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S.G. Shyam Sundar, Sr. MD, IDFC PE, On Infra Sectors, Boutique I-Banks

29 July, 2011

Homegrown IDFC Private Equity has been an active investor in the infrastructure sector. One of country’s largest risk capital investors, it has recently put in Rs 150 crore to acquire a minority equity stake in Chennai-based GVR Infra Projects Ltd, an EPC company in the road space. Over the last eight years, the PE firm has made 33 investments and some of these include deals in GMR Infrastructure, Gujarat State Petronet, Delhi International Airport, Manipal Global Education, Moser Baer Solar Ltd and Viom Networks.

In an exclusive video interview with VCCircle, S.G. Shyam Sundar, Senior Managing Director at IDFC PE, says that the power sector saw a lot of euphoria and that the investors now prefer to stay on the sidelines and be convinced of the execution capabilities of the companies before committing further exposure. In terms of deal-making, he adds that the role of small and boutique investment banks in tier II and tier III cities is set to grow. The infrastructure-focus PE fund remains bullish on sectors like roads, ports and power.

Can you give us an overview of the hot sectors within the infrastructure space?

If you consider 2010, it was a good year for investments in the power sector. We saw a lot of private equity transactions in that space. But if you look now, the investors are a little wary because there are a lot of challenges – in terms of project execution as fuel availability is fast becoming an issue and also in terms of valuations in the space. But I do see growing optimism in the market because the environment ministry has cleared quite a few coal blocks and that is actually sending a positive signal.

Of course, roads will continue to see action. 3i recently did a big transaction in KMC. And we have recently invested in GVR Infrastructure. Within the infrastructure landscape, roads will continue to grab interest because we believe that so much of built-out needs to happen in the next 5-10 years and companies who are ideally positioned to take this advantage are the ones which have a combination of EPC and BOT play. Because the margins in the BOT sector are coming down over a period of time, the IRRs are coming down as well. So, in order to look at a project which is profitable, it should have an EPC in-house. Therefore, during the past 2-3 years, we looked at various opportunities in the roads space and decided to pick GVR because we felt that it had a right mix of EPC and BOT.

Now, if you move on to the ports sector, there is not too much opportunity except for a couple of private sector ports, which are actually going for expansion and looking for capital. But not much is happening when it comes to airports because there is no privatisation happening there. So, if you look at the infrastructure sector, the focus will be mainly on power and roads. But there’s a wait-and-watch approach, especially in the power sector, as investors want to be sure of the execution capabilities of the promoters before opting for further exposure.

The power sector has seen a lot of deal-making. Can we say it’s the next telecom space for investors, in terms of growth and profit? What can we expect going forward?

I agree that the power sector has witnessed some kind of euphoria in the last couple of years. It basically comes from the fact that there is a huge demand-supply mismatch and more than 50 per cent of that requirement will have to be met by the private sector. If you look at the private sector players, they are not fly-by-night operators.

The major capacity is created by top corporate houses in India such as the TATA Group, Reliance, Birla, GMR, GVK, Lanco, etc. So, it’s not just euphoria or that we are entering the dotcom days all over again. There is clearly a requirement and a huge demand-supply mismatch, a fair regulation to get market-based tariff and also initiatives towards building more capacities.

But what investors are realising now is that it’s one thing to announce the capacity, but getting a coal block, converting the coal block licence into an operating coal mine and completing the project with all clearances are not easy to implement.

Any thought on the education sector, which is now very actively chased by investors?

We are one of the first investors in the education sector way back in 2006 when we invested in Manipal Education. In fact, it is one of the largest deals till date. For the last four or five years, we are looking around for the next best opportunity in education and find that there are many challenges.

For one, a lot of companies are in early-growth stage and do not meet our average capital size, as these deals are small. Also, it’s a hot sector with a lot of investors running after the education companies. So the sector is getting overvalued.

In my opinion, investors are, as usual, underestimating the execution challenges. Just because everyone is talking about K-12 education market, they think that they should come up with 100 new schools to meet the burgeoning demand. But they don’t realise that setting up even one school is a big project – right from land acquisition to construction, getting talent into place and so on.

Again, the situation is somewhat like that of the power sector where everybody announces plans but execution becomes difficult. Those who have started one or two schools think that they can scale things up to 50-100. Again, we don’t believe it’s possible unless there is someone who has already accumulated land banks and has the right partner in terms of managing the school. Only in such situations, we can come in as a financial investor. So, we are looking at something which is more like platform play, as opposed to a services kind of play.

So, will it be platform play in education space? Are you looking to replicate some of those in roads? We have seen some activities like Morgan Stanley forming a JV with Isolux Corsan to invest in roads or KMC teaming up with Tata.

Platform play is something we did in our first deal – the GMR Energy. We created it as a holding company and felt that the best play in infrastructure is to aggregate assets or to have a combination of some growth investments, rather than an early-growth project investment.

So, the platform theory was created by us in 2003, which was repeated when we invested in L&T at the L&T Infra holding company level. If you look at the road sector, we have done that when working with L&T and Ashoka Buildcon during 2005-2006. It took five years to create the next platform in road play and we are now doing that with GVR Infrastructure.

At present, it’s considered a difficult deal-making environment. So, what are your exit plans? Is there any fundraising on the radar?

We do feel that deal-making is becoming challenging. Currently, there are just too many funds in India. And everybody is running after the same set of opportunities – say, power or education. In terms of exits, last year was fantastic for us. We had about eight liquidity events, a combination of full and part exits. Plus, we had two fantastic IPOs last year. This year, too, we target to exit some three or four interesting companies – mostly through liquidity events, a couple of IPOs and some trade sales. So far, IDFC Private Equity is managing three funds, with $1.3 billion of assets under management. Our latest fund is worth $650 million, out of which we have invested around 50 per cent of the total capital. But we are still sitting on the remaining. So, we have some time before we go to the market for fundraising.

Is there any significant trend that you see emerging on the deal-making front?

It’s better to stay away from a sector which is actually hot. If you look at the PE deal closures, you will find that most of these PE transactions are intermediated by small boutique firms rather than bulge bracket investment banks. So, boutique banks, with a specific sector/regional focus and the capability to source transactions, have a long way to go. India is a very big market and I do expect the re-emergence of lots of boutique investment banks, with a strong forte in some specific sectors – so that they are able to intermediate in this market.


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S.G. Shyam Sundar, Sr. MD, IDFC PE, On Infra Sectors, Boutique I-Banks

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