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Mumbai: Transactions that involve the transfer of a controlling stake are increasingly becoming the norm in the infrastructure sector as short-term or private equity (PE) investors get replaced by long-term buyers.

At least three-fourths of total deals by value so far in 2016 have constituted a change in ownership, showed data from Equirus Capital Pvt. Ltd, an investment bank. In comparison, less than half the transactions in 2015 involved transfer of control. This trend is in sharp contrast to over five years ago when PE firms were leading transactions and were also willing to invest in a large number of greenfield and under-construction projects.

“One of the major avenues for promoters in infrastructure today to obtain liquidity is by selling their operational assets because minority PE investors have vanished from the infrastructure space," said Ashish Agarwal, director, infrastructure, Equirus Capital. “Investors in infra today want to buy majority stake and hold operating assets and cash flows, which is why M&A (merger and acquisition) is driving the market."

Deals that involved a change in control of assets across roads, power, renewable energy and construction sectors totalled $2.5 billion this year, more than three-fourths the $3.3 billion total deal value, according to Equirus data.

For asset owners, trying to exit their mature special purpose vehicles (SPVs), ceding control is the only available option, said Y.D. Murthy, executive vice-president of finance at Hyderabad-based construction and infrastructure firm NCC Ltd.

After selling its stake in a 1,320 megawatts (MW) power project to Sembcorp Utilities Pte Ltd and its 51% stake in Western UP Tollways to I Squared Capital-backed Cube Highways and Infrastructure Pte Ltd earlier in 2016, NCC is now in advanced discussions for selling its Bangalore Elevated Tollway highway road project to asset manager IDFC Alternatives, Murthy said.

The stress in the balance sheets of infrastructure companies from factors such as delayed projects and land acquisition problems also makes it difficult for them to raise fresh capital.

“Most assets are distressed. In that kind of a scenario, M&A seems to be the only option for companies to monetize," said Vikas Khemani, president and chief executive officer at Edelweiss Securities Ltd.

The number of such deals is only set to rise as Indian infrastructure firms continue their struggle with project delays and rising debt. Many have also been hurt by a mismatch in demand estimates, which have not grown as much as anticipated at the start of the project. Naturally, dozens of assets across roads, power and renewable energy, and several others across ports and airports continue to be on the block in the hope of securing attractive valuations, according to multiple people aware of ongoing discussions.

Funds such as US-based I Squared Capital, Indian asset manager IDFC Alternatives’ infrastructure fund, Canada’s Brookfield Asset Management and Macquarie Group are among active infrastructure-focused financial investors who have invested in the sector and are looking to buy assets across roads, thermal power and renewable energy to build their own portfolio in India.

This new breed of financial buyers, who have a low cost of capital and are willing to buy out 100% in operational projects, provide an avenue for private sector firms to unlock value from existing assets.

In August, road developer IL&FS Transportation Networks Ltd agreed to sell its road project in Andhra Pradesh to Cube Highways for Rs140.37 crore. Earlier in May, ITNL sold an additional 15% stake in its Gujarat road project to Australia’s Macquarie Group Ltd for Rs109.8 crore.

Deals, however, are taking longer to close and there are only a handful of serious financial buyers, said Santosh Yellapu, an analyst at Angel Broking. “It’s a buyers’ market, with a lot of assets to choose from."

While PE investors have stayed away from investing in asset-heavy roads or power sectors in the past two years, their interest in the renewable energy sector is on the rise.

So far in 2016, three PE deals totalling $393 million have been announced in the renewables sector by investors, including Piramal Enterprises Ltd, along with Dutch pension fund APG Asset Management, GE Capital, Abu Dhabi Investment Authority (ADIA) and Singapore’s GIC.

Only one PE transaction took place in the roads sector, where Goldman Sachs agreed to invest $220 million in Essel Highways Ltd in a structured financing deal.

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