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How this leading PE fund navigates India’s infra maze

Even as there is much optimism about how the new government is pulling out all stops to boost the country’s creaking infrastructure, there is one investor that has stuck by it through both good times and bad.

CNBC-TV18’s Kritika Saxena spoke with MK Sinha, CEO of IDFC Alternatives, the private equity arm of IDFC, which has routinely invested in heavily regulated sectors such as infrastructure, power and real estate.

One of India’s large PE funds, Sinha discussed the fund’s investment strategy as well as the outlook for the sector.

Below is the transcript of the interview on CNBC-TV18.

Q: If I look at the trajectory that IDFC Alternatives has maintained, you are sitting on a corpus of around USD 3 billion that you run across seven odd funds, you are perhaps one of the larger PE domestic investors in the country. You are probably higher than most of the foreign players in fact. Going ahead given that now we are seeing a turnaround when it comes to the reform cycle especially the sectors that you invest in, infrastructure, real estate being the key, what is the kind of investment or what is the kind of capital that you are looking at deploying in the next two to three years?

A: We currently have an infrastructure fund of about a billion dollars that we need to deploy so that is the immediate priority for us in deployment terms. We are looking to raise our next generation of private equity funds which is going to be our fourth private equity fund; it is about USD 400 million. We are looking to raise our next foreign real estate fund, that is going to be in the midmarket housing sector so there is two fund raisers coming up then there is deployment on the infrastructure side so that is our immediate plans right now.

Q: So the real estate fund, how large is the corpus and what would be the focus areas? Would it be across real estate or specifically midmarket?

A: So, we are looking at a mid market housing fund, that is going to be approximately USD 200-250 million approximately, that is our hard cap. We are going to be investing in six major cities across India.

Midmarket housing, the way we define it is housing for entry level aspirants, house owners so, it is basically for the 30-35 year olds who are buying their first house, nuclear families in cities that are disintegrating into two or three sub-groups buying their first house, so that is the kind of clientele that is going to be our target for midmarket housing.

Q: You have dabbled in the infrastructure sector even at a time when things were struggling when their was evident policy uncertainty around sectors like infrastructure, power, energy. [With the new government coming in] have things changed on ground actively when it comes to these three sectors?

A: There is too much made out of: have things changed on the ground? The government is doing a fantastic job. For a change the government is execution focused.

They did not get paralyzed when the Supreme Court cancelled the coal blocks. Within a month you had a framework for auctioning out these coal blocks again. These auctions have been successfully completed and the government has raised close to Rs 2 lakh crore which is going to be good for the system generally.

So they have been very execution focused, they have been very governance-focused, they seem to be doing the right things because we figured that if you are not governance focused, things can unravel in an ugly way.

Q: [Interrupts] Absolutely, very true.

A: We have seen that in the telecom, road, power sectors. So the good news is this government is very execution focused. You cannot get things right all the time. There has perfect is the enemy of the good, so it is good. You may not have a perfect solution but you have a solution and that makes us feel lot more optimistic.

Q: What is the timeline that for investors like yourself to say that India is a place where it is fairly easy to do business?

A: That is a mindset issue. Again the government has certain initiatives; the Pragati Initiative which is progressive governance or whatever and timely implementation. So, it shows the mindset, the government’s mindset is to make sure the projects get implemented on time. The project management office (PMO) is directly monitoring a bunch of projects. They are simplifying bureaucratic processes, there is focus on certain sectors of the economy, manufacturing for instance. They have been trying to pull through the land acquisition bill.

So, it is a process, I do not think you can put timelines to it. Like I tell a lot of my LPs, the foreign investors that invest with us: in India you cannot look at India at a point in time, because you would be terribly wrong either ways — on the optimistic side or on the pessimistic side. You have to look at India in three-year snapshots and we do well in every three-year snapshots.

Q: So, staying balanced is the key to your success?

A: Correct, I would say that.

Q: Let me ask you about the infrastructure space specifically in that case. In terms of the kind of investments that you have made, can you break up how much so far has gone into infrastructure and going ahead, what are the kind of infrastructure assets that you are specifically looking at?

A: Our infrastructure fund is meant for infrastructure, so all the investments in the infrastructure fund have gone to the sector. In our private equity fund, we have invested n the infrastructure enabler space; that is about 60 percent of our third fund. 40 percent of our third fund was invested more in the zone of confluence between infrastructure and consumption.

Real estate by definition is not invested in infrastructure. What is our focus in the infrastructure space right now? It is basically acquiring operating assets because in the last three years, there has not been any new asset creation or any new plans for asset creation.

So, that opportunity does not exist as of now. As and when that opportunity crops up, we would be more than happy to consider it but right now it is a market dislocation right at the infrastructure space. A lot of sponsors are over-leveraged. They are looking to pare down their leverage by selling assets we are interested in, operating assets.

Q: So a lot of groups like GMR , GVK , IVRCL  are consolidating their assets in order to pare debt, as you said. Lot of individual projects that are on the block or that are in the need of investment where you can probably look at minority investments, would these be interesting assets for you in that case?

A: I pick on the minority investment term. In the road sector we are looking to buy controlling interest. In the power sector we are happy to buy minority interest alongside credible sponsors. So, someone who has the ability to continue to take the twists and turns that one will see in the power sector over the next two years.

Q: So power will not be a big play right now for sometime unless and until it is.

A: Actually power will probably be our biggest play right now.

Q: But you will not look at controlling stake or buy out, you will stick to minority for now.

A: We will stick to our minority position with significant rights.

Q: Coming back to the roads sector space, you have already bought out a large road asset, if I am correct, in the last couple of quarters. Specifically are there any deals that are in the offing or that are there any specific projects that you would prefer versus the others?

A: We have a huge pipeline in the roads sector. We are waiting for the exit policy to be announced by the National Highway Authority. As soon as the exit policy is announced we are going to invest significantly in the roads sector. We find that sector as a proxy for the Indian economy. The economy is going to grow at 6-8 percent. Traffic is likely to grow higher than that and that is where we are likely to make money.

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