There has been a lot of talk about the opportunity for infrastructure investment in India. A cynic might argue that it remains just that – talk. After all, as Michael Queen, managing partner of infrastructure at global investment giant 3i points out, the “equity gap” remains huge.
Seated in a meeting room at 3i's smart new Palace Street headquarters near London's Victoria train station, Queen reveals the figures to prove this. Over the next five years, Indian infrastructure projects will require no less than $500 billion (€316 billion) of investment, of which the equity requirement is around $150 billion. At present, he estimates, around $10 billion has been raised for the task. Even allowing for the enthusiasm with which high-net-worth individuals and family offices have been putting money to work in the space, it's clear that demand for capital is currently outweighing supply by some margin.
3i has done its bit to close the gap. A day after our conversation, the firm announced the closing of its new India Infrastructure fund on $1.2 billion. The fund had a target of $1 billion and was, in Queen's words, “rapidly oversubscribed”. It is also being rapidly invested. Queen says $330 million has already been committed, with the balance to be invested over the next couple of years. A successor fund, he anticipates, is likely to be “substantially larger”.
success, it's surprising to learn that the Indian Infrastructure fund wasn't really supposed to exist at all. 3i's organised push into global infrastructure (the firm had already been making selective investments in the space as part of its mainstream private equity operation) began in March 2007 with the launch of 3i Infrastructure. A listed vehicle that raised £703 million through an IPO on the London Stock Exchange, 3i Infrastructure was designed to be the sole vehicle for all the firm's global investments in the space. “But then,” says Queen, “we entered into a relationship with the Indian Government and realised that the opportunity was so large that we needed a country-focussed vehicle.”
The relationship referred to was a memorandum of understanding signed with IIFCL, a wholly government owned agency set up two years ago to provide debt financing to Indian infrastructure projects (see also Asia Monitor, page 32). Queen explains: “Where $200 million of debt is required, the IIFCL will be the ‘first man in’ with $10-$20 million and other investors will coalesce around them. They're a pump-prime for the market.” Queen says the IIFCL “decided to enter into a series of relationships with equity providers to attract more capital and also so that the projects most suitable for equity investment could be identified and prioritised.” The relationship is not an exclusive one – India's IDFC Private Equity has a similar relationship, for example – but it's clearly a vital one. “It means we get access to a huge number of projects,” says Queen.
The first fruit of the relationship was seen towards the end of last year when 3i provided $227 million of equity and IIFCL the debt component for the acquisition of a stake in Adani Power, which is developing an independent 2,640-megawatt imported coal-based power plant in Gujarat. Queen says power is a key investment theme, and one where India has been markedly outstripped by neighbouring China. India, he says, is trying to reach China's
Queen goes on to describe the significance of India's power shortage in startling terms. “Forty-three percent of homes in India don't have mains electricity, and those that do sometimes experience a peak load power deficit of around 10 percent, which means that there are frequent power cuts. In Delhi, these can last six hours a day and the temperature is often in the mid-40s. So people use diesel generators as back-up, which produce a lot of Co2.” Queen uses this example to argue that criticism of investors involved in the creation of new power plants is misplaced. He says that the objective is to replace inefficient energy with a more efficient alternative and also makes the point that providing access to energy supplies to as many people as possible is a moral imperative as much as an investment opportunity.
Given the apparent scale of the opportunity, and the Indian Government's best efforts to draw attention to it, the lack of available capital seems surprising to say the least. Queen says the need to have the right contacts in the country's business community is a considerable barrier to entry. “People will tell you that the key business contacts in India are no more than around 500, most of whom have graduated from the country's institutes of management, which are extremely competitive. It's a network the like of which I've never seen anywhere else in the world – and you need access to that network.”
Queen continues: “A lot of funds have been staffing with non-resident Indians who have been through the education system in the US and believe that they can successfully reintegrate in India. It doesn't really work like that. Whenever you are a newcomer anywhere in the world there's a danger that you will be the dumbest money in town. All the old deal proposals no-one else was interested in will get dusted off just for you.”
That's not a trap Queen is likely to fall into, having become something of an infrastructure veteran. Having joined 3i as a 26 year-old investment executive back in 1987 (after he'd qualified as an accountant with Coopers & Lybrand), Queen was seconded to the UK Government's Treasury from 1994 to 1996, where he established and headed up the Private Finance Unit within the National Health Service to champion the rollout of public-private partnerships (PPPs) across the health sector, including developing contractual frameworks. He also became involved in PPP projects in the education, transport, prison and water sectors.
After completing his secondment, Queen recalls that he “sat down with the 3i board and said this will be a very big area for investment”, but it was decided that it was not the right time for a big push. “Then we began to see infrastructure opportunities coming through in other countries and that was significant because we needed it to be international.”
Queen says it was five years ago that Continental Europe first started to show its potential. At the same time, 3i began to analyse the opportunity in North America and Asia as well. Having become managing partner of 3i's global growth capital business in April 2005 – after eight years as group finance director – Queen was asked to run an infrastructure operation alongside it. Three years ago, the firm began setting up global infrastructure ‘hubs’, which resulted in bases in London, Frankfurt, New York and Mumbai.
