Private equity (PE) deals in the power and utility space have doubled and their value has tripled in the fiscal year to date, crowned by last week’s $425 million (Rs1,933.7 crore) infusion into Asian Genco Pte Ltd.
The number of transactions rose to 14 deals worth $820 million in the fiscal year until 18 March, from six valued at $274 million in the previous fiscal, according to data compiled by VCCEdge, the financial research unit of VCCircle.
Also See PE Energy Deals in Fiscal 2010 (Graphic)
Investors are trying to take advantage of the business opportunity offered by the demand-supply gap in India’s deficient power sector, driving PE deal making.
Last Wednesday’s announcement of a $425 million PE infusion into energy firm Asian Genco is testimony to the growing appetite of investors for the power sector. The deal is the largest PE transaction in the Indian power industry, beating a $395 million investment by LNM India Internet Ventures and Farallon Capital Management Llc in IndiaBulls Power Ltd in 2008.
Asian Genco is developing a power portfolio of hydro, thermal and non-conventional assets and has an aggregate capacity of nearly 4,000MW under construction.
“It has a highly differentiated portfolio. Its carefully chosen assets produce power in the peak hours of the day and during summer months. Hydropower plants, which run at peak capacity during these periods, are able to meet peak demand in the most cost-efficient way,” said Gautam Bhandari, head of Morgan Stanley Infrastructure Partners, which led the deal.
Other investors in Asia Genco included Norwest Venture Partners, General Atlantic Llc, Goldman Sachs Investment Management and Everstone Capital.
In India, the peak power shortage has been hovering between 11% and 13% and the energy shortfall is between 6% and 8.5%, according to industry estimates. India has a power generation capacity of 135,006 MW and plans to add 78,577 MW of capacity by 2012.
Even excluding the big-ticket Asian Genco deal, the power sector has attracted investors’ attention. Without taking the Asian Genco deal into account, the PE deal value in the sector stood at $395 million across 13 deals in the fiscal year to date, a rise in value of 44% over the previous year.
Consider this: Hyderabad’s Ind-Barath Power Infra Pvt. Ltd raised $100 million in funding from Sequoia Capital India, Bessemer Venture Partners and Citi Venture Capital International (CVCI). IDFC Project Equity has been a prolific deal maker in the space by closing investments in Essar Power Ltd, Adhunik Power and Natural Resources Ltd and GMR’s GMR Kamalanga Energy SPV Ltd last year.
According to Kuljit Singh, partner, transaction advisory, Ernst and Young Pvt. Ltd, power projects offer a lucrative internal rate of return and an attractive equity arbitrage opportunity. Still, while there is a huge amount of deal flow in the space, only a few projects are able to get funding, he said. The sector also faces challenges in obtaining regulatory approvals and tying up fuel supplies.
“It is very difficult to get a project to a stage where an external investor will invest in it,” said Sohil Chand, managing director of Norwest Venture Partners.
Promoters typically seek to raise about 30-40% of the total equity financing required for a power project. They resort to raising the balance through public markets, but are often unable to do so, leading to delays in implementation, Singh said.
Valuation is another big hurdle in the way of deal making. “There exists a huge expectation mismatch and Indian promoters want to leverage their equity to the maximum extent possible,” said Singh.
This does not go down too well with global institutional investors. Also, not all individual projects can tap money from capital markets.
So, can power do a telecom in terms of deal-making activity? “There are a lot of parallels that can be drawn between both sectors. The needs and demands are the same,” said Bhandari of Morgan Stanley Infrastructure Partners.
Given the deal flow in the space, investors say that power indeed has the potential to become the next telecom in deal making—but at the right valuations.
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Photo by Pankaj Nangia / Bloomberg; Graphic by Yogesh Kumar / Mint
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