Mumbai: Michael Maxwell, a key management committee member of Australia’s second largest private equity fund Babcock and Brown Ltd, which manages nearly A$70 billion (about Rs2.8 trillion) in real estate to infrastructure projects, was a frequent flyer to India last year. His most recent trip created waves in banking circles after he snared eight key executives from ABN Amro Holding NV’s India operations to invest in real estate and infrastructure projects, and to lease planes to airlines. As regional head of Asia for Babcock and Brown, Maxwell is in charge of eight cities in Asia and works closely with four business units—infrastructure, real estate, operational leasing, and corporate and structured finance. The asset management company, Maxwell said in an interview with Mint, is a long-term player in India and is undeterred by concerns such as falling real estate prices and rising costs of infrastructure projects.
Babcock and Brown is a late entrant into the Indian market. There are growing concerns about real estate prices falling and infrastructure costs going through the roof. So, why now?
Realty bytes: Michael Maxwell says there is compelling real estate growth in India
There is compelling growth in India. The middle-class population is getting richer and there is demand for more houses, roads, ports, power and planes. Our philosophy is not to make quick money. We take projects, invest in them, and take longer to exit. (In the) long term, we will make more returns on our investments than in the short term. When we entered the US in 1977, there were similar concerns but our philosophy got us better returns. We do not move into a country with just money; we carry tremendous expertise to the projects we invest in. We have 6,000 executives working on several infrastructure projects.
You are investing in India when there is a concern that the real estate sector is inflated. What is your view?
It appears so. It has been like this around the world. But we believe the fundamentals of the real estate market are strong. There are constraints in Europe and the US, where there is less population growth. In India and China, population growth is underpinning long-term demand. There is strong demand for rental accommodation and quality homes, and sophisticated financing is driving this demand.
A recent study by consultant McKinsey and Co. says private investment funds raised $105 billion for infrastructure projects from 2006 to mid-2007. Such interest heightens competition and creates a problem for fund managers and investors seeking profitable infrastructure opportunities.
If funds follow the crowd, bidding to operate existing assets under a business-as-usual model, they run a double risk because of the sheer volume of dollars now chasing deals and driving up prices: either they lose out to more audacious competitors or risk overpaying and achieve sub-optimal returns. Yet funds are under growing pressure to invest the money they have raised.
In India, investors say the risks, especially political risks involved with a project, are high compared with other countries because of policy fluctuations and delays. How do you expect to tackle this?
Your are right. We need to find different business models to work in different countries. We will not put our money and wait for our returns. We will work with the local companies. They will share most of the risks and we will bring in global expertise.
One way to deal with it is to participate in the local assets with local partnership. We are the fourth-largest wind power operator in the world and the third-largest port operator with 29 terminals in Europe. We have found an opportunity in India that we want to participate in. Partnering with the right people takes away most of the risk. On political risk, we have enough experience of working in a regulated market like India.
What is your quantum of investment and your investment horizon, because, in India, building projects takes longer?
For infrastructure, we have raised $400 million under the Asia infrastructure fund, and it could go up to $1.5 billion. This will primarily be invested in India. Other project-specific investment vehicles will be created. The investments can be from 3-10 years. We have been holding some of our investments for more than 20 years. We had got returns of 10-17% in infrastructure projects, 10% in real estate and even 25% in developed projects. In India, our challenge is to tide over the time delays, and manage it within cost.
In which areas are you looking to invest in India?
Other than power, ports, airports and roads, we would look at hotels. We have a large portfolio of hotels in partnership with the Accord group, which manages our hotels. This can be replicated in India. We would work with local partners to build hotels.
We would also look at new sectors such as renting storage space for valuable household appliances. Another key area would be leasing planes to passenger carriers. We have already leased 15 planes to Spi-ceJet Ltd and Kingfisher Airlines Ltd. We will focus on renewable energy, transport, social infrastructure and utilities including power plants, gas transmission and distribution.
One of the challenges for new infrastructure developers is the rise in costs. On one side, raw materials such as steel and cement have risen phenomenally and on the other, utilities have to sell power at prices as low as Rs1.12 per unit. How will you make money in such projects?
One way to deliver the promise is to use cutting-edge technology. In power, super critical boilers and turbines from China can cut costs. Technology is the key to build any infrastructure project.
What are the key challenges you faced in India?
We have experienced a shortage of talent. Land acquisition is very complex saddled with procedural delays.
Your rival Macquarie Bank Ltd has established itself in India. Don’t you think Babcock and Brown will take some time to catch up?
We are a smaller group compared with them. There is always something to some people and not all things to all people.