The recent episode of private equity investor General Atlantic Equity Partners filing a petition in Company Law Board against Fourcee Infrastructure Equipment Pvt. Ltd, seeking to appoint a CLB administrator to take control of the infrastructure services company (alleging the promoters have been siphoning money) manifests the simmering dissatisfaction of PE investors of infrastructure companies. The reasons for the discontent are obvious. Anyone associated with infrastructure companies would know about the pathetic corporate governance, promoters siphoning funds, the cooking of books, auditors being hand in glove with promoters, and so on.
As long as the infrastructure sector grew and fetched good returns, corporate governance issues didn’t matter. Only when growth tapered in the sector and investments eroded almost 90 per cent in market value did such issues surface.
PE investment in the infrastructure sector in India has grown from $1 billion in 2006 to about $2 billion per annum by 2012. Cumulative PE investments is $19 billion, representing 31 per cent of total PE investments of $62 billion in India.
Equity share
PE represents a modest share of the equity requirement of the infrastructure sector. The Planning Commission projects $1 trillion spending in the 12{+t}{+h} Plan (2012-2017). Half of this has to come from private sector funds, 30 per cent through equity and 70 per cent through debt. Hence the requirements would be roughly $30 billion per annum — a mammoth ask.
The diminishing interest for investment in the infrastructure sector is due to lack of sound corporate governance practices, delays in land acquisition and environmental clearances, weak project execution capabilities, delayed working capital cycles and lack of visibility for exits.
The telecom sector is plagued by controversy. Power sector investments are falling as coal linkage and pricing issues are yet to be satisfactorily resolved. The growth in roads has nearly stalled.
Expectations belied
PE players have entered the infrastructure sector with high return expectations. However, infra companies have failed to create exits, returning just $4 billion so far, about a fourth of total PE capital invested. In 2012, the industry saw six exits worth just $27 million. About $15 billion in the infra sector is stuck.
The infrastructure sector has singed many PE investors who invested at peak valuations during 2006-2010. If these investors were to exit today at the existing low valuations, they would lose up to 90 per cent of their capital.
Many PE investors also sit on the boards of infra companies as independent/non-executive directors in order to have a say in key decision making and to safeguard their investments. Of late, due to stretched working capital cycles and banks’ unwillingness to enhance lending limits, many of these companies have been delaying or defaulting on their payments to employees, suppliers, subcontractors and tax authorities. As a result, legal cases are being initiated against the companies, including against their PE investor-directors. Hopefully, going forward, things will change for the better for the sector and its investors if government gives the required thrust to the sector by actually spending the stated $1 trillion for infrastructure development.
(The author has worked as CFO in infrastructure companies. The views are personal.)