Project Equity Proposition
Project Equity can be broadly defined as investing in an entity that primarily derives its cash flows from ownership of infrastructure projects/assets.
Infrastructure projects/assets are characterised by:
- Regulatory and/or natural barriers to entry like concession structure and/or, high initial investments and
long gestation periods - Regulated and stable cash flows over the long-term
- Relative protection against cyclicality
- Revenues hedged against inflation
- Long-term growth potential and predictable earnings
- Lower exposure to technological change
- Lower correlation to other asset classes
The above mentioned features of Infrastructure projects/assets ensure focus and make earnings relatively predictable. Project Equity investments in infrastructure are therefore usually considered to have low risks and stable predictable returns.
Historically, the level of investment in infrastructure in India has been low and infrastructure facilities and services in India remain largely inadequate, thereby providing significant opportunities for investment. To support this requirement the Government of India is keen on accelerating investments in the infrastructure sector in large part through Public-Private Partnership initiatives.
With the increase in private sector participation in infrastructure in India and given the capital intensive nature of infrastructure, there is a need for a significant amount of long-term equity capital to fund the development of new infrastructure as well as the acquisition of operational assets alongside private sector developers.
Indian private sector developers, especially small to medium size players, are looking to Project Equity investments to enable them to pursue the increasing number of infrastructure opportunities in the country. Considering the longer investment horizon and the fact that project equity investments are made with no compulsion of short-term exit, there is an alignment of interests with those of project developers. This differentiates project equity from other sources of capital and makes it an attractive proposition for developers while generating long-term cash flow and significant risk adjusted returns for project equity investors.
