Mumbai: After having deployed a little more than $400 million (Rs 1,812 crore) across three transactions in India, Gautam Bhandari, managing director at Morgan Stanley Infrastructure Partners (MSIP), said that conducting due diligence on infrastructure deals in India is one of the most challenging aspects of investing in the sector. “The devil is always in the details. That’s why we tend to focus and spend a lot of time around diligence. This is not always easy because information is not always available.”
Bhandari spoke in an interview about the fund’s strategy for India and its plans to invest in urban infrastructure, ports and airports. Edited excerpts:
What is your strategy for India?
We are a global fund and we tend to look at deals across the globe and their risk and return profile. So within India we have done investments in power and roads. The other interesting areas that command our attention include urban infrastructure, ports and airports. The team is active in looking for deals in these sectors but the conversion ratio is lower than we like. We have committed a little more than $400 million across three deals in India. The allocation to emerging markets is 25% though it is not a fixed allocation.
What is the biggest challenge in investing and the reason for the low conversion rate?
First, it’s important to appreciate that just because there is a macro picture that India has a high growth rate doesn’t mean everything will grow. The macro picture is supportive but the challenge is in understanding the micro. The devil is always in the details on the micro aspects of infrastructure. That’s why we tend to focus and spend a lot of time around diligence and making sure that we have the asset-specific risk and return nailed.
This is not always easy because information is not always available. Emerging markets are characterized by inefficiencies. So, for example, if you go and bid on a road concession in the US you will get daily data for the last five years, but in India this doesn’t exist. The tolling may have started three years ago and it’s not even properly recorded. Because of such information asymmetry you have to basically go out and do all the work yourself, which takes time.
As investors, we tend to do double the due diligence in emerging markets compared to developed markets.
For diligence you have to rely on a third party. Do you see that market developed in India to do this kind of infrastructure diligence?
Almost all leading consultants have offices here. We, in general, rely on several experts rather than one consultant. Also, because their services seem to be reasonably priced and many times the investments are large, we don’t want to base a $200 million investment on a $5,000 diligence. Therefore, we actually send our own teams and personally spend time on assets to try and get a feel for them.
Have you done that before doing the Isolux deal?
Yes, my team and I have spent days in Surat just going up and down the road. You have to experience it first hand. In an infrastructure asset like a road, it is very critical to have driven that stretch a couple of times, and stopped at the dhaba, and talked to the truckers and driven at night. Unless you do that you will not get a sense for the asset. Personally spending time at the site gives you a sense of the area—if it’s prosperous. We visited a mall to see what the future users of the road are like, we also wanted to see the nature of the city and how it is going to progress.
The devil in the detail is that while all of India may grow 7-8% (this) does not mean that every part of it may grow at 7-8%.
It’s an average and within this average there are several deltas. There are cities that we believe will grow at a high rate and some areas which will grow below 7%. The art is in trying to figure that out.
How many deals have you looked at since making your first investment in India?
We made one investment in the transportation sector before Asian Genco but we can’t discuss it in detail due to the confidentiality agreement.
Today’s announcement is our third investment in India. We have looked at over 300 investments in Asia. Last year, we looked at over 100 deals.
For Asia, there tends to be a very high volume of deals that go into the initial screen.
Despite quite a high rate of initial rejection, the number that makes it to the diligence stage is quite large because of the sheer initial volume.
It’s a question of having the investment discipline to say no to a transaction. We have probably done over three dozen diligence reviews.
There have been deals where we have done lots of solid work, hired consultants and eventually not gotten there. It happens.
How is Asian Genco progressing?
The hydro plant is a showcase. The company has made tremendous progress and has completed almost 95%+ of its tunnelling work.
At 1,200MW (megawatts) it is going to be India’s largest, run-of-the–river, hydro plant when completed. We have a few more months of underground work and then the remaining time will be spent on turbine assembly and other civil works. We expect it to be up and running by Q1-Q2 next year.