Q&A: Standard Chartered Bank's Andrew Yee

Q: How big an opportunity is India distressed infrastructure?

A: It's definitely the biggest opportunity right now. For the first time, there are quite a few control deals available. Even some of the larger local conglomerates are now looking to divest whole subsidiaries or operating assets, for example in the toll roads or power generation sectors, in order to urgently pay down debt in that vertical or in other parts of the empire. Unconstructed greenfield projects even with off-take agreements are not terribly valuable now given the significant delays experienced in recent years trying to get projects developed. An operating infrastructure asset with a track record of at least a few years is sellable - at least for book value if not a bit more if it's performing well. We are looking at a whole bunch of deals. The infrastructure private equity story used to be $50-100 million for a minority stake, with maybe a $200 million deal here or there. Now there are multiple deals in the $300-500 million range, and potentially some even larger.

Q: What has happened to valuations?

A: At the height of the market you had certain infrastructure assets trading at around 3x book value - and some of these assets weren't even built. Paying such multiples of book value for regulated assets, no matter where you are in the world, simply isn't rational. If you look at all the listed Indian power companies, they are now trading on an average book value of around 1.1x. With the listed toll road companies, the average price to book value over the last five years was at least 2x, rising to 3x when the market was at its peak, and the average now is less than 1x. Given these are listed portfolios of operating assets with some greenfield projects for growth, it's now possible to earn a decent return as you are paying close to book value for existing cash flow with sustainable long term growth.

Q: There has previously been talk of the China market opening more should the economy start to slow and companies have to address their mounting debts...

A: I'm a believer in the China macro story - it's slowed down in recent times but it continues to grow at a reasonable and steady rate - and I'm also a believer in the China infrastructure story. However, the sector is dominated by state-owned enterprises (SOEs). Returns have been driven down through SOEs often building market share or size rather than focusing on the bottom line. It's been very hard for private equity to find deals with the potential to generate the higher returns we seek - even getting 15% has been tough since the SOEs have a much lower cost of capital of say 5-7% and they are often prepared to invest in projects with returns marginally above this. So while I am a believer in Chinese infrastructure, the China private equity infrastructure investment thesis remains challenging. Not to be too pessimistic, we completed a buyout of independent power producer Meiya Power, which held for three and a half years and then exited at a 35% IRR. But the fact remains we have looked at many Chinese infrastructure companies and made just three investments in the last five years.

Q: So which areas are most attractive in China?

A: For the last five years, we have been focused on water - water supply (including desalination), waste water treatment, and waste management. A lot of different technologies are being used in these areas around the world, and the multinational companies that own this intellectual property are venturing into China. In some cases, these companies will partner with SOEs that provide the connections and muscle. We are helping to bring them together and hopefully take a stake in the projects or holding company, which we ultimately seek to exit by way of trade sale (often to one of the partners) or occasionally by way of IPO. Water and waste management feel like the toll roads and power of China a decade ago.

Q: How does Southeast Asia compare to China in terms of government influence?

A: It's all relative given the extent of Chinese Government involvement in its infrastructure industry! In Indonesia the government is also prevalent and somewhat protectionist in terms of rules and regulations but at the same time, since the Asian financial crisis, it has reconfigured some key infrastructure sectors, such as power generation or tollroads. However the big difference is that Indonesian SOEs do not have the resources to build out all this infrastructure and retain control as the Chinese government has done. As such, Indonesian infrastructure is at an earlier stage of development. A lot of projects are bid out and you have a mix of local corporations active in the space, some in partnerships with international firms. So you have China at one end of the spectrum, Indonesia in the middle and the Philippines is at the other end. There, you have a handful of huge conglomerates - the likes of San Miguel Corporation, First Pacific and First Gen - that dominate most of the key infrastructure sectors. Their modus operandi is to own 51-100% and do it their way. It's taken the Philippines government a long while to get moving on infrastructure but under the current president, things are finally starting to happen. The government recognizes that the big guys can get it done but is also trying to diversify away from the usual suspects with more PPP projects.

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• Topics
• Southeast Asia
• Greater China
• Infrastructure
• Infrastructure
• Standard Chartered Private Equity
• Infrastructure
• China
• Southeast Asia