IDFC Alternatives eyes deals in stressed thermal power sector
Home-grown infrastructure investor IDFC Alternatives’ interest in thermal power plants comes amid a drought of deals in distressed assets space
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Mumbai: IDFC Alternatives is looking to buy troubled thermal power plants as part of its strategy to aggregate small and medium-sized assets and sell them later to larger funds, a top official at the private equity fund said.
“There is distress in power and steel sectors mainly, but power is more attractive because power business is not cyclical, compared to steel industry. Besides, no new coal-fired power plants are being conceived while many of the existing ones are in distress,” M.K. Sinha, managing partner and chief executive officer, IDFC Alternatives, said.
The next five-to-10 years will be great for power plants that are commissioned but are not able to sell power commensurate with their installed capacities, Sinha said in an interview.
The home-grown infrastructure investor’s interest in distressed power plants comes amid a drought of deals in the distressed assets space, despite significant capital commitments from large global investors.
Many thermal power projects have been shelved, abandoned or stalled in the past few years due to cash-flow problems, cost escalation and, in some cases, developers’ inability to bring in cash.
“The recently enacted Insolvency and Bankruptcy Act is the best in the world, and if it works the way it has been conceived, then this is a huge opportunity,” Sinha said. “While there is a huge opportunity, there also needs to be a viable ecosystem which needs to created which was lacking.”
While distressed thermal assets remain the targeted big opportunity for the PE firm, it is also looking to acquire high-yield generating assets with annuity cash flows. In April, IDFC Alternatives bought a 33% stake in New Silk Route (NSR)-backed telecom tower company Ascend Telecom Infrastructure Pvt. Ltd for around Rs585 crore. Significantly, the transaction also saw a consortium of 23 banks selling their loans, which were bought by IDFC Bank. “What is required is a viable ecosystem, where banks can take bona fide decisions without any fear of being hauled up subsequently because decisions can go wrong,” Sinha maintains.
How will the long-awaited entry of bigger funds in distressed segment impact IDFC Alternatives? “The large and viable capacities will be chased more than the rest and there will be always some assets which will be more attractive than the rest; but unlike us, for some of the large players doing a $30-to-40 million deal may not viable,” Sinha said.
“Our strength as domestic player is that we have a better reach in the market and can locate the smaller deals and also have the resources to execute such deals,” Sinha added.
According to Ajay Garg, managing director, Equirus Capital, there have been several positive developments related to the thermal power sector. “Firstly, fuel linkage has improved significantly for power producers. Secondly, the government’s Uday bond scheme has recapitalized distribution companies. I think it is an opportune time for investors like IDFC Alternatives to start looking at deals in this sector,” Garg said.