The country’s infrastructure sector may not be out of the woods as yet, but IDFC Alternatives, the alternate asset management vertical of IDFC sees this as a good opportunity to buy operational assets with $700 million to invest in two years. MK Sinha, managing partner and CEO, IDFC Alternatives tells FEs Shubhra Tandon that the fund is sharpening its focus on infrastructure by creating separate platforms for renewable energy, power transmission and distribution, and roads. Also, the fund will soon shake hands with a global partner for a platform deal in real estate. Excerpts:
As infrastructure requires long-term investments, how do you match private equity investment cycles with long-term financing needs of the sector?
Right now we are focussed on investing in operating assets and not investing in under-construction projects. I think typically, the way I conceive the infrastructure sector in India will develop is local Indian sponsors will do the development and construction of infrastructure assets and will flip it out to yield vehicles that are set up by financial investors like us, who will invest in operating assets for perpetuity and enjoy the yields that comes off those assets.
Are you comfortable with the quality of assets available in the sector for grabs?
If you have operating infrastructure assets there is nothing more compelling than that from the risk/return perspective. India is devoid of infrastructure. If you have an operating infrastructure asset it will be utilised, and more likely not to capacity. As the demand for infrastructure picks up, as the growth in the economy picks up, the user charges will also go up. So, utilisation is expected to be high, user charges are going to keep increasing. So, it’s a compelling asset class to be in, provided you are in operating infrastructure assets.
What is the strategy you are working with?
We are looking to create platforms which will be a receptacle for the assets which are developed by the private sector and once operational we could potentially buy those assets. We are aggregating assets in our road platform, re-creating a platform with just the operating renewable assets, and we are looking at having one in transmission and distribution. Also, we are exiting only those assets where we have stayed far too long. Otherwise, we are a buyer of operating assets right now. We think the valuations of road assets will only move up with revenues and margins improving as WPI pick up, GDP grows and interest rates fall further. In power there is a frenzy for renewable assets, and rightly so because capital costs have come down. So it’s compelling to invest in renewable assets.
What are your plans on fund raising and investments in the coming year?
We are working on a global partnership for a platform deal on the real estate side. Also, we should announce a final close of our second real estate debt fund shortly. On the infrastructure side, we are at the front end of harvesting Fund I, and deploying Fund II, it will be used to create the platforms as well. Investments will depend on how the climate pans out in the next 2-3 years. We have about $700 million to go in the infra fund and hopefully, in the next two years we will deploy that.
What is the plan on exits from previous investments across PE, Infra and real estate funds?
Across all the asset classes it could come to around $600 million of exits. We are trying to sell few road assets. We have a hospital asset that is in the market. We could potentially see an exit from one of the renewable companies as well. It’s been eight years since we raised Fund I, and now we need to start returning the capital.
Who are the buyers and what sort of returns are you seeing across asset classes?
Buyers are largely pension funds or annuity seekers, who are looking to invest in assets that will generate cash flows for the next 20-25 years. Returns from operating infrastructure assets are gravitating down as strategic and foreign capital is chasing safe operational assets (So, while the valuations are going up, the returns would be lower). In Infrastructure, returns are in mid-teens, in real estate the returns are attractive and are in high teens in the debt space and early twenties in the equity space. Likewise, in private equity also we would be able to make early 20s kind of returns, around 22%.