We want to focus on doing the largest transactions

Rahul Goswami, Managing Director, Greenstone Investment Banking, set up shop in Mumbai in 2014 after he moved to India from New York. Already one big-ticket deal (with the Aditya Birla – Abraaj transaction), and counting, Goswami would like to bring more new investors to India.

You´re a young firm. It´s been a good start.
Yes. When I came to India last year, I first focused on finding assets to finance. I started with some very small projects. These were portfolios of rooftops or small utility scale projects that gave us an understanding about the issues here. I´d also been advising the Aditya Birla group prior to moving, with the previous firm I was working with in New York. I´d already had that relationship and we were working with them on innovative financing solutions and ultimately, this broader capital raising process. The first six or seven transactions at Greenstone were primarily small-scale project financing deals and the transaction that we just completed is our first corporate level capital raising transaction. We are in the middle of closing five more delas and hope to announce this in the next six months. What is exciting is we are finding a lot of larger capital raising opportunities, sales of large portfolios as well as opportunities to arrange capital from overseas. We want to replicate a similar deal with other partners and we want to focus on completing the largest M&A transactions. We are a small bank, very focused and we are growing aggressively. We are also probably the only firm in India that exclusively focuses on raising capital for renewable energy developers.

Do you see the need for an investment banking firm focusing only on renewable energy?
I was afraid it would be too small a scope for exclusive solar, wind project financing and capital raising. But the sector is growing at such a significant pace that we are overwhelmed with opportunity. If you take a 10-year view of energy in general, there is lot of value to be created. Secondly, within that, I think renewable energy will have a large role to play. I wanted to be ahead of the curve and position ourselves as the number one financial advisor in this space in India. Our goal is to distance ourselves from our competition by inter-mediating relationships that are relevant to this space.

Are insurers, pension and endowment funds, etc., showing greater interest in RE projects?
II think it´s still early for those players to really come in. We know many insurance funds, pension funds and institutional investors. There are a few challenges. First, the type of capital that´s coming in from these types of groups tend to be more yield focused. In India, because of dividend distribution tax, you can´t actually take distributions and expect to make an appropriate return. As a result, most developers reinvest profits into new projects which tends to be a more suitable investment for private equity groups. The challenge with them is that the return expectations are higher. Consequently, the investors for this market are somewhat at odds with each other as project investments are a good match for yield investors, but taxes make this unviable. Large institutional investors are very risk averse and would expect large portfolios of operating assets and a strong concentrated pipeline.

For the types of ticket sizes that these groups have, the minimum type of deal they want to do is $150-200 million. In some cases we are looking at $400-500 million. There are few groups in the market who can absorb $200 million to $400 million of equity where more than half of that is going into existing operating assets. You have about four or five players and each of those particular cases will have their own considerations. Some of them have built projects in the past that may not have fully contracted PPAs; some of them might have return expectations that are below market. But all those are currently being explored and I do see that going forward, those types of transactions will start to happen. The other consideration here is the scale of the market is only now starting to get to a point where it´s becoming attractive. So yes, I do see more of those larger institutional players coming in but it´s not a guarantee and it´s not without some considerations being accepted by all the parties.

What the bigger institutional guys are looking for are large portfolios of existing operational assets. They want to invest in bonds; they don´t really want to take development risks.

For the types of ticket sizes that these groups have, the minimum type of deal they want to do is $150-200 million. In some cases we are looking at $400-500 million. Now, what kind of portfolio can take $200 million to $400 million of equity where more than half of that is going in existing operating assets. You have about four or five players and each of those particular cases will have their own considerations. Some of them have built projects in the past that may not have fully contracted PPAs; some of them might have return expectations that are different from the market. But all those are currently being explored and I do see that going forward, those types of transactions will start to happen. Unfortunately, because of the dividend structure, the nature of investing in India is more well suited towards equity, corporate equity types of players. The other consideration here is the scale of the market is only now starting to get to a point where it´s becoming attractive. So yes, I do see more of those larger institutional players coming in but it´s not a guarantee and it´s not without some considerations being accepted by all the parties.

Do you think it could be about two to three years before an entity like the Canada Pension Plan Investment Board (CPPIB)., for instance, makes an investment?
I wouldn´t think they are a year or two away. They have looked at all the major platforms here and they haven´t been able to get comfortable. Also, the return expectations are higher. I think people here feel like pension funds are this holy grail low of cost of capital. Just to give you some prospective, in the US, my partners are doing deals where equity returns on US projects in the solar space are 6.5-7 per cent. If I can get 6.5 per cent from a tier 1 entity like GE with double A, triple A rated off-take in the US with very clear policy risks, very clear transmission risks; what is the return I need in India? If you add 6-7 per cent for foreign exchange, we are already at 12-13. Now, we still have to adjust for the credit quality of the DISCOMs and the policy risks of India in general and you end at 15 per cent. People think they´ll come in at 10-12 per cent. I don´t think that´s realistic. But the benefits they have is huge pools of capital. Second, no need to exit. They want to be there for long the term, that´s also very helpful. So, they are well suited for this asset class but dividends, not acceptable. So you can make a profit from investments and the returns seem to be sufficient for them versus what they are seeing across the world. It´s not just one market competing here, so those are some things I see with pension funds.

Apart from that, what´s the comfort level?
When I left New York, very few people wanted to have a discussion there about India. It would be OECD markets only. To a large extent, that´s where a significant amount of capital is going but I think there are a few drivers if you were to look at the positive sides of India. Number one; from a macro perspective, it´s clear this is going to be one of the biggest markets in the world for renewable energy. Second; the issues with the OECD markets is that there´s a significant amount of margin compression. When I started we used to build projects in the US for 10-12 per cent equity returns, now I am telling you about 6-7 per cent. That´s a huge amount of compression. But even within that space the types of players getting significant utility scale capacity are limited to a handful of groups. One of the closest relationships I had in the US was with the company called NextEra Renewable Energy. They have over 20 GW of operating renewable assets which last year, I think was the entire capacity of India combined in one company. You have players like that and to compete with that type of scale and that type of cost of capital, it´s a very limited market for growth companies. That´s why rooftop has started to take off but the utility scale market is no longer accessible for the middle term players so much. Here we have opportunities for those guys to say that now we are not winning capacities against these giants, where else can we go for capacity? It´s not coming from Europe; it´s not coming from India; it´s coming from the emerging markets. That discussion has started to gain steam and I think it´s a function of all these factors happening. A lot of capacity is coming online in India; the returns tricky but the returns in the US maybe as part of a portfolio now makes sense to devote some resources to exploring these opportunities here. I think there is a compelling story, I think that it´s just getting around some of these nuances and having people understand that´s the trick and hopefully we can help intermediate a lot of that capital. All the relationships that I had in new York or in Europe, those are the ones I want to bring into India. We are currently working on the two other transactions where all our foreign investors are coming in.

These are big ticket deals or mid size?
Two of these are big-ticket; one of them is smaller sized but yes, getting overseas investors into India.