On March 22nd 2010 I sat next to next Ali Abbas Syed, Director of Zeus Capital,
on the same panel of an Indian Infrastructure Finance conference organised in
London by SJ Berwin LLP and eti Dynamics Ltd.
Earlier that evening I got chatting with Ali who was (and still is) quite elated
by his firm’s role of the sole advisor to Asian Genco that had in the previous
week received equity injection of USD 425 million from six major private equity
funds. Asian Genco is an India focused infrastructure development Company with
various assets across the power sector in India. Its most valuable asset has to
be the 1,200 MW Teesta III hydel power plant, which when completed will be the
largest hydro sector project development by a private company.
This deal included a consortium of six major investors led by Morgan Stanley
Infrastructure Partners. Other funds in the consortium are General Atlantic LLC,
Goldman Sachs Investment Management, Norwest Venture Partners, Everstone Capital
and PTC India (Power Trading Corporation).
This clearly is a blockbuster deal that India has witnessed to date. However one
major point troubled me quite a bit – why was there no major UK based PE funds
in the consortium which is clearly led by eminent American funds.
Is there some kind of trans-Atlantic rivalry at play here? I asked Ali and
subsequently Shaurya Doval, Zeus’s Director based in India, and their answer
simply was that the issue lies not in the origins of a fund but the fundamental
strategy of the fund. India is at a stage where its companies require copious
amounts of venture development and growth capital. They quoted the recently
released figures by Goldman Sachs and separately by the Indian Government that
India must spend upwards of USD 1trillion in the infrastructure sectors over the
next 5-7 years if it needs to sustain its growth rate.
Their main observation is that PE firms in Europe generally generate returns
through capital restructuring or through buyouts. Whereas India warrants
investment concentration on the early stage opportunities. This is even more
pertinent in the infrastructure asset class. In Europe whilst some PE funds are
participating in the infrastructure asset class, their entry into this market,
relatively speaking is fairly recent. For decades this segment has largely been
the playground of pension and insurance funds that invest in such an asset
classes for capital preservation and buying inflation to create a better
But India today and for the next few years offers a once in a lifetime
opportunity for PE funds to invest in the infrastructure asset class across the
board ranging from Core sectors such as power, roads, transport to social asset
classes such as healthcare, education, environment. Other service economy
infrastructure sectors like telecom, ISPs, financial payment gateways also offer
Of late there has been a surge in global PE funds entering the Indian market in
search for this growth. It is estimated that there are now over 300 private
equity funds in the hunt for investment opportunities in India. But only a
handful of these hail from the UK.
Why is this the case? I posed the same question to Gaurav Mehta who previously
worked in the clean-tech and renewable business of General Atlantic Partners in
the UK. He has since taken the entrepreneurial road and is currently building a
rural sales and marketing network in India to focus on the “bottom-billion /
rural segment”. His analysis of the situation is that firstly the size of the
deals – pointing to the sweet spot between USD 10-15mn per deal. Thus a USD
100mn fund can deliver 6-8 transactions in its investment period for which the
fund managers will have to find and evaluate at least a 75-100 transactions.
Therefore large buyout type structures are unlikely to provide the right
framework to succeed in India.
Secondly the people who will originate and deliver on these transactions need to
be based on the ground in India with great appreciation for regional differences
as India is not a homogenous nation. So unless a fund has decided that India is
of strategic importance for them and has created a great team on the ground they
are likely to find the road extremely rocky. Operating out of plush Mayfair
offices is not an option at all, unless there is significant foreign expertise
required on an ongoing basis which may only be needed in areas such as renewable
energy or high end innovation.
A number of funds make the mistake of going after companies that are already
national brand names who will but naturally command a premium. Although there is
definitely an opportunity at that level, it is however only for the largest of
the funds that are able to write cheques north of USD 100mn per transaction.
Also there are only a handful of such companies that can command a valuation in
billions of dollars to get a capital injection in hundreds of millions as was
seen in the Asian Genco transaction.
However transactions like Asian Genco are not out there for the taking. They
need to be created over a long period of time. Advisors like Zeus Capital or the
fund managers almost need to become part of the company management to be able to
create a structure that will deliver a win-win result for everyone.
This is the most fundamental difference between the PE model that will be
successful in India to what is prevalent in Europe claim Ali Abbas Syed and
Shaurya Doval of Zeus Capital. Those who are able to mould their strategies to
suit the local conditions and are flexible enough in their approach will find
deals like Asian Genco in India and for the traditionalists the market will
continue to prove difficult and fraught with uncertainties.
Perhaps this is where the cultural differences of American entrepreneurial
spirit versus European risk evasiveness come right to the fore. But there is an
old adage that is so right for this situation - “Fortune does favour the brave”.