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Business News/ Companies / PE investors find it tough to exit road projects
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PE investors find it tough to exit road projects

Since 2005, 86 PEs have invested $2.9 billion in highwaysthere have been only been eight exits worth $25 million

Photo: Pradeep Gaur/MintPremium
Photo: Pradeep Gaur/Mint

Execution delays and muted traffic growth are blocking the smooth exit of private equity (PE) firms that have invested in many build, operate, transfer (BOT) highway projects or holding companies executing such projects.

Since 2005, 86 PEs have invested $2.9 billion in the highway sector, but there have been only been eight exits worth $25 million, according to VCCEdge, a data service by media firm VCCircle Network.

Highway developers had expected traffic to grow by at least 8% every year, but many operational toll-based highway projects are seeing a big mismatch in traffic estimates from the time the projects were awarded and actual traffic on ground today, which has remained muted in the past three years, hurting the ability of the developers to service debt, said T.V. Sandeep Kumar Reddy, managing director of infrastructure firm Gayatri Projects Ltd.

Gayatri Infra Ventures Ltd, the company’s holding company for all BOT projects, had sold a 30% stake to PE firm AMP Capital in 2008. But given that most of the company’s projects were delayed by two years and saw cost overruns along with high interest rates, there was no equity return, said Reddy. AMP is looking to exit its investment but waiting for a buyer, he added.

Exit timelines are getting stretched also due to a change in investment strategies. PE firms, which in the past were willing to invest in greenfield and under-construction projects, are now looking to pick up only projects that are fully operational and have predictable cash flows.

This has reduced the possibility of secondary market deals. Secondary market deals are those where one PE investor sells his exposure to another. Global infrastructure and pension funds, which are looking at investing in the sector, are also being selective, said a banker.

“The classic PE firms are cautious on the sector given the returns the underlying asset class generates and the infrastructure-focused PE funds are being very selective in terms of the assets they purchase," said Sawan Kumar, executive director at UBS Investment Bank.

In the BOT model, developers use their own money to execute projects, operate them for a period and transfer them to the government. About 7,500km of highway projects awarded by the National Highways Authority of India (NHAI) to road developers between fiscal 2010 and 2012 on a BOT basis are at high risk today, said ratings agency Crisil Ratings in a report on Tuesday.

To avert a shortfall in serving their debt, toll revenue across these BOT projects will have to grow 37% compared with a forecast of about 10% for the near term, the report said. Toll rate increases are linked to wholesale price inflation.

Since 2010, PE funds jointly managed by State Bank of India and Australia’s Macquarie have invested in infrastructure firm Ashoka Buildcon Ltd; 3i Group has backed BOT project companies KMC Constructions Ltd, Supreme Infrastructure India Ltd and Soma Enterprise Ltd; and Norwest Venture Partners and the Xander Group have invested in Sadbhav Engineering Ltd’s unit Sadbhav Infrastructure Project Ltd.

Xander and Norwest only part-exited their investment in Sadbhav Infrastructure Projects when it went public on the Indian bourses last month. The two companies hold about 10% each and plan to stay invested in the road developer.

“As an emerging markets investor, India is a big piece of our portfolio and we hope that we continue to have it, but it has to continue to remain an attractive investment opportunity. Given the events over the last year, India is showing the right signals and some policy level changes would definitely help… All stakeholders including the government needs to reinstate investors’ confidence," said Rohan Sikri, a partner at Xander Group Inc., adding that the firm will start exiting its infrastructure investments only a year from now.

3i declined to comment and Macquarie did not respond to an email query sent on Wednesday.

Sohil Chand, managing director at Norwest Venture Partners India, said his company is happy with its investment in Sadbhav Infrastructure and in the past has made successful exits in BOT road developers IRB Infrastructure Developers Ltd and IL&FS Transportation Networks Ltd, when the companies went public in 2008 and 2010, respectively.

“Traffic growth (in highway projects) has been going down and the whole environment is a bit negative. The valuation at which the private equity companies must have invested in road projects, today the market value is inferior to that," said K.K. Mohanty, managing director at infrastructure company Gammon Infrastructure Projects Ltd.

The firm had in August sold its six road and three power projects BIF India Holdings Pte. Ltd for about 563 crore. BIF India Holdings, controlled by Canada-based Brookfield Asset Management Inc. and Core Infrastructure India Fund Pte Ltd (CIIF), unlike a typical PE investor, takes full control of the assets and invests in them for a longer period.

PE investors could sell existing investments to global pension funds or look for options such as the infrastructure investment trusts (InvITs) to exit their investments, said Reddy.

Ashish Agarwal, director (infrastructure) at Equirus Capital (P) Ltd, an investment bank, said promoters of road companies are looking at options such as initial public offerings, qualified institutional placement issues and structured promoter financing.

“Due to reduced growth of the platform and lesser viability of underlying projects, capital market exits have been extremely few. Hence, new PE has been extremely apprehensive to invest as minority partners in BOT holding companies due to lack of exit visibility," said Agarwal.

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Published: 13 Oct 2015, 01:33 AM IST
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