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N. Ramakrishnan

THE infrastructure equity fund was announced in the 2002-03 Budget and is taking shape now with a part of the Rs 1,000-crore corpus raised. The Infrastructure Development Finance Company Ltd (IDFC), which has been given the mandate of raising the money and administering the fund, has set up an asset management company that will manage the fund and rope in other investors. The asset management company is confident of raising the entire Rs 1,000 crore by June, even as it has started looking at some deals for taking an equity stake. In this interview, Mr Luis Miranda, Chief Executive Officer, IDFC Asset Management Co, talks about the India Development Fund, the name given to the fund, how it will be administered, and the challenges of setting up the country's first private equity fund, especially one with a such a large size.

Excerpts from the interview:

Why has taken it such a long time to get the infrastructure equity fund going?

After last year's announcement, a lot of time was taken up in discussing the fund's structure. Should it be a mutual fund or a venture capital fund, and who the investors would be. The fund is supposed to invest in infrastructure companies. It is meant to help promote young companies. Therefore, it will invest in unlisted companies. And, therefore, by definition we will be a venture capital fund.

IDFC wanted to create a new category of investment vehicle. Then we met a few investors, got their feedback and started working on the documentation, focussing on a couple of investors to raise money. We have signed up with IDFC, LIC, SBI, and New India Assurance. We expect to get GIC also signed up. Together with a couple of other banks we hope to close March 31 with Rs 500 crore.

When do you hope to raise the Rs 1,000 crore?

In the next couple of months. It took us a long time to do the initial Rs 300 crore. But after that the momentum picks up. We are now spending less time on fund raising and more on looking at deals.

You are looking only at Indian institutions to raise funds...

One of IDFC's roles is to develop markets, develop infrastructure. And, we need to develop a domestic investor class for private equity. What is lacking is a private equity model and that is where it is important for us to develop a local investor base.

If you look at some of the players in infrastructure today, the larger players like the Bharti group in telecom and the Pipavav port project, have raised private equity by going overseas. Studies done abroad show that private equity generated higher risk adjusted returns than public market. The money that has gone into private equity in the US is huge.

This growth has come from longer term investors such as insurance companies and pension funds. You are investing in unlisted companies. It promotes active style of management, we get on the board of unlisted companies. We have certain shareholders rights that other investors will not have. We get on to the management committees of the organisation. I believe that if you do not have that active style, it will be difficult to get value from our investment in an unlisted company.

What do those investing in this fund get out of it? They are not going to see returns for quite some time?

If you look at early stage and mid-stage investments, if you look at some element of convertibles and other structures we can get some short return to the investors. If you have got a balance sheet that is Rs 10,000-30,000 crore, Rs 50-100 crore (that the investor will be putting in the fund) is irrelevant. That is what we are telling the investors. Let us focus on putting a small part of your portfolio aside for a benefit that will take some time to come.

What kind of deals would you be looking at? Typically, what will be your exposure in the projects?

Let me tell you something about our team first. Our aim was to get the private equity experience. If you look at the infrastructure situation in India, you have got IDFC on one side, which has got the best infrastructure domain experience. The skills they have in various sectors are phenomenal. We do not want to duplicate that. As they are one of the sponsors of the fund, we will work closely with IDFC. Second, our investors are the largest debt financiers in the country. They have strong project finance teams. We are going to work with them.

What is lacking in this whole model is the private equity approach to it — someone who will look at a deal from an equity perspective and say how do we create value. In the fund, we will get private equity expertise. We will have a small team of four-five people. We are going to leverage our investors for the balance.

We are looking at deals in a number of areas — core infrastructure such as ports, power, and telecom, urban infrastructure, SEZs, and waste management. We will look at rural infrastructure and the food distribution chain. We will look at social infrastructure, including health, education and tourism. We will also look at tech-related infrastructure, for example a banking network, or communications network. There is such a wide canvas we have given ourselves. We will look at deal sizes ranging between Rs 30 crore and Rs 150 crore. We would look at investment deals where we could get anywhere between 15 and 49 per cent of the company. We would look at taking an active role in the company through the board.

It is true that IDFC is active in most of these areas. But the difference is that they do debt financing and we will do equity. We are looking at deals independently. There will be some deals we will do that IDFC will not do and vice versa. We are looking at one deal which IDFC turned down.

You mentioned earlier that you will be looking only at unlisted companies for taking equity stake. These companies may not have a track record, especially in the infrastructure sector, so how would you choose them?

