Macquarie Bank has been betting big on the world’s fastest growing economy, India, through its various infrastructure funds and joint ventures. One example is their recent L1 (highest) bid of $1.94bn for nine road assets under the Toll-Operate-Transfer (TOT) model. This deal is one of the largest FDI in public infrastructure in India, in terms of money received upfront and is part of the government’s plan to monetize publicly funded, operational national highways.
The TOT model requires the winning bidder to pay a one-time concession fee upfront (lump sum), which then enables them to operate the toll for a pre-determined concession period, in this case 30 years. Multiple provisions have been built into the agreement, designed to take care of eventualities like roadway expansion, high toll traffic variation, etc. to ensure that concessionaires are not exposed to undue risks.
Interestingly, the L1 bid was over 50% higher than the price of $1.26bn expected by the National Highway Authority of India (NHAI) and ~30% higher than the L2 (second highest) bid of $1.51bn placed by Canadian infrastructure giant, Brookfield Asset Management.
Whilst a cynic might feel that Macquarie’s aggressive bidding and the Equity IRRs are questionable, the fact is they have been operating and investing in India for a long time and truly understand the potential it offers. As Macquarie correctly points out, “This is a unique opportunity to invest in a high quality diversified portfolio of roads over a long concession period of 30 years. Macquarie Infrastructure and Real Assets (MIRA) managed funds have been investing in Indian toll roads since 2012.”
Some of the other investment projects undertaken by Macquarie in India include;
- Toll road projects - Trichy Tollways Private Ltd, Gujarat Roads & Infrastructure Corp, Swarna Tollways Private Limited
- Availability based road projects - GMR Jadcherla Expressways Limited
- Airports - GMR Airports
- Power / Natural Resources / Renewable Energy - Adhunik Power and Natural Resources, Ind-Barath Energy, MB Power, Soham Renewable Energy
- Telecom Infrastructure - VIOM Networks
Some of the other large global investment players holding majority stakes in Indian infrastructure assets include Goldman Sachs, Abu Dhabi Investment Authority, JERA - Japan, Global Environment Fund, GIC Singapore, Temasek Holdings - Singapore, Advent International, Actis LLP, United Kingdom and Canadian Pension Funds, I-Squared Capital among others.
The main point to articulate is that there is significant investor appetite from “sophisticated” players to participate early in the multi decade investment opportunity. It's a beckoning opportunity in a country which has always had excellent economic and geopolitical ties with Australia. So, are Australian investors ready to invest in India’s growth story, a market with 1.3bn people, majority of whom are under 30 years of age?
Thoughts and insights provided by Pratik Joshi, CFA, CAIA (Consultant, Research Advisor at Sydney headquartered India Avenue Investment Management)
Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique asset management company with offices in Sydney and Mumbai. He has over 20 years experience in Australia and is lead portfolio manager for the India Avenue Equity Fund.