Mumbai: IL&FS Investment Managers Ltd, the only publicly traded private equity fund manager in India, is raising a $500 million infrastructure fund to invest in roads and energy projects.

The fund manager started raising money for its latest infrastructure fund late last year from global limited partners, or LPs (investors in private equity funds), said Archana Hingorani, chief executive officer of IL&FS Investment Managers.

“We are targeting a first close for the fund during this financial year and a final close in the next financial year, generally within 12 months of the first close," she said.

One of India’s top private equity fund managers by assets under management, IL&FS Investment Managers has lately focused on raising new funds and managing exits from previous funds. The company is nearing the final close of its latest sector-agnostic growth private fund, Tara India Fund IV. It announced a first close of $40 million for the fund last year.

IL&FS Investment Managers has assets under management of $3.2 billion. The fund manager has made over 163 investments across 13 funds since it started operations in 1996.

Private equity and venture capital investors have pumped a record $22.9 billion into India in 2015, according to Bain and Co.’s India Private Equity Report 2016.

Hingorani said there has been a marked improvement in the perception of LPs towards Indian private equity. “Two years ago, nobody was willing to consider an India strategy because of the high degree of uncertainty. The view was very pessimistic," said Hingorani.

The development also comes at a time when India’s gross domestic product (GDP) growth has accelerated from 6.2% in fiscal 2013-14 to 7.6% in 2015-16.

India-focused funds raised $3.8 billion in calendar year 2015, as against $3.4 billion and $2.3 billion in 2014 and 2013, respectively, according to data compiled by private equity investment tracker Preqin.

However, there has been a churn in the traditional LP base committing to India till now, Hingorani points out.

“The American investors, who made large commitments to India, especially in the real estate space, have changed profiles after the financial crisis. They have either hived off emerging market strategies, or are looking at a fewer number of relationships or have completely stopped their international portfolio strategies," said Hingorani.

Investors from eastern markets such as Australia, China, Japan and South Korea, which did not participate in a meaningful way in the last wave, are keenly interested, she added.

“Today, investors are not comfortable looking at a portfolio that is 100% invested in new projects as the risk perception on such a strategy is quite high" said Hingorani.

“But, we still think it’s not possible to convince an international investor to come in India and just do ready/operational assets, because the returns when converted in dollars, which would be around 8-9%, does not give them enough capacity to justify why they are investing here," she added.

“In order to make sure the portfolio is risk mitigated to some extent but does allow for participation in larger return transactions, we will invest in a combination of ready and new assets," she said.

The fund will also allow co-investment in projects by LPs.

While LPs are looking at the infrastructure space more closely than a couple of years ago, given their previous experience, they are exploring more direct investments and co-investment opportunities, said Sanjay Sethi, managing director and chief executive at infrastructure advisory firm Nestor Consulting India.

“The market has undergone a lot of change and today, people are toying with different frameworks, as returns have, by and large, been muted in the space. Hence, you see some of the large LPs taking the direct investment route or investing in platforms that allow them co-investment opportunities," said Sethi.

In addition to roads and energy, IL&FS will also look at opportunities in waste management, ports and logistics.

IL&FS is also looking at expediting the sale of some of its investments.

The firm has several mature investments both in realty and infrastructure. In 2008, IL&FS Investment Managers raised a $658 million pan-Asian infrastructure fund jointly with Standard Chartered Bank. The Standard Chartered IL&FS Asia Infrastructure Growth Fund made nine investments in infrastructure assets in Asian markets, primarily in India and China.

“Anyone who has invested from 2005-12 is going to see challenges in terms of completing exits. Although there are a lot of exits happening, we still have a fair bit of the portfolio, especially the last couple of funds that need exit," said Hingorani.

Investments in infrastructure and real estate projects have suffered due to approval delays. “Once you have lost 3-4 years, even if that project does well and gives the same cash flows, the delay has eaten into your net present value and since the rupee has devalued, its impact is quite severe," she said.

The inability of fund managers to exit profitably was further compounded by the depreciation of the rupee against the dollar. IL&FS recorded exits worth 2,189 crore in the year ended 31 March, compared with 1,171 crore the previous year.

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