Follow
Luis Miranda

Time is ripe to back Infrastructure Developers

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. 

Post Your Comment
Name
Required
Email
Required, will not be published
Comment
All comments are moderated
 

Comment
Well What is the status now/today, will you ivest in any of the companies expcept L&T and sleep well in night
Anshuman Goenka
I am surprised at your optimism especially since the leverage plaguing most "passionate" developers, is, for want of a better phrase, high. While this was an "undiscovered" sector in 2003, today, this sector survives a flood of capital that washed almost all companies during 2006-10, companies with little execution capabilities who made aggressive bids to win projects at terms which belied economic sense. Just a question: there is so much secondary paper in this sector available today. What would you buy?
Anshuman, I wanted to put things in perspective. We often believe (many times fueled by the media) that we live in unique times. But if we look back in time we find that similar situations occurred in the past. I don't track secondaries, and can't help you in that!
Vicky Menezes
Great article Luis, India desperately needs investment in infrastructure. But its still risky business in a country like India. A lot depends on stable policy in infrastructure.
Vicky, absolutely true. Any new business which deals with a developing regulatory framework in a politically-sensitive are is bound to be risky. Unfortunately the politicians do not have the ability to push through effective measure ... the last time it was done was during Vajpayee's tenure when the Golden Quadrilateral was conceptualised.
Great memories of the exciting times seeing you do that first deal! Infrastructure has come a long way since then! You should be proud to be a pioneer of that sector!
Thanks. Those were good days before everyone started paying stupid prices to bad developers for poor projects. We had our fair share also.
Great stuff Luis. Infrastructure investments are the key to making India a great country. But we need to get rid of the corruption, crony capitalism, outdated technologies and scumbag politicians and their bureaucrat chamchas out of the system first in order to have world class infrastructure in India.
Rajat, Thanks for your comment. I believe that we cannot get rid of corruption (your old state of Florida is very corrupt) and crony capitalism easily ... what we need to focus on, instead, is accountability. Some developers have built world-class infrastructure deploying the latest technology - see some of the airports, ports and roads in India. However, a lot more developers have taken shortcuts. So if we had better accountability (from everyone, including users), we would see better infrastructure.
Luis, I agree with you that corruption is rife in Florida. Afterall, Bernie Madhoff lived in West Palm Beach and sold his wares to folks in Boca Raton, which was the town next door to Delray Beach, where I lived for a decade.
However, there is a big difference between India and Florida or the USA for that matter. In India, the corrupt get away with everything - just look at the crooks and scamsters in the current UPA government. They spend a month or two in Tihar Jail and when the media glare subsides or moves onto to the next scam, the crooks are out and living in the luxury of their ill gotten wealth.
In the USA, crooks end up in jail for life or atleast for a very long time. Bernie Madhoff will die in prison. Same is true of many other major crooks like the ones from Enron, Worldcom and so on.
However, the Joe Blog or the aam aadmi of America is always treated with dignity and with courtesy. The number of times I violated simple rules of driving are many. Yet I did NOT have to pay a single fine because either I said sorry or because the court clerks did not think that I had done anything seriously wrong.
As I mentioned to you in my email, the 30 year old infrastructure in Florida looks brand new while the brand new flyovers in Delhi and Mumbai look like they are 30 years old.
The Vice Chairman of SREI Infrastructure once told me that the boilers and other power plant equipment which are used in India are often of poor quality and look like pieces of junk even before they are installed.
No wonder Terminal 3 in Delhi has leaking roofs and the much vaunted Reliance Airport link metro from Terminal 3 to Connaught Place fell apart right at the beginning.
India needs a huge amount of investment in infrastructure but unless things are done the right way, our infrastructure will remain a nightmare that it currently is. The airport terminal in Goa, is a classic example of poor infrastructure. No wonder Florida gets 40 million tourists a year while Goa gets just 400,000 international tourists and that too when the natural beauty of Goa is multiple times better than the natural beauty of Florida.
I hope to see my Mother COuntry get the infrastructure it deserves.
I like the tone and the take of the piece. It is such a refreshing look at the otherwise gloomy narratives on infrastructure :-)
Dear Himanshu, Thanks for the comment. One has to be creative in today's environment to be optimistic! We often ignore history and feel that we are going through the best or worst time. History can teach us a lot. Luis
What about the Greedy business men who bid impractical lower tarrifs & later on started crying showing all the things right from increased fuel to unavailability of gas. Don't tell they invested 1000 crores of amount without analyzing these basic risks!!!!
Dear 'Indian', Beating up greedy business men is fine, but remember that the Markets occasionally get it wrong while the State only occasionally gets it right. I would rather have a greedy businessman build infrastructure and get penalised for doing it wrong (after all the State is the Regulator, and can't hide away from that role) than be stuck with poor infrastructure. Just look at the quality of roads, airports and ports that we used to have when the State only built it - no one challenged the huge cost overruns then. Road construction cost for NHAI has come down dramatically after the private sector got involved. As a rule, the private sector will be more efficient because of incentives. There will always be exceptions - like the Delhi Metro that the public sector developed. Luis
 
 
Luis Miranda
Luis Miranda started investing in India's infrastructure before it became fashionable. He started IDFC Private Equity and was earlier a part of the start-up team of HDFC Bank.
Luis has invested in and has been on the boards of companies like GMR Infrastructure, Delhi International Airport, Gujarat Pipavav Port, Gujarat State Petronet, L&T Infrastructure and Manipal Global Education.
Today he is involved with various non-profits like Centre for Civil Society, SNEHA, Human Rights Watch, Gateway House and Samhita Social Ventures. Luis graduated with an MBA from Chicago Booth.
 
 
 
Luis Miranda'S POPULAR POST(S)
Most Popular
Luis Miranda's Activity Feed
October 10, 2013 01:11 am by Prasun
Well What is the status now/today, will you ivest in any of the companies expcept L&T and sleep well in night
May 22, 2013 16:02 pm by Luis
Anshuman, I wanted to put things in perspective. We often believe (many times fueled by the media) that we live in unique times. But if we look back in time we find that similar situations occurred in the past. I don't track secondaries, and can't help you in that!
May 13, 2013 13:20 pm by Anshuman Goenka
I am surprised at your optimism especially since the leverage plaguing most "passionate" developers, is, for want of a better phrase, high. While this was an "undiscovered" sector in 2003, today, this sector survives a flood of capital that washed almost all companies during 2006-10, companies with...
May 12, 2013 11:59 am by Rajat Bhatia
Luis, I agree with you that corruption is rife in Florida. Afterall, Bernie Madhoff lived in West Palm Beach and sold his wares to folks in Boca Raton, which was the town next door to Delray Beach, where I lived for a decade.
However, there is a big difference between India and Florida or th...
May 11, 2013 15:43 pm by Luis
Vicky, absolutely true. Any new business which deals with a developing regulatory framework in a politically-sensitive are is bound to be risky. Unfortunately the politicians do not have the ability to push through effective measure ... the last time it was done was during Vajpayee's tenure when the...