IL&FS targets smaller funds as investors turn cautious

IL&FS Investment Managers (IIML) plans to raise smaller funds for investment in the real estate and infrastructure business. The oldest Indian private equity firm sees opportunity for itself in fund sizes not more than $500 million, targeting 10-12 opportunities.

Its earlier real estate fund, IL&FS Realty Fund-II, raised a corpus of $895 million in 2008 against the targeted $750 million and made as many as 28 investments. Its earlier infrastructure fund, raised in collaboration with Standard Chartered Bank in the same year, was of $658 million.

"Given the time that has taken for every transaction to mature in the last economic cycle, it does not make sense to do beyond $500 million that gives you 10 transactions of $50 million," says Archana Hingorani, chief executive, IIML. "This is now where the opportunity for us is."

IIML manages assets worth $3.2 billion and it has so far made about 100 exits from 163 investments. It has delivered a gross internal rate of return of 22 per cent in the dollar terms. The firm, which invests under three verticals - real estate, infrastructure and general corporate - is currently fully allocated and is in talks with investors known as limited partners in industry parlance for raising fresh funds. Its previous general corporate fund, Tara India Fund-III, raised in 2008, had a size of $225 million.

These limited partners, usually large pension funds and university endowment funds in the developed markets, have turned cautious with economic cycle getting stagnant for two-three years and depreciation in the rupee's value, taking away their return. This has made the fund raising tough. IIML requires $1.25 billion to make fresh investments across the three verticals it operates in.

"We have been wanting to raise capital. There is greater interest (now) than (during) pre-election (days), but there is no momentum that everybody wants to get into India through PE," says Hingorani. She attributes this to the change in investor profiles, as limited partners are now looking to invest directly or doing co-investments to have greater control on returns.

Early this year, Canada Pension Plan Investment Board teamed up with Oman's State General Reserve Fund to invest Rs 2,000 crore in engineering major Larsen & Toubro's (L&T) infrastructure development arm L&T Infrastructure Development Projects. This was the first foreign pension funds to directly invest in India. This trend is expected to accelerate now.