Indian infrastructure is where all the action appears to be for global institutional investors if findings of an industry research house are a pointer. According to Preqin, a London based research firm that tracks private equity fund raising globally, of all unlisted infrastructure funds targeting a single country within the emerging markets, the highest proportion is focused on India.
Going by such unprecedented interest in the Indian infrastructure space, it appears that this asset class can actually outshine the interest of institutional investors into private equity. There are currently 38 unlisted infrastructure funds with a preference for investment in India, 25 of which have already held a final close raising $9.5 billion while 25 have already held a final close raising an aggregate $9.5 billion, and a further 13 currently in the market seeking an additional $7.3 billion in institutional capital, the report adds. Further, there are also nine India-focused infrastructure funds expected to be launched by unlisted fund managers in 2011, so the amount of capital available for infrastructure investment in India over the next few years is anticipated to more than double.
Aside from India-specific infrastructure funds, there is a growing number of Asia focused funds coming to market which could potentially include India within a wider investment remit, the report suggested. It showed that funds currently on the road focused on emerging markets outnumber those focused on both the developed European and North American markets. About 51 funds are currently on the road targeting infrastructure opportunities in Asia and Rest of World. This includes the 13 India-specific funds already mentioned and a further 21 vehicles with a broader Asia focus, showing the growing importance of such funds in the global fundraising market.
So, what makes this asset class so attractive? Institutional investors are keen to gain exposure to emerging market infrastructure opportunities for a number of reasons – portfolio diversification, or the chance to increase returns by investing in infrastructure assets capable of providing a level of return similar to that of private equity.
According to the research house, of about 191 institutional investors willing to invest capital in Asia, 137 of them are willing to invest in the more emerging markets within the region. A considerable number are based outside of Asia but are looking to increase their exposure to infrastructure opportunities in the area. Investors based within Asia are split between India and other countries including Japan, Vietnam, Singapore, South Korea and Hong Kong.
Among the institutional investor base, International Finance Corporation (IFC) has been particularly active investor in Indian infrastructure. The firm, which invests in emerging markets, has invested capital in a number of Indian infrastructure projects, both through direct strategies and commitments to third party infrastructure funds. Its unlisted portfolio includes a $50 million investment in Macquarie State Bank of India Infrastructure Fund and further commitments to IDFC India Infrastructure Fund and Asia Environmental Partners.
In terms of the global total, India has attracted the third highest number of deals for a single country since 2004, behind only the US and the UK. This shows the growing importance of Indian infrastructure assets in the global marketplace.
According to the government of India, more than $1 trillion will be invested in the Indian infrastructure, which has obviously created multiple pockets of opportunity. While there is a lot of money going in the “core” infrastructure sectors such as energy, transportation, telecommunications and utilities dominate the marketplace, the growth equity dominated PE investors have also expressed significant interest in construction firms and ancillaries rather than on developers, who may behave like asset gatherers and assume risks unknowingly because of inexperience.
Since 2004, 80% of deals completed by unlisted infrastructure fund managers in India were in these four core industries. Other important sectors include logistics and social assets such as education and healthcare facilities.
The largest India-based deal on record is $ 982-million acquisition of a 20% stake in GMR Kamalanga Energy by a consortium of investors led by IDFC India Infrastructure Fund in 2009. The transaction included a debt package provided by a consortium of 12 domestic Indian banks totaling Rs 3,400 crore.
Although commitments in countries like India expose investors to significantly higher level of risk/return, investors recognise the need for diversification within their portfolios. A growing number of investors are beginning to turn to emerging market infrastructure to provide an additional layer of diversification and there will be an abundance of opportunities on which they can capitalize as countries such as India attempt to bridge the widening infrastructure funding gap in the coming years, the report added.