Infrastructure Q&A: Luis Miranda
Luis Miranda, President and CEO of IDFC Private Equity, talks about the Indian infrastructure opportunity, and international interest.
Q: How would you characterize the state of infrastructure and infrastructure investing now and looking forward?
A: It's not so much an Asian problem; it's a global problem. There are problems in Europe, in the US, and so on. In my view, the only country which really has good infrastructure that is modern among the large economies is China, because they've spent a lot on it.
And as countries come out of the GFC, they realize that they don't have the cash to build it out. So they're relying more on the private sector.
Q: How is the opportunity evolving?
A: Before the GFC, infrastructure had become the biggest opportunity to invest in India, and a large part of that had to do with the government of India. It focused a lot on this segment. The Prime Minister, whenever he spoke, pointed out the need for it. And then, with the GFC, there was less capital available. If you look at it today, where the largest investment opportunity is, where the most money is going, is to infrastructure. You look, for example, at the six largest deals that have happened [lately]: five are them are in infrastructure. It's the same story with the largest IPOs.
Q: What's the breakdown in private equity involvement between domestic players versus international funds?
A: There's a lot of money from all over the world coming into India. All the large players are here: Macquarie has set up a JV; 3i is here too. Actually, one of the challenges we have today is too much money chasing too few deals. [But] the biggest competition we have is not from other private equity funds but from public markets.
That's because the public markets at times are willing to pay a valuation which private equity or infrastructure guys would not.
Q: Where do you see the most interesting investment destinations for this money?
A: I see it actually going into power … today, given the uncertainty in the global markets, there's a lot more comfort in investing in domestic plays, where you're less vulnerable to externals. Power comes out as the big story in India.
The next would be roads. We have a new minister who's talking about increasing the speed of development by 10x. So there's a lot of money interested in getting into that space. And we've invested in about 30 roads across the country. And we're to some extent enjoying the interest current in it.
Q: What about the chief risks?
A: I think the biggest risk that investors are NOT seeing is execution risk. I'd say it's near being totally ignored and, frankly, that's a big worry. You see, for example, investors paying value for future development which could be delayed just because execution is always a challenge. There are issues with land acquisition, environment, actual construction, testing equipment…
Q: Why is it being ignored?
A: First, I think the entrepreneur in India is doing an excellent job of selling his business/product. The second is that there's a lot of liquidity, and people need to deploy that liquidity. So where else can they deploy that money? They feel that India is interesting and that the risk, if there, can be managed. A third reason might be simply that the growth is in India, and people want to be a part of that growth story and are therefore inclined to pay a higher price.
Q: Apart from execution risk are there others we haven't touched on?
A: There is a fear also that a lot of companies in India may be taking on more debt [than is healthy]. That's also a legacy of what happened in 2008. When the market slowed down and valuations came off, it was easy for a lot of companies to take on debt here, and the banks were supportive of this – and rightly so, because no banks here really lost money from the GFC. They were supportive of the need to provide liquidity. So today we see many companies carrying a lot more debt than would normally be prudent. That said, many of them are out trying to raise equity to de-lever themselves. But still, my point holds.
In conclusion I'd say that the infrastructure opportunity in India is very real and large, but people need to price risk appropriately, or they'll lose money. Simply saying "I want to invest in India and be part of the action" can lead to pain at times.
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