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Sunday, October 9, 2011

For PE firms, energy is a red-hot pick

This story first appeared in DNA Money edition on Saturday, October 8, 2011.

The energy sector has attracted maximum investments from the private equity players during July-September, the third quarter of calendar year 2011.

Of the $2.25 billion worth PE placements across 98 deals in Indian companies during the quarter, about $823 million, or 37%, was in 16 energy-sector companies, according to data by Chennai-based research firm Venture Intelligence.

Vikram Uttam Singh, head-private equity, KPMG, said, “We saw deals of close to $5 billion in the energy space last year and what is happening now is an extension of it. One of the reasons for this is that until recently very few deals of this size were available in the market. Power industry is very capital intensive and hence the deal sizes tend to be huge,” he said.

Among some of the largest investments in the quarter are The Blackstone Group-owned Sithe Global Power’s around Rs1,280 ($261 million) investment in SKS Chhattisgarh Power Generation, Blackstone’s direct Rs500 crore ($111 million) investment in Visa Power and Goldman Sachs’ Rs1,000 crore ($204 million) commitment to ReNew Wind Power.

Industry experts said that increased traction in the energy space is also because most companies are adopting the cluster approach to fundraising (seeking investments in multiple assets) as compared to a single asset approach earlier.

“If you look at fundraising done by players like GMR and Sumant Sinha’s ReNew Wind Power these are all cluster transactions,” Singh said.

Also, unfavourable primary market is another reason for promoters to turn to PE firms. Interestingly, despite bad market conditions, energy companies are getting fairly good valuations from PE firms, which is visible in the number of deals getting closed, an expert said.

“A non-conducive market environment generally tends to favour the PE companies owing to discounted valuations. However, from the current deal momentum, there appears to be meeting of minds between the investor and the investee over valuations, which is good for others looking to raise PE money,” said a top official from an international investment advisory firm.

According to a KPMG paper on power sector last year, India has the fifth largest generation capacity in the world with an installed capacity of 152 GW as on 30 September 2009, which is about 4% of global power generation.

A recent news agency report cited that India has a peak-hour power deficit of about 14% and that the renewable sector comprises 6% of the total power mix.

Among other sectors that topped the PE wishlist included information technology and IT-enabled services, which was the second largest sectors attracting $437 million across 29 transactions. SoftBank’s $200 million investment in mobile advertising network InMobi was the largest deal in this space, followed by the $40 million raised by online group buying service from Bessemer Ventures with participation from existing investors IndoUS Ventures and Nexus Venture. Also Blackstone invested about $33 million in financial inclusion-focused tech firm Fino.

Interest in infrastructure firms operating in the roads and water projects helped the engineering and construction industry attract $279 million in eight investments across companies such as Soma Enterprise, HCC Concessions and GVR Infra Projects.

However, the PE investment during the third quarter was lower than the same period last year ($2,357 million invested across 111 deals) and also the preceding quarter ($2,911 million across 122 deals).

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