PE investments set to flood power sector

India’s power sector will be a key destination for private equity (PE) players to park their money, with close to $1.64 billion worth of infrastructure funds, mainly in power, awaiting their launch. According to industry experts, once the liquidity situation improves globally, the sector will see good investment momentum.

This is despite the fact that PE investment in the power generation sector dropped by around 80 per cent between April and September 2009, to $157 million (around Rs 770 crore) from $902 million (Rs 4,419 crore) a year earlier. The number of deals also dropped to six from 17.

According to Venture Intelligence, a research service focused on PE and mergers and acquisitions, investments in this sector for a comparative period in 2006 were $122 million, which increased to $495 million in 2007. “For the first time in the last four years the sector witnessed a negative growth”.

Arun Natarajan, chief executive officer, Venture Intelligence, said the significant drop is predominantly because the big-ticket deals (typical for the power sector) in this space have dried up after October 2008. However, with improvement in liquidity globally, “we expect power sector investments to recover strongly”.

Adding, “for PE investors, this is one of the promising sectors, which gives a 16 per cent guaranteed return.” He noted three infrastructure funds worth $1 billion are to be launched soon and the prime focus of these would be the power sector.

The reason for this bullish growth emanates from two reasons. One is the continued capacity expansion plan and investment outlay from the government. Two, growing demand in the domestic market. An Assocham-Ernst & Young survey titled ‘Private equity in Indian infrastructure: strengthening the nexus’ has ranked power as the most sought after segment among respondents for investment in the future.

The economics of the power sector is almost entirely driven by the domestic market and the attractive demand-supply dynamics. Sector opportunities are characterised by a large quantum of new projects, most of which are under various stages of planning.

Since 2006, roads and highways have attracted PE investments worth $530 million in a total of 15 deals. Companies in this space have successfully raised growth capital to fund their existing projects, as well as expansion plans.

No wonder global players are eyeing this sector. Two European financial institutions, Principle and Europa, have launched a $1 billion India-focused infrastructure fund. The new fund will be led by Shailesh Pathak, a former senior director at ICICI Venture. The fund is aiming to raise capital mainly from endowments and pensions, to invest in greenfield infrastructure projects.

Private equity fund manager IL&FS Investment Managers has raised $640 million for its infrastructure fund floated in a joint venture with Standard Chartered Bank. The Standard Chartered IL&FS Asia Infrastructure Growth Fund plans to mop a total of $800 million by December.

Other funds in the market to raise infrastructure-oriented funds targeting India include India Infrastructure Advantage Fund, Q India PE Fund, Eredene Capital India Infrastructure Fund and Alcazar Capital India Fund. Then there are other emerging markets and Asia-focused infrastructure funds, for whom India is an important investment destination.

Some of the funds currently in India are IDFC Private Equity, 3i India Infrastructure Fund, IL&FS Investment Managers Limited, SBI Macquarie Infrastructure, IDFC Project Equity and ICICI Venture.