Sinha from IDFC Project Equity talks infrastructure

IDFC Project Equity leverages the strength of the IDFC platform to invest in infrastructure projects in India. President and chief executive officer MK Sinha explains the strategy.

Can you introduce the fund?
IDFC Project Equity manages a $927 million fund focused on Indian infrastructure. We raised the fund in 2008 primarily from investors in North America and Europe. We have 12 limited partners who have made significant commitments. Around $300 million came in bite sizes less than $25 million, routed through a feeder fund vehicle. We raised 12-year money, extendable by three years.

The investment manager, IDFC Project Equity, is a wholly owned subsidiary of IDFC. IDFC is an infrastructure-focused Indian financial institution with a presence across all products relating to infrastructure financing.

What differentiates IDFC Project Equity?
A fund investing purely in infrastructure is a new concept in India, although players like 3i and Macquarie have popularised this concept globally. Infrastructure investments are defensive and ideal for annuity seekers -- they generate stable, inflation-hedged, revenue streams immune to cyclicality. The underlying assets are often monopolistic public utilities with high barriers to entry.

What is your target return?
We invest in low-risk assets, therefore are satisfied with relatively lower returns. We target between a 16% and 18% IRR [internal rate of return] on a long-term, discounted cash-flow basis.

Can you elaborate a little on your target investments?
It is important to differentiate here between assets and businesses. We see ourselves as an investor in assets. We do not take growth risk, unlike private equity. So, for example, we will invest in power generation, transmission and distribution assets, roads but not transportation companies, airports but not airlines, ports but not shipping companies.

How do you generate investment ideas?
We benefit tremendously from the franchise value of IDFC, which has a presence across project finance, investment banking, and private equity to name just a few areas. IDFC has multiple touch points with sponsors of projects and referrals from IDFC are a very important source of deal flow for us.

How much of the fund has been invested?
We have made commitments of $350 million. Around $140 million is invested in the power sector across three assets. We have invested $120 million across seven road assets. We have a $50 million investment in an urban waste management company, a $30 million investment in the ports sector and a scaleable $10 million investment in a gas distribution asset. Our aim is to build a well-diversified portfolio.

Your investment size spans a wide range. Do you have a sweet spot?
Yes, we target around $50 million per investment. The exception being our road sector investments where we have multiple small (around $15 million to $20 million) investments in SPVs [special purpose vehicles]. However, these investments are homogenous so we view the aggregate as one portfolio and having a number of SPVs diversifies traffic risk. Road assets are annuity assets once they are constructed. We intend to invest up to $300 million in the road sector.

How will you exit the investments?
We envisage different exit strategies for different sectors. Our road sector investments, for example, could be bundled and IPOed. We could make secondary sales of some investments to other funds/investors. When we raised money from investors we had anticipated listing the fund. Market conditions have changed somewhat since then, but in the future an IPO of the fund could still be a possibility.

There is a view that India's huge infrastructure deficit is partly due to the difficulty in getting things moving in India on large infrastructure projects. What are your thoughts?
While the view is not completely incorrect, I think it is important to remember that India is a bottom-up economy and the world's largest democracy. This leads to some challenges, but overall India has made tremendous progress in the last 10 to 15 years. Telecom and power are good examples -- India has so far focused on developing a policy framework to attract private capital into these areas and has been successful. The results may not be fully tangible yet but things are moving.

How do you ensure you have done adequate due diligence on the assets you invest in?
We choose assets which are close to achieving financial close, are close to being commissioned or are already commissioned. Therefore, most implementation issues have already been addressed. We don't seek a controlling stake, rather we team up with strong local players who have a demonstrated ability to execute.

Do you expect the number of players with a focus on infrastructure investing in India to increase?
India has the largest potential for infrastructure investing globally. Given the aging demographic in many western countries, pension funds and insurance companies are seeking avenues of investing in annuity streams, and Indian infrastructure offers an ideal opportunity. So, we expect more money to flow into India. There are plenty of investment opportunities for multiple infrastructure funds.

What is your own background and the background of your senior management?
I have worked with SBI Capital Markets and Bank of America in India, and with GE Commercial Finance across the US, London, Hong Kong, Singapore and India. I returned to India in June 2005 from the US to join IDFC as an executive director, and subsequently moved to IDFC Project Equity in June 2007. I am supported by Sachin Johri and Vikram Pant. Sachin joined IDFC in 2006 after stints at Macquarie, Dresdner Kleinwort Wasserstein and ICICI Bank in Singapore and Mumbai. Vikram worked in the telecom investment team of ABN AMRO Capital in Amsterdam between 1999 and 2007. He has also worked with ANZ Grindlays for six years.

This story was first published in the April issue of FinanceAsia magazine.