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Mumbai: IDFC Alternatives, the asset management arm of IDFC Ltd, is working on exiting almost half-a-dozen portfolio companies in its first infrastructure fund to return capital to investors.

In 2009, IDFC Alternatives raised the India Infrastructure Fund, which had a corpus of $927 million. The fund invested across infrastructure assets such as roads, thermal energy plants, ports and hospitals.

“We are at the front-end of our exits in our first infrastructure fund," said M.K. Sinha, managing partner and chief executive officer at IDFC Alternatives, India’s largest home-grown asset manager with assets under management of over $3.4 billion across private equity (PE), infrastructure and real estate funds.

Currently, IDFC Alternatives is looking at exiting, completely or partly, several of its investments across roads, hospitals, and logistics companies.

Sinha said these exits will allow the fund to return more than half of the $927 million it raised from limited partners (LPs) or investors in PE funds.

“The fund has already returned about 20% of its corpus. and with these planned exits we would have returned around $500-600 million to LPs," he said.

LPs are usually pension funds, institutional investors and wealthy individuals. A PE manager that returns half the capital raised in seven years has better prospects of raising another fund.

PE funds are under pressure to return capital to LPs in the context of limited opportunities to exit profitably from big investments made in the boom years. Their ability to make profitable exits has been further crimped by the rupee’s depreciation.

According to Sanjay Sethi, managing director and chief executive at infrastructure advisory firm Nestor Consulting India, exits in the infrastructure sector continue to be a challenge, despite several positive developments in the sector over the last one to two years.

“Last one year has by and large been good for toll roads, with traffic going up by 6-8%. Lot of the issues faced by individual road projects has been sorted out. So to that extent, the overall market is looking more benign than a year or two ago for exits to happen. But on the valuation front, it will continue to be a challenging environment for exits," he said.

Sinha said India Infrastructure Fund has completely exited from city gas distribution firm Sabarmati Gas Ltd. It has partially exited companies such as telecom tower operator Viom Networks Ltd, in which American Tower Corp. acquired a 51% stake last year for 7,635 crore, and Karaikal Port Pvt. Ltd. The fund is also exiting smaller road projects where it doesn’t have a controlling stake.

“We are looking to exit our stake in SMS Shivnath Infrastructure, which operates the Durg bypass road (in Chattisgarh). We have stakes in two projects with Gayatri. We are looking at exiting those too," said Sinha.

The two projects with Gayatri Infra Ventures Ltd are a 49.3km stretch and a 50km stretch on NH 25/26 in Uttar Pradesh.

In June, Mint reported that US-based infrastructure investment manager I Squared Capital and India’s Tata Realty and Infrastructure Ltd are in contention to buy the 18.4km bypass road project at Durg, Chhattisgarh. IDFC Alternatives’ first infrastructure fund acquired a 48.4% stake in the project.

From the first infra fund, IDFC Alternatives is also looking to exit hospital chain Sahyadri Hospitals Ltd.

In February, Mint reported that IDFC Alternatives is looking to sell Sahyadri Hospitals, the largest chain of multi-speciality hospitals in Maharashtra, in a deal that could value the hospital chain at up to 1,000 crore. IDFC invested 190 crore in 2012 to acquire a 51% stake in the company.

“We will also exit some structured investments in the next one year," said Sinha.

IDFC Alternatives Ltd invested 350 crore in Mytrah Energy (India) Ltd through a structured finance transaction.

IDFC plans to stay invested in larger road projects and in the energy sector.

“We are not exiting other road and power assets right now. We think that in the next two-three years, as GDP (growth) picks up, demand will pick up," said Sinha.

The infra fund’s thermal energy investments include Adhunik Power and Natural Resources Ltd, Essar Power Ltd and GMR Kamalanga Energy Ltd.

IDFC Alternatives has continued to invest in this sector out of its second infrastructure fund, raised in 2014 with a corpus of $900 million.

In January 2015, it invested 500 crore in DB Power Ltd, a 1,200 megawatt (MW) project in Chhattisgarh. In April 2015, it bought a 23.5% stake in ONGC Tripura Development Company Ltd, a gas-fired power plant, for around 426 crore.

The second fund will also see IDFC build a renewable asset portfolio.

“Ideally 20-25% of the fund is what we could deploy in renewables, which would mean a couple of hundred million dollars. But we are not limited to that— we could get some co-investments from our LPs, so the investment could be much more," said Sinha.

A co-investment involves the fund and some of its LPs together investing in a company.

Mint reported in June that IDFC Alternatives is in talks to buy about 275MW of solar assets from ACME Solar. The fund, along with its LPs, was in the race to acquire 1.1 gigawatts of renewable power assets from Welspun Renewables Energy Pvt. Ltd.

The investment manager is also focusing on exits from its PE and real estate investment platforms.

“Our PE vertical is more mature, having returned two funds now and (made) some notable exits in Green Infra, Viom and Parag IPO," said Sinha.

Overall, IDFC Alternatives has had 27 exits to date from a total of 41 PE investments, realizing over $850 million. IDFC Alternatives is currently on the road to raise its fourth PE fund.

The real estate arm has also seen exits.

“Through our real estate vertical, we invested about $150 million in two office assets in 2011 and exited them in 2014 at a 22% IRR (internal rate of return); we have been making regular distribution and redemption from our first RE (real estate) debt fund of 750 crore," said Sinha.

Private equity funds invested in India returned around $9.4 billion in 2015, an increase of 57% in value terms over the previous year, according to Bain and Co’s India Private Equity Report 2016.

“GPs (general partners, or those who manage the fund) expect number of exits to increase, but volatile macroeconomic conditions, IPO market underperformance and a mismatch in valuation expectations could hinder exits," the report said.

swaraj.d@livemint.com

ABOUT THE AUTHOR
Swaraj Singh Dhanjal
" Based in Mumbai, Swaraj Singh Dhanjal is responsible for Mint’s corporate news coverage. For the past eight years he has been writing on the biggest deals in private equity, venture capital, IPO market and corporate mergers and acquisitions. An engineer and an MBA, he started his journalism career in 2014 with Mint. "
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