Blackstone to invest $4bn in India

Blackstone, the private equity group, said on Wednesday it expects to invest up to nearly $4bn in India over the next five years after it announced its biggest single transaction in the country so far, a $300m purchase of a stake in a local power generation company.

The deal shows how US private equity companies are ramping up their interest in the country, with rival Kohlberg Kravis Roberts also announcing two big deals this year.

V. Jayasankar, head of private equity at Kotak Investment Banking, estimates the total volume of private equity deals in India this year could top $8bn, or about two-thirds of the peak of two years ago.

Akhil Gupta, chairman and managing director of Blackstone Advisors India, said the group had already invested $1.25bn in India in equity commitments.

“If you look at our performance over the last five years and the fact that we’re a much bigger team now and much more experienced in India.

“We think that in the next five years we should be able to do two to three times what we’ve done in the last five years,” Mr Gupta said.

In Blackstone’s latest deal, the group is to invest $300m in exchange for a “significant” minority stake in Moser Baer Projects Private.

Last month, Blackstone took a small stake in Monnet Power, a subsidiary of listed Monnet Ispat and Energy, for about $59m. Monnet’s core asset is a coal-fired plant in Orissa, on India’s east coast. The deal is expected to close by the end of the year.

Moser Baer Projects has a diverse pipeline of thermal, solar and hydro power generation as well as coal mining operations.

Its parent, Moser Baer India, is a high-tech company but with a strong manufacturing base. It is the world’s second-largest maker of optical storage devices such as CDs and DVDs.

Mr Gupta said he expected to invest up to $1bn in India’s power sector in the coming years but any deals would depend on whether the projects had acceptable execution risk.

Power is a difficult sector in India because of challenges obtaining coal and other fuel sources, land issues, government regulations and political risk.

Sushil Bhagat, chief financial officer of Moser Baer Projects, said it is planning to build 5,000 megawatts of power generation capacity by 2016, 80 per cent consisting of coal-fired thermal plants.

This would require total investment of nearly $7bn for which the company had already secured about $1.1bn in debt.

Blackstone, the private equity group, is to invest $300m in exchange for a significant minority stake in Indian power developer Moser Baer Projects Private, marking the buy-out group’s second energy deal in as many months in the country.

The deal, which is expected to be announced on Wednesday, comes just days after Blackstone reached agreement with Dynegy to acquire the US independent power producer for $4.7bn, the biggest private equity transaction this year.

In the past, private equity groups viewed power companies as safe investments. But in recent years, they have proved risky because of volatile energy prices. The risk is magnified by the fact that buy-out companies place so much debt on their companies, meaning they have less flexibility to ride out hard times.

But the calculus is different in emerging markets, where economic growth is strong, especially in countries such as India, where demand vastly exceeds supply. “If you are bullish on economic growth in India, you have to be bullish on power in India,” said Dave Foley, who led the investment for Blackstone.

The risks of investing in energy in India, where power theft is a big problem, would have been far more daunting a few years ago. Regulatory interference in pricing has also been a big issue for independent power producers.

But in recent years, these energy merchants have been able to deal with Power Trading Corp, which functions as a clearing house, enabling power providers to minimise their sales to state electricity boards and the frequent disputes over pricing. In addition, the new venture will not sell power directly to retail customers, further reducing any political sensitivities.

Blackstone now has more than $1bn invested in India, with in excess of half of that dedicated to infrastructure and logistics. In July, Blackstone took a small stake in Monnet Power, a subsidiary of listed Monnet Ispat and Energy, for about $59m. That company’s core asset is a coal-fired plant in Orissa, on India’s east coast. The deal is expected to close by the end of the year.

Moser Baer Projects has a diverse pipeline of thermal, solar and hydro power generation as well as coal mining operations.

Its parent, Moser Baer India, is a high-tech company but with a strong manufacturing base, rather than specialising in software, the traditional comparative advantage of Indian high-tech businesses. It is the world’s second-largest maker of optical storage devices such as CDs and DVDs and also manufactures solar panels.