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Bumpy road ahead for infrastructure fundsn

Reghu Balakrishnan & Katya Naidu / Mumbai 10 May 12 | 12:19 AM

The infrastructure sector, considered the most attractive private equity investment destination, is going through a crisis in fund raising and investments. Though nine infra-focused funds were launched in India with a plan to raise about Rs 20,000 crore during 2009-2012, they have managed to raise only Rs 7,800 crore due to the uncertainties looming over the sector.

According to senior executives, general partners’ (GPs or fund managers) lack of experience and sector knowledge remains a major reason that keeps them away from convincing limited partners (LPs or investors) for successful fundraising.

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Of nine funds launched since 2009, only three have completed fund raising successfully. SREI Venture Capital raised relatively small amounts of $13 million and $20 million, while SBI Macquarie Infrastructure Management raised $1.2 billion.

According to media reports, Enam has ceased fundraising of its $750-million Enam India Infrastructure Fund.

Sources said ICICI Venture, which is raising a $750-million India Infrastructure Advantage Fund, received commitments worth $250 million so far.

According to Satish Mandhana, managing partner, IDFC Private Equity, a limited track record of returning capital or generating consistent yields from infra funds is the major concern among foreign investors. “Increasing regulatory uncertainty, government's indecision and inability to resolve issues impacting infra sector, and higher interest rates are creating a challenging environment," Mandhana said.

The high-return expectation brings more PE investors into infra space. According to a recent KPMG study, investments in energy and energy equipment provide a weighted internal rate of return (IRR) of 41.6 per cent (cash multiple of 5.1x), while investments in engineering & construction give IRR of 37.8 per cent (2.6x). The telecom sector gives an IRR of 24.7 per cent with cash multiple of 4.2x.

Due to the massive investment opportunity, India still remains on the radar of global investors. The XIIth Five-Year Plan (2012–17) forecasts that infrastructure outlays will double to some $1 trillion, with the private sector accounting for between 40 per cent and 50 per cent.

According to a study from Bain & Co, PE funds have invested approximately $13 billion, equivalent to one-fourth of the capital flows to India, into the infrastructure sector over the last five years. Since 2006, annual PE investment in infrastructure has grown fourfold, from about $1 billion to $4 billion in 2010, when it rebounded to the 2007 levels.

However, the uncertainties in infrastructure space have affected PE investments in 2012. Compared with 60 PE/VC investments worth $3 billion in 2011, Indian infra space witnessed 13 deals worth $227 million in 2012 so far.

INFRASTRUCTURE FUNDS FROM 2009-2012*: FALLING SHORT OF TARGET
Fund name Fund manager Fund size Amount raised Launched
India Infra Development Fund UTI Capital 500 120 2009
Infra Construction Fund SREI Venture Capital  13 13 2009
Macquarie-SBI Infrastructure Fund SBI Macquarie Infra Management 1200 1200 2009
Prithvi Infrastructure Fund SREI Venture Capital 20 20 2009
Enam India Infrastructure Fund Enam Infra Fund Management 750

-

2010
India Infra Advantage Fund ICICI Venture 750

-

2010
Golden Gujarat Growth Fund I GVFL 192 73 2010
IFCI Sycamore Infrastructure Fund IFCI Sycamore Capital Advisors 500 100 2011
Urban Development Fund LICHFL Asset Management 110 38.12 2011
Figures in $ million                  * Year to date                                                                   Source: VCCedge

According to Anubha Shrivastava, managing director at CDC Group Plc, a fund-of-funds owned by the British government, lack of an experienced team is the major concern for infra-focused funds in India.

CDC, with net assets of £2.3 billion, is one of the largest investors in Indian PE space, and has invested more than $1 billion.

Echoing the same view, Mandhana said, “Deep knowledge of the sector, understanding of its interface with lenders and regulators and various government bodies make a big difference in delivering capabilities of infra funds. GP’s capability to ensure bidding discipline in a fiercely competitive bidding environment goes a long way in delivering returns to LPs and can be the real differentiator between well performing infra companies capable of creating world-class assets and debt-ridden mediocre performers."

Delayed projects
Apart from concerns over stable and capable team, PE investors are anxious over the delay in projects due to issues such as regulatory hurdles and lack of fuel availability.

Shobhit Agarwal, managing director, Protiviti Consulting said, “Infra projects are facing significant implementation issues, which is delaying project execution thereby increasing costs, delaying cash generation and therefore affecting return analysis."

For example, GVK Energy, after receiving investments from Actis and 3i India Infrastructure Fund, deferred its plans to set-up two gas-based power plants accounting to as much as 1,600 megawatts. The company decided to opt out as fuel supply in the KGD6 basin became bleaker.

Another power firm that chose to go slow on power projects is Adani Power, which is backed by UK-based 3i. The company decided to freeze work on three projects of 6,000 Mw due to lack of clarity on coal issues.

GMR stalled its fundraising through IPO for the next six months. A Subba Rao, chief financial officer, said, “If the coal scenario improves in another six months, then the valuations will improve."

The macro-economic environment in the power sector — like fuel supply obstacles, high interest rates and other roadblocks in terms of land acquisition — has made companies pare down their investments, say experts. Another major, Lanco Infratech, which started on its fund raising plans much later, has not found success yet.

Anubha Shrivastava said the uncertainty with government regulation bring negative sentiments to the Indian infra story. “Incidents, such as cancellation of coal block allocation will further tarnish the image," she added.

However, a few like Mandhana remain optimistic. “Global LPs are still keen on Indian infra growth story as infra funds offer long-term visibility on consistent returns, which are generally accompanied with reasonable yield," he said.

According to reports, Infrastructure Development and Finance Co (IDFC) is in the early stages of raising close to Rs 5,000 crore through IDFC Project Equity, for a new fund to invest in infrastructure projects in India.

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