IL&FS Investment Managers (IIML), India’s largest private equity (PE) company and the only one listed, recently merged another firm, Saffron Asset Advisors, with itself. Archana Hingorani, executive director and chief executive officer, outlines IIML’s business strategy to Raghavendra Kamath.
What does it feel like to become the largest private equity player?
Let me clarify that we were the largest fund manager earlier also. It is just that the merger of Saffron Asset Advisors will add $400 million to our assets under management. Our AUM will go up from $2.8 billion to $3.2 billion. We were and are the largest private equity company. It is just that in the last two years we have ramped up the scale of our operations.
Can you tell us something about your funds under management?
In growth private equity, we have two funds. Fund two is in divestment mode. And fund three is completing its investments. Both are sector-agnostic funds. That’s how we started. It is just that real estate and infrastructure have become the new words. The total corpus in these two funds is about $375 million.
Then we have an infrastructure vertical which has $700 million. In our real estate vertical, we have $1.9 billion. We have two opportunity funds (FDI compliant) and two yield funds (domestic). Yield funds invest in only existing buildings and generate quarterly yield for investors.
What are your new fund raising plans?
Since we are out of money in growth PE, we will raise funds for the coming quarter, say $300-350 million.
Fund managers used to say they launch and close funds in three-four months. Is that still possible?
That’s not possible. Even in good market conditions, it would have taken six to nine months. In stressed market conditions, like now, it will take between 12-15 months. When we raised around $700 million (Rs 3,300 crore) last year, it took us over a year. We took 12 months for the initial closing. The time taken for the first closure is really important. It will be the same today.
If you look at the world market, the US continues to remain stressed. Europe recently breathed a sigh of relief. Their world view is still risk averse. It is not easy to convince investors. Of course, it is better than last year, no doubt about it. People are willing to listen to potential investment opportunities. But the time frame has not changed materially from last year. People are studying minutely everything before saying yes to new investments. Whether it is institutional or individual, both have to show performance, before they can launch second, third or fourth funds.
Half-a-dozen Indian fund managers are operating domestic funds. Why are you not doing the same?
We have done them. We have yield funds with large retail money. But they are not a large part of our strategy. We are more comfortable doing institutional partnerships than doing retail, primarily because-- for retail investors-- putting their money, for 8,9,10 years it is not the same as it is for institutions. Institutions can stay invested for 8-10 years. You and I, as retail investors, do not understand this space.
Secondly, if they (individuals) have Rs 5 lakh or Rs 10 lakh and want to invest, what they do not understand is that they have to invest when the money is called. When the markets were bad last year, many fund managers could not get the money when it was called, which absolutely goes against the business model of a PE business. If you don’t get money, you cannot promise investments on time. We are slow on this because of this reason.
I am not saying retail investors will not learn, they will learn over time. Since it is new, it is highly risky for the retail investor and fund manager. Over time, they will learn as to which funds to invest in, how long to be invested in, how much to invest and so on.
How much money is still to be deployed?
In real estate, $400 million out of $1.9 billion is still to be deployed. There is another $300 million available in infrastructure, and almost nil in Growth PE. This is available for deployment in 12-18 months.
Where do you see IIML going from here?
We want to grow our platform. From $300 million to $3.2 billion now, our growth idea is divided into three buckets — infrastructure, growth PE and real estate. Our vision is to raise new funds as and when our funds get over and, inorganically, as and when new opportunities come up.
Besides, within these three verticals, we want to create special funds. For example, in real estate, we created yield products two years ago. Similarly, there are specific-sector opportunities that are maturing. Education and healthcare, by themselves, have become big enough to be able to raise funds. We are also looking at geographies. For instance, we are today in India and Asia. With our Dubai office, we will do funds for the Middle East. We are expanding both, geographies and the type of funds that we are doing.
Why did you acquire Saffron?
For two important reasons. First, real estate skill set sets are very limited in India and the merger provided us an opportunity to bring in a large team. If you want to grow your platform, handle investments and exits properly, you need to be hands-on. You need a whole lot of skill sets. Clearly it is a young industry.
Second, we can tap new set of investors which we did not have before. Saffron investors come primarily from Europe and the market that looks at listed investments. A part of Saffron will become part of our funds under management.
You were one of the candidates shortlisted for Axis PE. What is the movement there?
Yes, we were shortlisted. But there isn't much movement there.
Are you bidding for any such funds now?
Not right now.
There were reports that you want to make six exits and raise Rs 2,000 crore. Have you identified the exits?
It is not like that. If we had identified them, we would have done that. What we are trying to do is this: For the money we have invested, those projects are executed on time and completed on time. Of the money we invested in 2006 and 2007, some are ready for exits and we will definitely pursue these.
Are there any changes in fund life, returns expected and ticket size of investments?
The life of our funds will range from five to 10 years, with five years for yield products. For everything else, it is seven to 10 years. For growth PE, the ticket size is $15-25 million. For real estate and infra, it is $25-75 million. It should not change, as we do not expect new fund sizes to be bigger than earlier funds. IRR (internal rate of return) expectations have come down because of the global crisis. We are now looking at IRRs of 20-21 per cent as against 25 per cent earlier.
Are your investors happy with your performance?
They will be happy when we completely return their investments. We have not yet reached that size and I do not want to comment further.
A lot of PE players are doing structured debt deals. Why are you sticking to pure equity deals?
We focus on taking equity risks. And getting equity returns. But in some cases, where performance is not up to the mark, there could be an adjustment in valuations. There may be waterfall structures because of valuation issues. We do not do any structured transactions where there are capped returns and there is downside protection. We are willing to take both upside and downside risks but make sure the valuations we pay for are commensurate with the business prospectus.
