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Roadblocks for PE investments in infrastructure?

In an article for Economic Times, Srivatsa Krishna makes a fervent case for freeing up hurdles in the way of Private Equity investments in India's infrastructure sectors.

The one possible way ahead is for PE funds focused on infrastructure, of which there are now at least 20 large ones globally with combined funds under management of almost $130 billion, to invest in Indian infrastructure in a big way. India, at the highest levels of government, needs to dedicate a small core group to woo these funds into India. PE is one of the few asset classes, which does not face redemption pressures and though there is a shortage of capital around the world, yet there still are a fair amount of PE funds focused on infrastructure looking for good deals.

...However a number of strategic, regulatory and operational reasons are forcing these funds to keep away from Indian infrastructure projects, especially when many of them get an assured 12-14% post-tax return in mature brownfield projects such as railroads in the US or in Australia.

Extremely poor governance, absence of clarity and predictability in bid documents and procedures, constantly shifting and unclear concessions and multiple authorities, lack of viable ‘good’ deal flow, unrealistic valuations expectations of Indian developers, the inability to ‘manage’ a rapacious Indian political system keen on rent-seeking alone, the unwillingness to leave a lot of the potential upside on the table to future uncertain ‘renegotiations’, the absence of a corporate bond market, incomplete contracts and poor quality of contracting, and the enormous execution/construction risks some of which are peculiar to India, ensure that foreign PE firms shy away from large infrastructure projects.

Further there is simply not enough deal flow in the $150-300 million big-ticket equity category, which would attract funds with big muscle that are simply not interested in smaller deals. Given some of these risks mentioned above, most of the larger funds are looking for brownfield investments, even at a lesser rate of return (such as in the low to mid teens).

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

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