In sister title PEI Asia, we this month ponder the question: “Now that the debt market bubble has been pricked, where next for Asian private equity?” Of course, the obvious caveat before attempting any answer is that Asian private equity, having had to endure many [arguably unforeseeable] crises over the years, is a potentially volatile beast even in apparently the best of times. In the wake of financial markets turmoil, and in a scenario where even those organisations worst afflicted by the crisis seem unable to accurately gauge the scale of their liabilities, how much more difficult is the challenge of assessing medium- to long-term prospects for the asset class in this part of the world?
Nonetheless, some observations do seem relatively safe. One is that the pain caused by the debt hiatus should not be felt as severely in Asia as in Europe and North America. After all, it could be argued that only in Australia has anything like a buyout boom been experienced – and, even there, the LBO market seemed to lose its momentum some months ago. A second observation is that non-majority expansion financings, already the most popular form of investment in many Asian markets, are likely to become more popular still.
For evidence that such investments are very much in the minds of GP groups, one need look no further than The Blackstone Group's inaugural results announcement as a public company in August when CEO Tony James told analysts that opportunities in areas such as Indian minority investments were still attractive and deal flow strong. As if to underline the point, the firm shortly afterwards announced the $150 million (€108 million) purchase of a 12.5 percent stake in Nagarjuna, a Bombay-listed Indian construction company.
Indeed, the Nagarjuna deal is notable not only as a minority investment but also for the fact that the target company provides a range of services to Indian infrastructure projects, as well as owning, through subsidiaries, several infrastructure assets on a build-operate-transfer (BOT) basis. This is significant because infrastructure is becoming a hyped area of investment on a global basis – and in India in particular.
In India, the infrastructure opportunity appears as compelling as anywhere in the region. A private equity professional with experience of investing in Indian infrastructure recently told PEI that, one to two years ago, he calculated that the total capital required for the space over the following five years was $320 billion. Today, he believes that close to $500 billion is needed over a five-year period. Assuming a breakdown of one part equity to four parts debt, this translates to the need for $100 billion of equity over the next half a decade, or $20 billion a year.
The same source comments that India today, in sharp contrast to the situation prior to economic reform in the 1980s, is an open, fair and well regulated place to do business and one where the political will to modernise the country's infrastructure remains constant – even though the speed of progress may shift up or down a little depending on who holds the reins of power at any given time.
In anticipation of the opportunity, several large funds targeting Indian infrastructure have been launched or mooted. For example, London-listed 3i Group's infrastructure subsidiary, 3i Infrastructure, in August committed $250 million to a new India-focused fund that is aiming to raise $1 billion altogether. In the same month, India Power Finance Corp, a state-run lender to the power sector, announced it was in talks with “five or six” companies – reportedly including Blackstone and Goldman Sachs – with respect to a new infrastructure fund that also seeks $1 billion.
But while the opportunity seems clear enough, the main worry must surely be that the drought of liquidity being experienced by the LBO market may extend to infrastructure also. After all, while the underlying assets in the infrastructure space are often considered a relatively safe bet compared with buyout-backed assets, the debt multiples offered in support of their purchases has in some cases been every bit as hairy as anything witnessed in the LBO market.
Whether significant sums of capital slated for large private equity will instead be diverted into infrastructure projects in countries like India is another of those tricky imponderables of the rather opaque current scenario. It's perhaps at least as possible that infrastructure may end up a victim rather than a beneficiary.