there will be entry by more players as the sector is receiving a push from the government, and thus provides a plethora of investment opportunities.