Mumbai: Kotak Mahindra Bank Ltd has formed a three-way partnership with Japan’s largest bank Sumitomo Mitsui Banking Corp. (SMBC) and Canada-based asset management company Brookfield Asset Management Inc. to launch a $300 million (Rs 1,350 crore) infrastructure fund that will invest in Indian firms that generate and transmit power, and build roads and airports, a senior company official said.
The fund is the latest among many such that have raised nearly $9.5 billion to invest in infrastructure companies in India, which, according to the country’s Planning Commission, needs to spend $1 trillion between 2012 and 2017 to build roads, ports and power plants.
“Infrastructure is a natural fit given that we already have a real estate fund and a general PE (private equity) fund,” said C. Jayaram, executive director of Kotak Mahindra Bank. “Also, we have enough experience in corporate banking and investment banking and, hence, can leverage those relationships and networks.”
The three partners will contribute 22.5% to the fund— SMBC will put in 10%; Brookfield, which invests 30% of the $100 billion it manages in infrastructure companies, will put in 7.5%; and Kotak will invest 5%.
The domestic portion of the fund will be managed by Kotak Investment Advisors Ltd and the offshore one by Kotak Mahindra (UK) Ltd. Of the remaining money, around $50 million will be raised from Indian investors and the rest from foreign investors. The fund will invest most of the money in green and clean-technology projects.
“An infrastructure fund has to be a part of a larger institution that understands infrastructure financing,” said Raja Parthasarathy, managing director of IDFC Private Equity Co. Ltd, which manages a $1.3 billion infrastructure fund, but the biggest challenge is that there are not enough quality infrastructure assets being created, he added.
Meanwhile, factors such as high inflation, high interest rates, volatile stock markets and political uncertainty, apart from problems related to land acquisition, the bane of many infrastructure projects in India, may force limited partners that invest in PE funds to go slow on India and look for better returns elsewhere.
That’s where Kotak is expecting its partners to play a part. “SMBC will help us raise anywhere between $175 million and $180 million from Japanese investors,” said Jayaram. “Brookfield’s global network will help us raise money from European and American investors, besides identifying right companies to invest.”
The infrastructure fund marks the continuation of Kotak’s relationship with SMBC. Last year, the firm bought a 4.2% stake in Kotak Mahindra Bank for $295 million.
The expertise and experience of Kotak’s partners in the infrastructure fund should also come in useful.
“While there is a huge demand for infrastructure companies, limited partners (investors in PE funds) have become very sophisticated,” said Bhavik Damodar, executive director and head of infrastructure transaction services at audit and consulting firm KPMG India Pvt. Ltd. They will want to know if the team has any past infrastructure experience and whether they have seen the entire cycle of investing as infrastructure has a high gestation period, he explained.
Kotak, which started as a non-banking financial company in 1985, earns 65% of its profit by lending money to companies.
It plans to close the domestic portion of the fund by September and the offshore one by December. Kotak already has a real estate-focused PE fund headed by S. Sriniwasan, which has $800 million under management, and a general PE fund headed by Nitin Deshmukh, which has $650 under management.
“We will look to invest anywhere between $30 (million) and $50 million each in six to eight Indian companies over the next four-five years,” said Suman Saha, who will be heading the infrastructure fund.
Of all unlisted infrastructure funds targeting a single country within the emerging markets, the highest proportion is focused on India, according to data from Preqin Ltd, a UK-based research firm that tracks the alternative investment sector. There are currently 38 unlisted infrastructure funds with a preference for investment in India, 25 of which have already raised $9.5 billion.
Infrastructure has become popular with PE funds in recent years.
Last year, five PE firms, General Atlantic Llc, Goldman Sachs Investment Management, Norwest Venture Partners India, Everstone Capital Management, Morgan Stanley Infrastructure Partners and PTC India Financial Services Ltd, invested $425 million in Asian Genco Pte Ltd, which is developing hydro and thermal power generation plants that will together produce 4,000MW. The Blackstone Group has invested $300 million in energy company Moser Baer Projects Pvt. Ltd.
“Globally, large infrastructure funds acquire ports or airports or toll roads, which have already been operational for 15-20 years, but in India such assets have been operational only for the past 5-10 years, so the risks associated are more,” said IDFC’s Parthasarathy.