Mumbai: India Infrastructure Fund, or IIF, has invested $50 million (around Rs250 crore) in two companies floated by Nashik’s Ashoka Buildcon Ltd to build two stretches of road connecting two cities of Maharashtra and Chhattisgarh, according to M.K. Sinha, president and chief executive officer of IDFC Project Equity Co. Ltd, which manages the fund.
The fund has taken a 49% stake in these two entities, both structured as so-called special purpose vehicles, or SPV, which will build two stretches of toll roads totalling 162km between Nagpur in Maharashtra and Raipur in Chhattisgarh. SPVs are limited to the financing of specific assets.
Venture plan: IDFC Project Equity’s M.K. Sinha says almost 60% of the fund will be deployed between power generation and road projects. Santosh Verma / Bloomberg
This is the third investment from IIF, sponsored by IDFC, Citigroup Inc. and India Infrastructure Finance Co. Ltd (IIFCL). The first investment was for $70 million across four road projects, which acted as seed assets for the fund, and the second was a $70 million investment in Essar Power Ltd in March.
IIF was conceived in 2007 by IDFC, Blackstone Group LP, Citigroup and IIFCL to invest in India’s fledgling infrastructure projects. Going by government estimates, India needs $500 billion of investments in the infrastructure sector through 2012.
The fund was to raise up to $5 billion—$2 billion equity and $3 billion long-term debt—but the corpus was subsequently reduced, with IIF garnering $875 million in commitments from investors in June 2008, and on the road to close another $50 million.
Blackstone pulled out of the fund as the economics did not work in the US buyout fund’s favour.
“Almost 60% of our fund will be deployed between power generation and road projects,” said Sinha of IDFC Project Equity, adding that ports, airports, telecom infrastructure and power and gas distribution and transmission projects will make up the remaining.
The fund, according to him, will make investments at the project level, compared with private equity, which typically comes in at the holding company level, potentially exposed to several undeveloped projects.
“Our investments will be in projects that are either under construction or up and running, and are likely to generate dividends quickly. Our focus is more on regular cash flow by way of dividends, not just capital appreciation. Private equity can live without dividends and generate returns upon exit over three-five years. We would like to generate dividend income over the lifetime of the asset,” said Sinha.
That will mean that returns may not be as high as private equity, but a return mix that’s a blend between dividend income and capital appreciation on exit.
“When I say low returns, it’s still in the 18-20% range, but we’re not looking to generate those returns in two or three years. We’re looking to generate those returns over 8-10 years,” said Sinha. The fund term for IIF is 12 years, extendable by another three years.
Even as many listed infrastructure funds globally are hurting, there are not too many options for funds such as IIF to exit project-level investments, other than listing. “We do not borrow as a fund. Most of the other listed infrastructure funds that are hurting are those that have borrowed and do not have matching cash flows to service that borrowing. We do not intend doing that,” said Sinha.
IIF is negotiating exit options at the investment level as well. This could involve transferring its equity from the SPV level into a holding company at the time of the initial share sale or a put option or even a tag-along, which enables the fund to sell when the promoters are selling out. A put option will give the fund the right to sell its holding back to the promoter at a pre-determined price.
“There are various ways of exiting SPV investments as well. The most optimal one would be to list the fund, but we don’t know whether that will happen,” Sinha said.