Mumbai:Standard Chartered Private Equity Advisory (India) Pvt Ltd., or SCPE, has decided to offer debt finance alongside private equity (PE) finance as it seeks to enter India’s lucrative infrastructure sector.
The PE arm of Standard Chartered Plc is currently working on three mezzanine deals—which include equity and debt components—in India and hopes to close at least two by March, Nainesh Jaisingh, managing director, SCPE, said in an interview last week.
“For the first time in the history of Indian PE investing, four-five deals in the $200 million-plus category happened in 2010. All of these were infrastructure asset plays,” Jaisingh said.
The Planning Commission has forecast a major ramp up in infrastructure spending—from $514 billion in the 11th Five-Year Plan (2007-12) to $1 trillion in the 12th plan (2012-17). With the Reserve Bank of India unwilling to let banks lend to this sector and the corporate bond market still in its infancy, analysts expect PE capital to fund these projects.
The power sector alone saw 34 PE deals worth a total $2 billion last year, according to Venture Intelligence, a research firm that tracks the PE sector. Overall PE investment in India for the year stood at $8.3 billion across 376 deals.
SCPE has so far deployed $575 million across 14 investments in India, in companies such as Coffee Day Holdings in the consumer sector, ABG Shipyards Ltd in the shipping sector, Firepro Systems Pvt. Ltd in the securities services sector and PI Industries Ltd in the agriculture sector.
It now joins the ranks of PE firms such as Kohlberg Kravis Roberts and Co. (KKR) that also dabble in debt financing. KKR has deployed Rs2,800 crore of debt so far.
“Mezzanine financing will be done through our non-banking financial company in India and to the extent that the regulatory framework allows—through our cross border fund,” Jaisingh said. “Mezzanine financing helps to tackle the whole issue of valuation gaps and also enables large ticket sizes.” Standard Chartered Bank, in a joint venture with IL&FS Investment Managers Ltd, India’s largest PE fund, also has a $658 million Pan Asian Infrastructure Fund.
“While our sweet spot of deals has been in the $50-$100 million range, to invest in infrastructure asset-oriented companies, we will write bigger cheques,” Jaisingh added.
Avinash Gupta, head of financial advisory at audit and consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd, said PE firms started debt financing globally when banks stopped giving debt for leverage deals. The returns from such deals are 18-20%, below typical PE returns of 25-30%. But the risks are also commensurately lower.
Gupta said a combined proposition of debt and equity financing by PE firms will be more attractive for promoters as infrastructure projects are 25% equity and 75% debt.
Agreeing with Gupta, Bhavik Damodar, executive director and head of infrastructure transaction services, said there is a huge opportunity for infrastructure PE funds to get into debt financing as banks may not be able to give all the debt needed for such projects. Apart from expanding investments, SCPE is also in exit mode. In 2010, it made $200 million worth of exits at 2.5 times returns, said Jaisingh.
It completely exited Mahindra and Mahindra Financial Services Ltd in December at 2.3 times returns on an investment of $75 million in 2008. It also sold half its 14% stake in ABG Shipyard Ltd after investing $30 million.
“Three companies in our portfolio are in the pipeline to list in the public market this year,” Jaisingh said, but declined to name them. The firm will be partially exiting its investments in Endurance Technologies Ltd at the time of its initial public offering, bringing down its stake from 14% to 4%.