Article by Sonny Lulla of Infrastructure India plc
Sonny Lulla of Infrastructure India plc discusses the company's experiences investing in infrastructure businesses in India.
In March 2011, Guggenheim Global Infrastructure Company (GGIC) sold its two Indian infrastructure investments to Infrastructure India plc (IIP) in return for share consideration. The co-founders of GGIC were appointed to IIP's board, while an affiliate was appointed manager.
Rationale for the deal
The rationale for the transaction was relatively straightforward: a lack of diversified, well-managed, UK-listed, actively traded equities were preventing public market investors from accessing India's burgeoning infrastructure industry. IIP was originally envisioned as one such company, but unfavourable market conditions meant it needed a catalyst to help get it there. The addition of the GGIC-owned businesses, coupled with the strength of IIP's investment pipeline in India, provided just that.
Investment opportunities
Since March, IIP has made an offer for and acquired Indian Energy Limited (IEL), an AIM listed developer and operator of wind energy projects in India. It has increased the size of IIP's investment in the Shree Maheshwar 400 megawatt hydropower project at accretive returns to IIP shareholders and it has also consolidated full ownership of Vikram Logistic & Maritime Services (VLMS) into IIP. IIP now has investments in three strong projects in India and additional outright ownership of two scalable businesses in attractive sub-sectors of infrastructure, namely renewables (IEL) and transportation and logistics (VLMS).
Investment approach
Investing in infrastructure businesses should be approached as much from the vantage point of developer as investor, as there is significant value to be created in disciplined project development. One of the challenges faced by investors in India is finding reasonably priced transactions with reliable project partners. Outright ownership of IEL and VLMS means IIP can deploy significant capital into businesses that it controls (and whose management the company appoints) to develop projects and earn attractive returns for investors at the base cost of the asset, not at a large premium. VLMS's recently announced acquisition of Freightstar is one example of this strategy at work.
IIP is also positioned to invest opportunistically (and disinvest) smaller stakes in other infrastructure businesses that meet its investment criteria. Those criteria focus us on basic, hard-asset, project-financeable businesses which we understand. In our view, IIP's businesses have a sustainable advantage (and corresponding returns) coming from regulation, concession, location, monopoly position and contract.
Given the work IIP has done to date, the company seems well positioned to raise and deploy additional capital, giving it the scale it needs to achieve what we intended back in March.
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