Cautious Interest

PE investment experience, challenges and future outlook

The government has made a concerted effort in recent years to attract private equity (PE) investments, especially in the infrastructure sectors. In the pre-Covid era, PE investments had picked up substantially, especially in sectors such as roads, power and telecom. A number of big-ticket deals were formalised. While during the first wave of the pandemic, investors held a positive outlook for the infrastructure sector, the second wave has changed their outlook somewhat to cautious.

Creating a level playing field

The investment landscape of the country has changed significantly as a result of the government being a potential partner through two infrastructure investment trusts (InvITs) that it has announced. The increased level of transparency in the past couple of years has been the most significant game changer in terms of the enhanced flow of PE investments in the country. Increased transparency ensures that domestic and foreign investors have a fair playing field. Since natural resources and concessions are being bid out on a transparent basis, the global investor does not feel disadvantaged, sitting outside the country.

Impediments to PE investments in India

The delayed dispute redressal system forms a major barrier to foreign investments in India. Very often, failure to resolve conflicts on time is the fundamental cause for delays in investment projects and cost overruns, resulting in global investors pulling out their capital from the Indian markets. If investors disagree with a central or state agency, they would be almost certainly left to go from pillar to post for the next 10 years, risking their capital in the process. To ensure the effective and timely completion of investment projects in the country there is a need to explore new systems to resolve industrial conflicts in an effective manner. In the case of the road sector, demonetisation-related claims are yet to be resolved, demonstrating the tardiness of India’s dispute resolution mechanisms.

Recently, it has been observed that the government is attempting to shift all the risk to the private sector, which the private sector has to accept in its quest to put its capital to work. In order to improve the efficiency of the contract negotiation process and reduce the frequency of disputes during the concession period, it is critical for the government and the private sector to develop fair risk allocation strategies for public-private partnership-based investment projects. Risk allocation between the state and the private sector has to be more balanced and the risk should be allocated to the sector that is better positioned to manage it.

The Indian debt market is still in its infancy and needs to go a long way to match the equity market. While the country’s equity market continues to witness record capital inflows, foreign investors are leaving India’s bond market. To deepen debt markets in the country, a new set of debt market reforms is needed. The provision of regulations allowing insurance firms to invest in InvITs, but not in the debt side of InvITs, should be repealed, as it drives away a huge amount of capital out of the country. Despite obstacles, India’s debt market must scale up to develop the most conducive global environment for attracting foreign capital.

Focus area of key PE firms

I Squared Capital is a PE firm concentrating on energy, utilities, telecommunications and logistics in North America, Europe and selected economies of Asia. As a part of its investment strategy, I Squared Capital’s focus has been to build platforms in the sectors in which it invests. The company has made increasing and continuing investments in sectors where it already has platforms existing, for example, Cube Highways and Transportation Assets Advisors Private Limited, which was set up a decade ago and has grown manyfold since then. Data infrastructure, which includes towers, fibre networks, data centres and enterprise connectivity, is a priority for the company. As per the company, the logistics and warehousing sector is expected to contribute significantly to foreign investments in the future.

Global Infrastructure Partners (GIP) is a global independent infrastructure fund manager, focusing on the energy, transportation, water and waste segments. The company has made investments in the renewable energy sector that has witnessed a lot of capital coming in recently. It is the only asset class that has withstood the vagaries of Covid-19, especially in terms of power demand. Further, data infrastructure is the second asset class that has attracted the most amount of capital from the company. Power transmission is another sector that has drawn significant investments from the company. The water and waste segment is a critical component of GIP’s global business; however, in the Indian context, this sector has always been a laggard. The political complexities involved in the urban infrastructure sector keep investors hesitant from investing in opportunities arising out of this sector.

The Canada Pension Plan Investment Board, operating as CPP Investments, has invested in roads, renewables and telecom towers as these sectors have relatively stable regulations and sanguine concessions. With the Indian government boosting private sector participation in cargo operations at major public port CPP Investments, as part of its investment strategy, is planning to invest in the ports logistics sector. The company would like to infuse funds in sectors that are intertwined with India’s consumption story and have remained intact in the aftermath of the Covid-19 pandemic. Latin America and India remain the CPP Investments’ primary focus in terms of the emerging markets across the world. CCP Investments has no key infrastructure investments in China because a global investor cannot compete with China’s state-owned companies and their exceptionally low cost of capital.

Future outlook

Despite the economic disruptions caused by the first wave of Covid-19, PE investment mostly continued and maintained the pace and momentum of the previous year. Many infrastructure sectors have shown resilience to Covid-19; they have not been as affected as other growth parameters. The transportation sector was severely harmed, but the renewable and telecommunications sectors were mostly unaffected, balancing out the overall growth. But with the emergence of the second Covid wave in India, financial year 2021 is projected to witness a substantial drop in Indian PE investments across all asset classes, compared to the previous year. PE firms are expected to become more circumspect and calibrated in their investment approach and decision-making. Over the next year, they will concentrate on managing the risk by diversifying their asset classes. In other words, PE firms will try to remain risk-averse, while simultaneously trying to expand their investment portfolios.

India is certainly one of the most promising markets among emerging markets. Global investors are quite bullish on capital inflows in the Indian infrastructure sector in the coming period, with the only caveat being that no legacy issues come in the way. Sluggish dispute resolution mechanisms, inequitable risksharing between the public and private sectors, and the underdeveloped debt market discourage foreign investments in the country. The infrastructure sector, which is largely driven by the government, has received a fiscal stimulus and significant attention from the government recently, leading to more opportunities for investors in both brownfield and greenfield projects. So far, foreign players have focused their infrastructure investments in a few sectors, such as renewable energy, roads and power. There is a lot of room to replicate a similar kind of success in other sectors such as aviation, ports, railways, transmission and urban infrastructure.

Based on inputs from a panel discussion among Aditya Aggarwal, Partner, Global Infrastructure Partners, Singapore; Kunal Agarwal, Principal, I Squared Capital; Deep Gupta, Managing Director, Macquarie Infrastructure and Real Assets; Pushkar Kulkarni, Senior Principal, Infrastructure Private Investments, CPP Investment Board

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