Mumbai/Bangalore: Two leading private equity (PE) players will invest Rs 698 crore in power company GVK Energy Ltd, a wholly owned subsidiary of Hyderabad-based infrastructure developing company GVK Power and Infrastructure Ltd.
On Thursday, GVK Power said it signed an agreement with private equity firms Actis Advisors Pvt. Ltd and an affiliate of the government of Singapore Investment Corporation (GIC) for an investment of Rs 349 crore each in GVK Energy. Actis and GIC’s affiliate will bring in Rs 218 crore each as the first tranche of investment.
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GVK Energy has tied up a total Rs 1,498 crore from three private equity players, including Actis and GIC, and the overall stake dilution will be 24.97%. In early November, another private equity firm, 3i Infrastructure Fund, agreed to invest Rs 800 crore in GVK Energy. GVK’s power portfolio comprises an operational capacity of 909MW with a further 4,200MW under various stages of development.
“We have tied up private equity investments for around Rs 1,500 crore. As on date, we have raised Rs 936 crore from Actis, GIC and 3i. The second tranche of funds will be raised as and when we require the same. These funds will be used for the capital expenditure of our 4,200MW power projects under various stages of development,” said Issac A. George, director and chief financial officer at GVK Power. “We have given an initial public offer (IPO) as an exit option for private equity companies. This should happen in the next 72 months.”
Experts said GVK Power is following a well-documented business plan with specific plans of exit options and sourcing funds for its power projects. “The company may look at investors in airport division in similar fashion. The surprising element in this development is the entry of GIC,” said a senior analyst tracking GVK Power stocks at a domestic brokerage. He did not want to be identified.
Actis is an emerging markets private equity investor with $4.7 billion (Rs 21,338 crore) under management. GIC is a global investment management company established in 1981 to manage Singapore’s foreign reserves. GVK is present in sectors including energy, airports, roads and urban infrastructure. As on date, GVK has invested more than Rs 10,786.02 crore in infrastructure projects and has on-hand projects worth more than Rs 25,000 crore.
G.V. Krishna Reddy, chairman, GVK Power, said in a statement: “While this strategic transaction will enable GVK Energy to deploy further capital, we believe that both Actis and GIC will prove to be ideal partners in the next phase of the company’s growth.”
Michael Till, a partner and co-head of the Actis infrastructure business, said his company is helping secure Indian’s current and future energy needs through this investment.
On Thursday, GVK Power and Infrastructure rose marginally to Rs 39.60 on the Bombay Stock Exchange.
Private equity players are betting on India’s power sector as there is a demand-supply mismatch and regulations are being streamlined.
The sector has become attractive for private equity investors who seek clarity in policies, said Kalpana Jain, senior director, Deloitte Touche Tohmatsu India Pvt. Ltd, a consulting and audit firm. “If someone can get land, organize coal procurement, and get a power purchase agreement (PPA), power can be very attractive at this moment,” she said.
Queried on why private equity firms were looking at backing subsidiaries, Jain said: “The expectation is that power has higher growth potential, which could be the play of the subsidiary, and could be taken to the market faster than the parent company. An investment in a subsidiary also increases the value of the parent company. They are keeping their options open.”
Vikram Utamsingh, executive director of KPMG India, a consulting firm, said big-ticket deals in the power sector have been triggered by the huge amount of dry powder (capital yet to be invested) lying with private equity investors. “Private equity players need to find large-ticket deals and there are not many opportunities available for deals above $100-150 million outside the infrastructure sector.”
Expectations on returns are another reason. The private equity community expects infrastructure at an asset level could yield returns of 15-18%.
“Non-infrastructure private equity funds look for returns of 20-25%, so they take a call on these 15-18% returns and, looking at the demand, they know they can get returns of 25% once the asset is up and running,” Utamsingh said.
According to both Jain and Utamsingh, investment in the power sector will continue to gain momentum in 2011 as well.
This calendar year has witnessed similar investments in the power sector. Bangalore-based GMR Infrastructure Ltd received a $200 million investment from Singapore’s government investment arm, Temasek Holdings Ltd, for its wholly owned subsidiary GMR Energy Ltd. Similarly, US private equity firm Blackstone Group LP has invested $300 million in unlisted energy firm Moser Baer Projects Pvt. Ltd.
In the electricity sector alone, India is facing a peaking shortage of nearly 12% and an energy shortage of 9-10%. Sushilkumar Shinde, Union minister for power, in October said India was targeting a capacity addition of 62,000MW in the 12th Five Year Plan (2012 -2017). In 2007-2012, the funding requirement in the Indian power sector has been estimated at $230 billion.