I recently spoke at a PE Conference after a long time. I started off by describing the power sector in 2003, when we started IDFC PE. The outlook looked very bleak. Many global players had started developing power plants in India during the previous decade and after struggling with archaic regulations for years, most of them had given up. The customers were mainly bankrupt electricity boards. Tariffs were low and did not make economic sense for the distribution companies. Political interference was high. The demand supply gap was large. Banks had significant exposures to the power industry. Fuel was an issue, with some plants using expensive fuel and gas was expected to be the savior. And, despite the passing of the new Electricity Act 2003, no sane investor would invest in the power sector.
Fast Forward to 2013. Many power plants developed in the previous decade are struggling because of fuel supply and environment issues. The customers are still mainly bankrupt electricity boards. Tariffs are ridiculously low. Political interference is high. Demand is way higher than supply. Banks are overexposed to the power sector. Fuel is an issue with the absence of gas from the KG basin and issues on domestic and imported coal. And, despite the moves by the Finance Ministry to instill financial discipline in the sector, no sane investor is looking to invest in the power sector. Amazing how things look the same, albeit at a much larger scale today.
But we did invest in power way back in 2003 – our first investment was in GMR Power, despite the power sector being the biggest disappointment over the previous 5 years. They had two plants that used expensive fuel – HSD and naphtha – and were developing a new plant fueled by natural gas (our diligence report highlighted the risk that the gas may not be available). And to top it off, no one on the team had invested in a power business before. We must have been smoking something very interesting to have done that deal! One of my professors at Chicago Booth, Steve Kaplan, wrote a case study on this deal. I was present in his class when he taught the case was the first time and the students highlighted the lack of power investing experience in the team as a huge risk in the deal. I agreed with them and said that if we had experience in the power sector we most probably would not have done that deal.
That deal ended up being our best deal ever. Of course, by the time we had exited some time in 2007 the deal had had changed significantly. Our share holding had flipped into the parent company and we had an IPO of a diversified infrastructure company involved in airports, power and roads. The IPO was priced attractively. We believed in the developer, we were creative in the way we structured the deal and we had no experience investing in power.
I believe that we have moved full circle and the time is back to do deals in infrastructure – backing passionate developers (if they still exist) who want to build world-class infrastructure.
Luis Miranda spent the last decade investing in India’s infrastructure. He started IDFC Private Equity in 2002 when there was hardly any risk capital available for India’s infrastructure because people didn’t believe that you could make money by investing in India’s infrastructure. IDFC Private Equity identified interesting opportunities and created innovative structures that helped infrastructure become the hottest investment opportunity in India a few years later. Luis has invested in and has been on the boards of companies like GMR Infrastructure, Gujarat Pipavav Port, Gujarat State Petronet, L&T Infrastructure and Manipal Global Education. He was involved in the highly successful IPOs of some of these companies, which created significant wealth for various stakeholders. Looking back, he is proud to be associated with great infrastructure projects like Terminal 3 at Delhi International Airport and APM Terminals Pipavav, which showcase India’s ability to build world-class infrastructure despite the constraints we face.