Mumbai: IDFC Project Equity Co. Ltd, which manages the $930 million (Rs4,240 crore) India Infrastructure Fund focused on public works, was busy adding to its investments last year when most private equity (PE) investors were engaged in troubleshooting at portfolio companies struggling with the economic slowdown.
IDFC Project Equity is a subsidiary of Infrastructure Development Finance Co. Ltd (IDFC) and only invests in infrastructure assets.
In an interview, IDFC Project Equity president and chief executive M.K. Sinha says that infrastructure assets consistently generate returns irrespective of an economic boom or recession. Edited excerpts:
You were the most prolific private institutional investor last year, with five deals totalling an investment of $230 million, according to VCCEdge (VCCircle’s financial research platform). How do you see deal-making going forward?
We just converted the deals that were in the pipeline from 2008 onwards. So before public markets took off, we ended up closing a lot of deals. After the boom in public markets, we have done only one deal. We are very concerned about valuations. We do not pay more than what we should.
Growth area: IDFC Project’s Sinha says the infrastructure sector consistently generates returns. Santosh Verma/Bloomberg
How are you different from IDFC Private Equity, which also has infrastructure as its central theme?
We are two different asset classes. We are an annuity investor, they are a growth investor. They invest in businesses, we invest in assets. We invest in core infrastructure, they have a theme which is infrastructure, but that is widely defined.
In growth equity, the dividends are reinvested into the business, whereas we like to collect our dividends. We will invest in ports and not shipping; airports and not airlines; roads and not an automotive or an EPC (engineering procurement and construction) company... Where we are similar is that the management fee and compensation structure is the same as the PE arm.
Within infrastructure, which sub-sectors look more attractive?
Infrastructure constantly generates returns in high teens across sectors. Opportunities are high in the power and road sectors. As over 70% (by way of traffic) of Indian airports are already privatized, there is not much opportunity left here.
How do you deal with the longer gestation period in these projects?
We come in at financial close or when projects are under construction. The technology involved in infrastructure projects is fairly standard. We are happy to take on construction risk. There is visibility of usage and cash flow as soon as you construct. We don’t care about the gestation period as long as the first dividend cheque comes in three years.
What is your exit strategy?
We may never exit our investments. It’s an annuity stream once the first dividend cheque comes in. We could package it and sell our fund as a listed fund. Our investment horizon is typically much longer (seven-eight years), unlike private equity (three-five years). If we get our fund listed, we don’t need to exit investments as long as we get annuity income out of it. It’s like buying a house, renting it and living off it. Like REITs (real estate investment trusts) in the real estate sector, we are doing the same thing for our infrastructure assets.
When do you plan to list the fund?
The best time would be when we have fully invested the fund with most of our assets generating annuities. I don’t know how soon that will be. We will invest the fund in two years and probably, two-three years later, our fund will start generating annuities. That is the kind of time frame we will look at.
In terms of returns, how are you positioned against the PE arm?
Returns in private equity are higher than project equity. They make 23-25%, while we make 18-20% over 10 years, which we think is better than making 25% over three years because what matters is income. IRRs (internal rates of return) don’t really matter as our horizon of investment is longer and steady.
Is infrastructure an easy sell?
The Indian infrastructure story is known to everyone, so it’s an easy pitch. The challenging thing is to prove your credentials. We were the only Indian entity successful to raise money in 2008. IDFC has a dominant prominence in project finance, investment banking, mutual fund and private equity, and has huge credentials in Indian infrastructure. We cumulatively raised $1.6 billion when no one else was able to raise money.
In fact, we initially planned to raise a bigger fund of about $2 billion, but our investors asked us to first invest $1 billion and then go back to them. About one-third of the fund is invested till now.
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