Monday, December 4, 2017

The alternative assets universe and India

The latest quarterly update of infrastructure funds from Preqin shows that the total dry powder held by unlisted infrastructure funds has reached a record high of $154bn as at September 2017. Most of this is routed to N America and Europe, with just $20 bn earmarked for all of Asia, including China and Japan. 
As regards India, the total dry powder currently available aimed at investing in India is just $3 bn. The vast majority of this comes from overseas funds, rather than domestic fund raising. In fact, India forms just 7% of the $65 bn unlisted infrastructure assets in the Asia-Pacific region. 
As to the entire alternative investment funds industry - private equity, venture capital, real estate, infrastructure, private debt etc - the total assets under management (AUM) as of December 2016 was $598 bn. India's share was $42 bn, of which $13.5 bn was the dry powder.
The major share of the AUM in India went into PE/VC funds. The PE sector has been boosted by the pick-up in exits, $10 bn in each of 2015 and 2016, and $7 bn to date this year.
While $7 bn of the $23.6 bn in the PE/VC sector is dry-powder available for deployment, a very small proportion of this is currently earmarked for buyouts. This allocation is contrast to elsewhere, including in Asia, where buyouts form the dominant share. 
Two observations

1. The government has planned infrastructure investments in the range of $700-1000 bn over the coming five years. It is estimated that a significant share of the investments will come from foreign investors. But, as these numbers show, we would be happy if even 10% of these investments come from abroad. Therefore, expectations of the National Infrastructure Investment Fund (NIIF) being able to leverage its $3bn corpus ten-fold etc are simply unrealistic.

One approach to attracting more infrastructure funds is by selling commissioned assets where revenue streams are predictable. Entities like NTPC and NHAI should consider divesting certain existing assets both attract infrastructure funds as well as mobilise resources to finance newer projects.

2. The new Bankruptcy Code and the resultant wave of distressed assets sales promises to flood the Indian market with massive buyout opportunities. The domestic market may not be deep enough to absorb anything beyond the first few sales. Foreign buyout funds would be essential for the fair price discovery required to make these sales sustainable, both commercially (for banks) and politically. 

While the currently earmarked amounts India-focused buyout funds is negligible, this distressed asset sales present a great opportunity to attract a big volume of such funds and deepen India's alternative assets market. This may require more strategic approaches to some of these sales, including bundling assets into groups so as to make it large enough to be commercially attractive.

As to the distressed assets sales themselves, two articles in Mint point to the challenges that are likely to be faced going ahead. One concerns the 26 GW of thermal power assets without any power purchase agreements, which makes them risky even after write-downs and restructuring. In these cases, as I have argued earlier, it may have to fall on NTPC to become a buyer of last resort.

The other one relates to steel sector, where the problems are worse still and massive haircuts may be necessary. And, unlike with power assets, it may be very bad idea of have an inefficient SAIL buy them up. In this case, strategic sales by bundling assets assume relevance.   

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