Beware the road blocks

Enthusiasm for private equity investment in Indian infrastructure is justified by market fundamentals. But the opportunity is not straightforward, warn Zeus Capital’s Ali Syed and Shaurya Doval.

The investor frenzy surrounding all things India- and infrastructure related continues. During the current calendar year a number of large private equity funds are being marketed to investors which will focus on the infrastructure sector. In addition, the Indian government is contemplating an $11 billion fund (debt and equity) to finance the infrastructure investment needs of the country.

That doesn’t include more than $8 billion currently committed to incumbent private equity players, including both local and international firms. It should be noted the infrastructure sector represents a far larger share of the overall private equity investment opportunity in India than is the case in other parts of the world. As a result we see several generic private equity funds also participating in infrastructure deals, thus increasing the competition for quality deal sourcing.

This trend is further fuelled by the Indian government’s announcement that that the next five-year plan from 2013-2017 will double infrastructure spend to $1 trillion, while Goldman Sachs estimates this to be in the $1.7 trillion range. Foreign direct investment (FDI) in the financial year 2009 has totalled more $3 billion for power and roads alone (2007 and 2008 combined totalled $3.8 billion).

While the strong macro-economic fundamentals have attracted interest from international and local private equity investors, results on the ground have not been what you might expect.


The deal environment remains very complex with few deals consummated and an even fewer number of exits. While infrastructure may be defined as a broad space, private equity activity has been overwhelmingly in the power and roads sectors. This partly reflects the maturity and stability of Indian government policies for these sectors and investors’ perception of their relative transparency.

To date, the Indian market has seen very few private equity exits in the infrastructure sector, thereby making it difficult to assess the success of these investments or justify entry prices for future investors. The only meaningful exits have been Adani Power (3i) and India Bulls (Farallon).

But this has not precluded many infrastructure promoters from tapping the capital markets for capital raisings (be it private equity or IPO) at much earlier stages of their evolution with limited (if any) current cash flows and a large project pipeline. The ability of the Indian IPO market to price this risk has been a source of further competition for private equity investors.


The local promoter is beginning to realise that the much larger pool of institutional capital will eventually replace promoter capital and that this is a long-term irreversible trend. With this, we expect the next stage in the evolution of the market to be the emergence of control deals.

From plain minority equity stakes, we are already seeing the emergence of more structured minority investments. Typically these are structured such that, despite having a minority stake in the business, the private equity investor has veto rights on most business decisions. This trend is likely to accelerate further in the coming years as deal sizes become larger, competition more severe and the need for investors to manage exits becomes more urgent.

The other emerging trend is the entry of global majors that have so far avoided India because of its complex regulations, the greenfield nature of its assets and the general difficulty of the operating environment. Their views have also been tainted by the handling of multinationals by the Indian government in the past.

As is the case with other sectors, the infrastructure multinationals are expected to make strategic inroads as their comfort level with the Indian environment rises. While also providing a source of exits, global majors with their strong balance sheets and operating culture are likely to provide serious competition to the portfolio companies of private equity investors. A pick-up in local M&A activity is, therefore, to be expected.


The Indian infrastructure sector will continue to offer attractive returns opportunities for private equity players (vis-à-vis other parts of the world). But challenges remain severe and the ability to overcome them will be a critical litmus test that will divide the winners and losers.

Private equity players will have to localise their capabilities, find strong local promoters and actively manage their portfolios. Though the overall trend driven by fundamentals remains positive, the chances of getting it wrong are higher than the chances of getting it right. 

Ali Syed and Shaurya Doval are partners at Zeus Capital, an India-focused infrastructure advisory and investment boutique.