Investing in Indian infra - too much of a good thing?

Last week, India's first Ultra Mega Power Plant (UMPP) reached US$4 billion financial close. It promises to be the first of a series - and is an indication of the seriousness with which the country is tackling its infrastructure deficit. That is being matched by an unprecedented influx of equity investment capital aimed at the sector - but can all that liquidity make its way to a good home?

The Indian federal government has valued the country's infrastructure needs over the next five years at around US$500 billion. This projection can be found repeated in some shape or form in the publicity of almost any Indian infrastructure fund to have launched over the last few months.

And there have been a few. It seems every week brings news of a new fund launch aimed specifically at the Indian infra market, or emphasising India as a key focus of a pan-Asian or global fund.

Likewise, private equity funds launching to take advantage of the burgeoning Indian economy across a variety of sectors almost without fail find the time in their launch materials to emphasise the key role the infrastructure sector will play in their sphere of investment.

Of course, it's not just the size of the investment needed that makes Indian infrastructure so special. China, the US, and the Middle East and Russia are all likely to - or at least ought to - spend big over the coming years on their infrastructure.

India's embrace of the PPP model - at least on paper - is getting a lot of people excited. Perhaps India's legacy of a British-style legal system makes the country an ideal candidate to adopt a British invention such as PPP to help bridge its infrastructure gap. Whatever the reason, it is seen as the way forward in India - or in the words of Société Générale Asset Management: "PPP is a magical wand through which the country plans to tide over [its] huge deficit in infrastructure."

India's economic progress over the last decade is a major factor in its growing attraction to infrastructure investors. Another statistic India's cheerleaders never tire of repeating is that the country has the largest middle class in the world - about the same size as the total population of the US.

While China's growth has dominated recent headlines, India's rate of growth has been solidly impressive, if unspectacular compared to that of its eastern neighbour - and the value of the Rupee has grown steadily.

Alongside the undeniable need for infrastructure, an openness to the private sector in meeting that need, and a sufficiently affluent - and huge - marketplace, the final piece in the jigsaw might be the improvements that have been made in the regimes regulating India's various infrastructure sectors. According to the head of 3i's Indian infra fund Anil Ahuja: "Visible progress has been made by the regulators of all infrastructure sectors over the last 10 years - and especially since 2003."

The investment scene

At the end of April, two of the infra equity world's biggest names have set up shop in India. There was recent news of Deutsche Bank's alternative investments arm - RREEF - opening an office in Mumbai with a team of six, intending to invest US$1 billion over three years.

The head of the new team, Kishore Gotety, says: "Healthy and sustained economic growth, a strong currency, favourable demographic profile and rising incomes certainly position India among the world's most attractive investment destinations."

The next day, Babcock & Brown announced its Indian presence - nine local staff based in Mumbai and Delhi, aiming to get a return on US$2 billion over the next three years.

Macquarie is there, of course, looking to raise US$2 billion in partnership with local banking giant State Bank of India (SBI) and the World Bank's private sector investment arm, the IFC.

Private equity infrastructure specialists 3i announced its India fund overshot its US$1 billion target by a fifth in the middle of last month, since when the Indian Development Finance Corporation (IDFC) has announced it is to raise its third fund for the sector - which at US$700 million is set to dwarf its first two, which together total US$630 million.

One participant in IDFC's latest round of fundraising is Canada's export development agency, Export Development Canada (EDC), which picked the fund for its largest single equity investment to date anywhere in the world.

EDC chief executive Eric Siegel said: "India's strong economic growth and government initiatives to channel more private capital into all sectors are expected to lead to massive infrastructure growth."

India's local players have been on board from the beginning, of course - but Tata Asset Management's announcement of a partnership with UK fund manager New Star in March this year, to tap retail investors in the UK for Indian infra, shows how far enthusiasm has spread for a sector which seems to tick all the boxes in these troubled financial times - a defensive asset class in an economy as well shielded from US recession as any.

SBI has a long-term partnership with Société Générale Asset Management - they of the magic wand analogy - and the two have together put together what is SGAM's first infrastructure-specific fund, investing in India, aiming to tap retail investors in the Far East.

These are some of the big guns - and alongside them are plenty of other players each raising hundreds of millions of dollars to build the infrastructure of India.

But the question being asked in some quarters is: will there be enough deals to go around?

Do the numbers add up?

However much money has been raised, it's nowhere near the half-trillion dollars that India's planning board has said is needed over the next five years. But the figure's rising all the time - IJ Online has reported on around US$20 billion announced in the last two months alone.

But Anil Ahuja of 3i, however, is sceptical of the US$500 billion figure - not that that much is needed, but that all of that will get built - and calls for realism on how much of that will come through equity investors.

"Let's say realistically half of that gets built," he says, "that's US$250 billion needed. Then let's say that amount is financed by a debt:equity ratio of 80:20 - that's US$50 billion, or US$10 billion a year. Of that, US$3-4 billion a year will come from private equity. That's more realistic."

Ahuja is confident that his fund will find solid opportunities for its US$1.2 billion - focusing only on the transport and power sectors. He even says that it will be invested in less than the four year period it's aiming for. But the implication is that some funds will find it hard to place all the capital they say they are raising.

Aashish Kalra, co-founder and managing director of local real estate and infrastructure investor Trikona Capital, is even more sceptical - though he thinks the official estimate of India's infrastructure needs is too low, saying: "I think we'll need US$1 trillion as a conservative estimate."

"A lot of people are announcing funds," he continues, "but it will be interesting to see how many of those are raised. It's very fashionable to announce a fund at the moment."

He also wonders whether funds will find the opportunities for good returns. "It's a challenging market to be in," he says. "India is growing, but growth has its own challenges - it's dynamic, unlike a distressed environment.

"The problem is that there is nothing already there - Indian infrastructure has been so neglected for so long. Trikona is succeeding because we have the capabilities to take a good idea through to execution.

"A lot of the big funds have three, four or five people who know how to crunch numbers and get on a plane. But there will be a lot of money chasing very few deals. We've made money where we've been involved in creating the opportunity ourselves.

"The funds that don't succeed will be those who view India opportunistically; those which lack a business plan and who don't understand 'what' in India and 'why' in India; and those which lack the ground-level execution capacity."

Satish Mandhana, investment director at IDFC, recently sounded a note of caution saying people should be "reasonable" with their return expectations in Indian infra. In particular, he said that outsized returns on power projects would be likely to run into popular opposition.

3i's Anil Ahuja argues such returns will not be available in the first place: "I think the tendering process today is so competitive that outsized returns are not possible.

"PPAs are being signed in the Rs2-2.50 range, which is about half the cost of some existing generation capacity. Power companies are going to have to become more efficient in order to make good returns."


It's no surprise that India is attracting the level of investment interest it is. As Aashish Kalra says: "It might be the last big play left in the world."

The potential for infrastructure development is undoubtedly enormous, and the economic and demographic fundamentals appear to back up investors' optimism. In the words of Anil Ahuja: "Anywhere where there's a large demand for capital and a viable proposition, capital will make its way there."

But the number of actual deals available must depend in the final analysis on what is actually getting built. IJ Online's database lists projects closed in the last three years totalling a little more than US$28 billion - so to hit the country's target of US$500 billion in the next five years, India will have to up the pace significantly.

There are signs that that is happening - with last week's US$4 billion financial close of the first of the much-vaunted UMPP programme a prime example - but the feeling still remains that all the talk isn't being matched by the same level of action.

An influx of capital on its own is not enough - and if the market fills up with funds looking simply to 'ride the wave' of infrastructure growth, many could find themselves paddling about in calmer waters than they had hoped.