That is why, I said, we need to take an active role in these companies. There are four criteria we look at while examining deals. First, it has got to be an A+ promoter or management. Experience has shown that you would rather do a bad deal with a good promoter than do a good deal with a bad promoter. We look at what deals they have done, what has been their track record, we do a lot of reference checks. We also see if the promoter is someone who is creating value for his partners or value for himself.

Second, we look at the actual business. Is it scalable? Is it a sustainable business model? Are there regulatory risks which could kill it. The third element is the actual income, because that really defines our relationship with the promoter and the company. We will have a shareholders agreement which will give us rights and obligations, and will define the parameters of our investment. The fourth, and important, factor is our exit. At the end of the day, I may have a great investment which is turning the country around, and creating jobs and creating value into the company, cash flows. But if I do not sell it, my investors do not make money. That is why I am a fund. I am a close-ended 10-year fund. One of the questions I will ask at the time of doing the deal itself is how will I get out. If we do not know what our end goal is, with our investment, we are just going to be floating around over there.

We do not believe that finding the deal is an issue. Looking at it from a fund's point of view, raise the money, find the deals, and then exit the deals. Raising the money is something that is behind us. Finding deals is not too much of a problem. We are going to focus a lot on how we can finally exit the deals.

Typically, how long do you think you will hold equity in the company?

It could vary. You are looking at any infrastructure project which takes two-three years to kick off, then cash flows start coming in and it starts becoming profitable after another two-three years. For a debt investment that is exactly how you look at it, saying that I can get my loan back only after the cash flows come in and start making cash profits. From an equity perspective it is different. In equity, the value of my investment keeps going up from day one as long as there is progress and there are milestones to be met, and if there is better visibility on the future cash flows.

So as long as you have a company which is creating value, where future investors can see what it is doing, the progress has been made and money coming in, you will find someone willing to pay a price for it. Given the type of infrastructure project which has got a 30-year concession, I cannot be an investor for 30 years because my fund is 10 years. I have got to find some one over the next few years who would buy that over and then hold it for the next 20-odd years or sell it to somebody else. That is really the challenge over here.

Take Bharti for example, they have been able to bring in investors at different stages. They have had an IPO because people have seen value in what the Mittals have created. We will see that as an automatic progression for a business. But, we will also invest in a mix of early stage and mid stage companies to balance out the portfolio. We will look at some companies which have got something going. It will cost a little bit more in terms of equity, but we are just balancing out the risk in terms of the portfolio. We would like to do a deal by June 30. We are looking at a few deals, I do not know which one will click really.

Most of the smaller private companies do not understand the insistence on due diligence and the contracts that you go through. Is that a hurdle for projects taking off?

It will be. At the end of the day, if someone does not believe we need to do a due diligence, we are going to ask if we are going to work with this person. It is something that is critical. There are so many deals which are languishing because we have not been through with the financial closure or there is some problem with the promoters.

The way we see it is our investors are the largest debt financiers in the country. So, you would necessarily have to go to them for your debt component. So, if I can tie up with the equity part, and be on the board of the company, have access to information, I would like to see that as giving more comfort to the lenders, who are my investors anyway, that this project is viable.

An equity position is different from a debt position. But if one could work together, there would be appropriate confidentiality issues, Chinese walls. We believe we could create a unique model in India for infrastructure projects.

We have the IDFC AMC with the private equity experience, we have the infrastructure domain experience of IDFC, we have the project finance skills of our investors, and we will also tie up with experts and have an advisory committee within the AMC.

One question we get asked a lot is what is the focus of the fund. Is it development of infrastructure? The categoric answer is that this fund is there to make money. That is the primary driving force. We have two goals. The first is it to give a financial return to the investors. The second is to invest in infrastructure equity in India. We are going to be driven not so much by the development needs, but rather that this is a financial investment for investors. There is a lot of scepticism about equity, about infrastructure. That is something we want to turn around.

What do you think would be your biggest challenge, the policy and regulatory risk?

You are right. Finding deals where we do not run as large a regulatory risk that we cannot manage it or box it in, that is going to be one of our big challenges. The second one is exiting the deal.

Another problem with infrastructure projects is the continuity of policy, especially in the States, whenever there is a change in government. How do you think you would be able to manage this?

That is why we believe our network will help. We believe that we have through our investors, a network which will be phenomenal. IDFC is just one part of it. We have got LIC, which is the largest insurer in the country, and, SBI, which is the largest bank in the country. We are actually spending time with each of our investors saying that we do not want just your equity money. I want to leverage of you a lot more.

Does the mandate for the fund allow it to invest in the equity of projects that are part-owned by the Government?

Our documents allow us to look at deals in the public sector as long as there is a mandate to privatise that. But, I do not think we will do a simple public sector deal that will remain in the public sector.

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