A pause to India

The Indian infrastructure market may be slowing, but market participants remain optimistic about its prospects, writes Cezary Podkul.

As the fundraising slowdown in the second half of 2008 demonstrates, anecdotal evidence often precedes the numbers that eventually confirm a trend.

So with the Indian infrastructure market, except for one key difference: the optimism that led investors there in the first place is still holding firm.

Cezary Podkul

For much of last year, figures coming out of India showed infrastructure and real estate at the vanguard of deal activity in the country. In two consecutive reports by accountancy Grant Thornton – one in October 2008 and another in January 2009 – the two sectors stood out as the most active for private equity, attracting $3 billion in the first eight months of 2008 and $3.3 billion overall for the year.

Those deal values will be hard to top this year. Investors active in the region say the global financial crisis has firmly disrupted the flow of capital to infrastructure in India, from fundraising to deal activity.

“Last year, we probably saw 15 to 20 Indian funds which were in the market. Now, it’s between five and seven. Probably more like five and six,” comments one investor, who did not wish to be identified because of his firm’s corporate communications policy.

On the deal side, funds are not chasing as many deals as they used to. There are fewer bidders for large public tender projects since it’s become harder for them to secure financing. And those that do see a greater likelihood that they will have their financing pulled from a troubled lender. Not surprisingly, investment bankers aren’t shopping opportunities around as much as they used to – three or four potential investors at most, says one GP.

Despite these glum anecdotes, market participants remain remarkably optimistic. And the optimism goes beyond faith in the fundamental drivers of increasing population and the government’s inability to finance infrastructure by itself.

They point to the steps the Indian government is taking to de-risk projects, such as the state-owned India Infrastructure Finance Company’s Rs50 billion (€800 million; $1 billion) bond issue to facilitate lending to infrastructure projects. The country’s high savings rate will help absorb these bond issuances, they say, while falling raw material costs will make project delivery cheaper going forward.

An added bonus: in the near term, all say that some of the “froth” has been removed from the market.

“There will be fewer people in the market, yes, but I do think that it remains an extremely attractive proposition,” says Alastair King, head of Eredene Capital, a UK-listed fund that invests in Indian infrastructure.

Despite the market disruption, the firm is pushing ahead with plans to raise its first $300 million unlisted fund for infrastructure in the country: another sign that, while India may be cooling off, it is likely to continue to remain a hot destination for capital.