The project equity arm of Infrastructure Development and Finance Company, which launched the $927 million Indian Infrastructure Fund in June 2008, had opted for a lower risk-return matrix and invests in operating assets of mid-sized projects. In an interview, IDFC Project Equity’s President and CEO, M K Sinha, tells Manojit Saha the road ahead may be bumpy, as valuation hiccups and slow implementation are dampening the demand for funds. Edited excerpts:
Till March, you had committed investments of around 46 per cent of the IIF corpus. How much will you invest in the current financial year?
We hope to put another $300 million to work this year. The pipeline is quite strong. But, valuation disconnect with the promoter and slow progress in some projects is resulting in delays in putting our money to work as quickly as we would like.
Which are the sectors experiencing disconnect and implementation delays?
It is across the board. The sponsors’ expectations have been set high because of a robust public market and we cannot match those expectations.
Why are you opting for a low risk/return tradeoff?
If you look at IDFC’s alternative asset management businesses, it has a private equity fund which invests in growth and across the wider definition of infrastructure. Our area is core infrastructure assets. We invest in roads and not transportation companies. Similarly, we invest in ports and not in shipping companies. IDFC Private Equity invests in a wider definition of asset classes where you have growth; they look at Ebitda (earnings before interest, taxes, depreciation and amortisation) multiples, PE multiples, when they evaluate their investments. We look at discounted cash flows, assets which will generate steady annuity over the long term.
So, our returns are lower. But our assets are immune to cyclicality. The way we look at, generating 18–20 per cent over eight to 10 years is better than doing 40 per cent in three years.
Till the end of March, you had called for 36 per cent of the funds. How much more have you called in the current financial year?
The same number, I would say. Since we invest in projects under construction, the right number to track is how much we have committed. We have committed about 46 per cent.
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What kind of return do you expect?
Returns are fairly standard. If you invest in a power plant, you might make lot of return simply because power is in short supply. In transmission and distribution, you make regulated return, which is around 16 per cent. The road sector, you can make returns in high teens. It’s not 35-40 per cent returns, it’s high teens to 20 (per cent).
How attractive is investing in infrastructure, given the valuation disconnect?
It is very attractive. I think 16-18 per cent return in infrastructure is great. You cannot look anything lower than that. Debt costs you 11-12 per cent; six per cent premium is fair value because of the low risk factor.
Which sectors are looking attractive?
There are opportunities in road and power space. But it is important to diversify; we cannot have a fund which is only road and power sector. We want to have a true infrastructure portfolio.
When are you planning to launch a second fund?
Technically, we can launch the fund when we have deployed 75 per cent. Hopefully, in the next one-and-a-half years, we should be able to launch our next fund.
Are you looking at listing your fund?
We have thought of it and I hope the markets are supportive. The assets should mature wherever we have invested and existing investors should agree. Also, the regulator should have regulations to facilitate that.
Infrastructure needs long-term investments. Would you consider not exiting at all from your portfolio companies?
We cannot stay invested beyond 12 years, because we have to return money to our investors after 12 years. You can extend it by another three years. So, 15 years is the hard-stop date. So, even if we like to stay invested, we cannot.
The government has announced $500 billion investment in infrastructure development and about a third is expected come from private sector. How do you see this opportunity?
This means the private sector will contribute $150 billion, which means $40 billion will come through equity. Of the $40 billion, if at least 25 per cent comes from private equity, that’s a $10-billion market size. We are only a $1-billion fund, so the market is huge, provided the projects happen. The problem right now is that projects are not happening, mainly due to land acquisition issues and environmental clearance issues.