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E&Y: Private equity drawn to Indian infrastructure

Private equity firms have invested $2.7 billion in Indian infrastructure since the beginning of 2006 and a pick up in investment activity is anticipated in the next eight to 12 months.

Private equity firms have invested a total of about $2.7 billion in Indian infrastructure projects from the beginning of 2006 till the end of June in 2009, according to Ernst & Young.

Within the infrastructure sector, the power sector was the most popular among investors, drawing in 36 percent of the capital invested or investments worth $971 million across 14 deals, according to a survey of private equity firms by Ernst & Young and the Associated Chambers of Commerce and Industry of India (ASSOCHAM).

The survey noted that unlike other sectors whereby the effects of the global financial crisis have been evident, the economics of India’s power sector is largely driven by the domestic market attractive demand-supply dynamics.

Roads and highways have also been a popular investment destination among investors, attracting 19.7 percent of the capital invested in infrastructure or $530 million across 15 deals from the beginning of 2006 till the end of June 2009.

A total of $321 million was invested in ports in the same period.

According to the results of the survey, private equity investors have also shown interest in investing in infrastructure players with diversified project portfolios – such companies received about $782 million in investments. Other sectors that interest investors lie in the urban infrastructure segment and include water, waste water, sewage system and solid waste management.

Interestingly, 84 percent of respondents in the survey said the current environment is conducive to raise infrastructure-focused funds.

“Despite the credit crisis, private equity investors remained positive about returns expected from their investments in infrastructure projects,” Kuljit Singh, partner and transactions advisory leader for infrastructure, real estate and government, said in a statement. He added that about 50 percent of respondents expect to achieve a targeted IRR of between 20 percent and 25 percent, while 31 percent of respondents target more than 25 percent IRR on their investments.

Respondents are also anticipating a pick up in investment activity in the next eight to 12 months. “With increased government focus on encouraging private sector participation the Indian infrastructure sector is set to offer vast investment opportunities,” Singh said.

He added that the private equity investors’ appetite for investments in infrastructure has increased due to a strong pipeline of projects, increasing private sector participation in the sector and the rise of infrastructure-focused funds in the country.

“As the sector continues to evolve over the next 5-10 years, it will pave the way for increasing opportunities for various sub-segments requiring large capital commitments,” Singh said.