Will infra see turbo-charged push from PE money after 2019 elections?

Airports, pipelines, highways and roads will be the biggest draw
Earlier this week, Brookfield Asset Management announced that it will buy RIL’s East West Gas Pipeline for just under $2 billion (Rs 13,000 crore). Then, global private equity giant KKR closed on a $530 million acquisition of industrial waste management company Ramky Enviro, marking the consummation of the first big infra-related acquisition in 2018. Both deals mark a stepping up of interest and deal-making in infrastructure.

According to the Economic Survey, India has a requirement of $4.5 trillion, which means that capital will have to be a mixed basket that includes domestic and international as well as private and state funds. 

The survey claims that India can meet around $3.9 trillion infrastructure investment out of $4.5 trillion, projected as required capital for the next 25 years. Infrastructure is a theme that funds worldwide are zooming in on. Late last year, KKR closed on KKR Global Infrastructure Investors III, a $7.4 billion fund, focused on pursuing global infrastructure investment opportunities with an emphasis on investments in OECD countries. Right now, KKR doesn’t have a dedicated infra fund for India but those who track the sector say that is likely to soon change.

Brookfield is in the process of raising its fourth global infrastructure fund that is expected to close at around $25 billion, will be the largest one in the world, and is likely to see at least a fourth of that make its way to Asian nations like China and India. Australian investor Macquarie Group last year reported that its Macquarie Infrastructure and Real Assets (MIRA) division closed its second Asian regional infrastructure fund at $3.3 billion.

Since, Macquarie Infrastructure investments include GMR Airports, Soham Renewable Energy India, and highway project developer Gujarat Roads and Infrastructure Corp Macquarie also won the auction for 9 toll-based highways under the T-O-T or toll-operate-transfer model for Rs 9,681 crore (around $1.5 billion) from the National Highways Authority of India. Brookfield has its focus divided into three streams: $4.5 billion for real estate, $3 billion for infrastructure and around $200 million for private equity.  A source says, “In infra every deal is a big bang transaction. One deal can triple your infra size.” Even so, there are two other key points. For one, investors have largely only been scoping operating assets in India and staying away from greenfield ones. That is because an operational asset requires offers, fewer regulatory hurdles, and the nightmare of getting stuck in red tape.

So will infra see a turbo-charged push from PE money? “Private capital can play a bigger role in infrastructure development but India needs a robust banking system to support PE investments,” opines Anuj Ranjan, senior managing partner, and regional head middle east and South Asia, Brookfield.  

There’s excitement around Indian infrastructure. “As LPs’ are directly investing into India, as opposed to going through traditional GPs’ showing that deals are getting larger with lower risk,” says Kuljit Singh, partner, infrastructure Ernst & Young. “It’s critical that there is no adverse government action such as sudden shifts in regulatory frameworks, delayed approvals, taxation changes, ad hoc financing restrictions, which could negatively impact the reasonable risk perception of Indian infra,” he said.
Still some areas just don’t see action.  Singh says that Waterways as infrastructure are unproven as yet and that thermal power is distressed and lenders continue to be unsure of what they want to do.  

Hardik Shah, a director in KKR’s infrastructure team, says that, in the past, plenty of investments have been made in thermal power, however there are considerations that have made other investment opportunities more attractive over time. “Internet-related infrastructure is still a few years away from being a target for infrastructure funds” he adds. An analyst who declined to be named said that world over thermal is seen as the anti-thesis of green-friendly energy and may be a reason why global investors are keeping away from it. 

While hard assets will draw the most attention — airports, pipelines, highways and roads, “the game-changer is going to be the all — pervasiveness of invisible-infra, even in remote villages over the next few years,” says Elias George, chairman - Infrastructure, Government and Healthcare, KPMG India. “India is also poised to ride the first wave of the 5G revolution, which is expected to radically enhance entrepreneurship, even in remote rural India”

In the past infra deals had been lucrative and drew the attention of most investors looking for a big ticket project with stable returns but that slowed down in the years between 2010 and 2016. Part of that was because Public Private Partnership or PPP models weren’t the most successful. “We need to further improve our PPP models, and re-look at the risk-reward ratio, as well as PPP financing models. The PPP paradigm may also benefit from stronger legal underpinnings,” George adds.

In recent years however, there seems to be a resurgence of both interest and opportunity and options are becoming more institutionalised with the likes of Macquarie and Brookfield buying road and energy assets and billionaire investor Prem Watsa’s Fairfax Capital getting into airports. Urban infra is also poised to take a big leap forward, with programs like Smart City and increasing induction of private investment.

Sanjay Nayar, KKR India’s CEO said that in the absence of a long duration, corporate bonds market such as infra bonds in the country, ultimately the prospect of infrastructure models taking flight will hinge on the ability of an administration to harness policy in a manner that is conducive to the quick execution of projects as well as makes for a viable business case for the investor. “For the galvanization to happen, it has to be a definite and collaborative play with participation from Infra funds, the government and institutional capital.”

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