The next major milestone for 3i's global infrastructure aspirations came with the launch of the listed 3i Infrastructure, which has built up a portfolio of assets diversified by geography, sector and maturity, and which is currently 88 percent committed. Investments to date include a 16.7 percent stake in T2C, a German waste-toenergy plant, and a 45 percent interest in three subsidiaries of Oiltanking, which provides storage facilities for petroleum products in Amsterdam, Malta and Singapore. The vehicle has also made a $250 million commitment to the India Infrastructure fund.
Well on course to beat an initial two-year plan for putting the IPO proceeds to work, 3i Infrastructure gained access to further funds in March this year when it signed a three-year £225 million revolving credit facility with Barclays Capital, Dresdner Kleinwort, Lloyds TSB Bank and the Royal Bank of Scotland. In addition, Queen anticipates a further capital raising “within the next six to 12 months”.
Continental Europe will continue to be a major focus of 3i's infrastructure efforts, with Queen describing the opportunity as “enormous”. He is enthused, for example, by energy deregulation in Germany, including the unbundling of distribution from production. Equally, he concedes that projects in the region “tend to come through the pipeline quite slowly”. Delays, not just in Europe but in other parts of the world as well, are frequently political in nature.“You need to advocate to politicians and to the general public the benefits of private ownership,” he says.
In the UK, where Queen cut his infrastructure teeth, he fears that sentiment is turning against private sector involvement in public projects. “It's a tougher political climate now and that's ironic at a time when opportunities elsewhere in the world are becoming very attractive. The UK Government has to be careful that hostility doesn't drive people to international markets where they're being welcomed with open arms.”
Queen notes that, following the PFI peak of the last five to ten years, the UK market has become “extremely competitive”.“ You initially had a benign political approach and that attracted in the big Australian funds and the US investment banks and deals became aggressively priced. Investors perceived the political risk to be low and I'm not sure that was entirely warranted. The Government has been getting a great deal – but I'm not sure it appreciates how well it has been doing.”
US TO TAKE THE LEAD
While the UK begins to look less attractive, over the other side of the Atlantic it's a very different story. The Minnesota Bridge collapse in August last year drew attention to the United States' long-neglected infrastructure. The urgent need for a huge programme of spending on renewal means that, in Queen's view, “the US will be the largest infrastructure market in the world within the next five years”. He adds: “There are few areas where US investment banks are hiring new staff these days, but infrastructure is one of them. We want to be a part of that market.”
To that end, 3i is currently recruiting its own team in New York. Earlier this year the firm hired Mark Murtagh, who spent the previous six years at New York-based mid-market private equity firm Liberty Partners, to head the operation. It's a good time to be building a team rather than doing deals, Queen maintains. “The US has an awareness of the need for infrastructure investment and there is regular commentary on the need for the private sector to get involved. But we're in the electoral cycle, which means that there will be no major project announcements before November. They will be a 2009 story.”
One chapter of that “story” is likely to be oil and gas pipelines. “The BP refinery disaster [when 15 people were killed in Texas City following an explosion and fire in March 2005] has focused minds on quality and safety,” says Queen. “There will be upgrades to existing pipelines and new pipelines built.” Chemical and oil storage and waste water treatment are other areas identified by 3i as ripe for investment in a US context.
Canada is also viewed by 3i as a potentially important market. Queen says opportunities exist in both energy and social infrastructure in the country. “It's where the UK was six or seven years ago in PFI and the peak is still to come.” He adds: “The debate is whether we should approach the market out of New York or whether we need to be in Toronto.”
Nor is the infrastructure opportunity restricted to those markets already given a mention here. Queen is enthused by emerging market possibilities beyond India, though in some cases he argues that the legal framework so essential to supporting infrastructure's long-term contracts needs to develop further. At the other end of the spectrum, he would love to do deals, he says, in the world's most mature infrastructure market of Australia – but admits that, as a newcomer, it would be tough for 3i to compete against “lots of established players”.
LESS IMPACTED THAN PE
In light of the opportunity opening up around the world, has the credit crunch and its aftermath come along at precisely the wrong time? Queen claims that infrastructure has been relatively less impacted than private equity. “Undoubtedly banks are cautious about the debt they will provide, and the scale a year ago is different from today. But the terms of debt are not that different to a year ago. Infrastructure offers good asset backing and good cash flow cover. The potential of infrastructure investment has been slowed by the credit crunch, but I think things will return to normal after six to 12 months.”
Perhaps a greater danger to infrastructure investors than the liquidity crisis is that of public and/or political sentiment turning against them. “You're investing in extremely sensitive assets such as hospitals, schools and utilities,” Queen points out. “They're important to governments and they touch the lives of voters. It's important that the rewards and benefits of infrastructure investment are shared among the widest possible group.”
Queen feels that infrastructure funds must be as transparent as possible in their dealings with the public, including their reporting. For a listed fund like 3i Infrastructure this is to a degree proscribed by the UK's listing rules and Companies Act, but he says there is still a debate about how to report in the most effective manner. “I think it will evolve and we want to be involved in any debate,” he says, adding that quality of reporting rather than quantity is the key issue. “Some listed companies report in great detail but that detail can be counterproductive – it's hard to see the wood for the trees.”
Seeing things clearly – and understanding where opportunities lie – is a knack Queen seems to possess. That impression will be reinforced should 3i's early foray into India prove to be an astute move. One thing already evident is his dedication – Queen currently spends a week each month in Mumbai and a second week in New York. “Travel's never an easy thing but you get used to it,” he insists, without a hint of fatigue. Sceptics should consider that something at the end of those long-haul flights is clearly keeping Queen rejuvenated.