“While we don’t have country specific allocations, we can see ourselves putting somewhere from $500-600 million to a billion dollar plus in the country over the life of our fund. If the right opportunity shows up, then we can transact at that scale," said Gautam Bhandari, partner at I Squared Capital, who is looking to deploy about one-third of its funds under management in the region.
In 2015, I Squared Capital raised a $3 billion fund named ISQ Global Infrastructure Fund. That corpus has now grown to $3.8 billion, Bhandari said in an interview on Thursday.
I Squared has invested more than ₹ 1,000 crore through its investment platform Cube Highways and Infrastructure Pte Ltd in three road assets till date. It has committed to invest in assets worth ₹ 2,000 crore to its rooftop solar platform.
Founded in 2012 by former Morgan Stanley executives, I Squared Capital is an independent global infrastructure investment manager that is focused on energy, utilities and transport in North America, Europe and some high-growth economies. It was started by Sadek Wahba (former global head of Morgan Stanley Infrastructure), Gautam Bhandari (earlier head of Morgan Stanley Infrastructure in India, Middle East and Sub-Saharan Africa) along with Adil Rahmathulla (the head of investment execution in the Americas for the group).
The investment firm is looking at only doing so-called control deals, giving them more say over their investee companies.
“We do deals in which we have governance and control. That can really add a lot of value to our portfolio companies and, therefore, to the assets," Bhandari said.
He considers the road assets in India to be a highly attractive investment opportunity.
“We take a very nuanced approach, where we like some of the assets within infrastructure in India; we think some assets need lot of policy and regulatory help before they can become mature enough for investments. So, specifically, the road sector is one which we have identified in India as being attractive globally," said Bhandari.
Besides, the risks in the road sector are lower now, given the National Highways Authority of India’s (NHAI) standardized concession agreements and progressive policies, he added.
The sentiment around the road sector has improved in the recent times, primarily on the back of policy and regulatory decisions by the government and NHAI, said Vishwas Udgirkar, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd.
I Squared Capital is looking at risk-adjusted annual returns between 15% and 20% from the road sector, Bhandari said.
I Squared Capital has invested in Indian road projects through Cube Highways and Infrastructure Pte Ltd—its toll road and transportation investment platform. Cube Highways is a joint venture between I Squared Capital and International Finance Corp. (IFC), the private investment arm of the World Bank.
Cube Highways has made three investments in India till date: a 74% stake in Madhucon Agra Jaipur Expressways Ltd, a 100% stake in Western UP Tollway Ltd and 74% acquisition of Jaipur Mahua Tollways Pvt. Ltd, a road project in Rajasthan for ₹ 525 crore.
I Squared Capital has committed to invest in road assets worth ₹ 8,000 crore through Cube Highways.
The firm will also look at creating platforms for investing in the logistics business and warehouses and bring in equity partners for the same. “As a strategy, we love to partner. On Cube, we have a significant investment of 20% with the IFC. As we look at logistics we are open to partnering with people who have specialized focus on logistics," said Bhandari.
Investing in logistics and warehousing is part of I Squared Capital’s India investment plans.
“Our near-term expansion plan will be on the associated peripherals of highways. We are working actively with NHAI, in some of these peripherals like wayside amenities. We are also planning to convert two of our roads to intelligent highways, which could be a big business in the future," said Harikishan Reddy, chief executive officer of Cube Highways Advisors.
Out of the planned ₹ 8,000- crore commitment, Cube Highways plans to have 70-75% of its assets in the road sector and the rest in other sectors like logistics, warehouses and wayside amenities.
“The thesis that we have when we do these platforms is one of technology-led turnaround," Bhandari said, adding that technology has allowed Cube Highways to improve the operating performance of highways significantly and the warehousing sector is on the verge of a similar technology-led story.
Besides roads, I Squared Capital has made significant financial commitments in the renewable energy sector. It has committed to invest in assets worth ₹ 2,000 crore to its rooftop solar platform Amplus Energy Solutions Pvt. Ltd. The platform sets up rooftop solar power solutions for industrial and commercial clients.
However, in the short term, the fund plans to stay away from large scale solar power projects.
“The utility scale larger power projects tend to be very competitive, and the returns are simply not attractive enough for us from a risk-adjusted perspective," said Bhandari.
Large projects in the solar sector will undergo the trajectory of roads, which witnessed high exuberance followed by several challenges, he said. I Squared Capital’s bullish stance on the road sector comes at a time when most infrastructure and road developers are reeling under huge debt. In certain cases, lenders have been forced to take over some of these companies through the strategic debt restructuring (SDR) mechanism.
SDR allows lenders to convert their debt into at least 51% equity in borrowers.
Lenders have initiated SDR process at several infrastructure firms, such as Gammon India Ltd, IVRCL Ltd and Lanco Infratech Ltd.
According to a 13 May report by Kotak Institutional Equities, road asset sales worth around ₹ 20,800 crore have been announced in the last three-and-a-half years by debt-laden infrastructure developers.
While firms might be under pressure to sell assets, not much has changed in terms of valuations, said Reddy of Cube Highways Advisors, adding that the valuation expectations of sellers remain high.
Also, banks have not been as active as their Western counterparts in cases of distressed infrastructure developers, added Bhandari.
“While the banks have woken up to this, they are still less active than what they have been in the West. If this was the US or any other developed market, I think the banks by now would have more or less completed their restructuring," he said.
Infrastructure is a key focus for the Narendra Modi-led government to stimulate investments into the country.
Finance minister Arun Jaitley, in his budget speech this year, announced that the total government capital expenditure on infrastructure during the fiscal year will be ₹ 2.21 trillion.