Q&A: IDFC Alternatives' MK Sinha

Q: On the private equity side, there have been partial exits from Green Infra and Viom Networks and a full exit from Maharashtra Natural Gas in the past year. So realizations have been a focus...

A: The one weak spot in Indian private equity has been a lack of exits. We are now three funds old and we couldn't really go out and raise another fund without an exit track record. Indian PE as a whole has raised $100 billion in the last 15 years and returned $37 billion. In the last 12 years, we have invested about $1 billion in 42 companies and had exits from 27 of them, returning close to $1 billion. This includes all the companies in Fund I and most of the companies in Fund II. With Green Infra and Viom, we sold our Fund II interests in these companies and continue to hold our Fund III interests. Both are good build-out stories. Green Infra was conceived on paper by IDFC and we grew it into 650 megawatts of capacity with another 50 MW under construction. When we invested in Viom it had 72 telecom towers; now it has about 45,000.

Q: There have also been IPO filings from Parag Milk Foods and GVR Infrastructure. How dependent has IDFC been on public market exits?

We are now three funds old and we couldn't really go out and raise another fund without an exit track record

A: We've always had a multi-pronged exit strategy - IPOs, trade sales and promoter buybacks. Typically, buybacks are typically situations where, four years after the investment, the promoter feels he sold out too cheaply and wants to buy back the stake. We usually agree to that request because there is no point staying in a company as an unwelcome guest. As for IPOs, it depends on sentiment. Right now I don't see any sustained trend of improvement in the market. Five or six months ago a few companies came into the market and a few more are in the pipeline. But will there be a flood of new IPOs? I doubt it will happen any time soon.

Q: When IDFC was raising its infrastructure fund, there were expectations of deal flow from conglomerates divesting assets. Is this happening?

A: It has not been as quick as we would have liked it to be. This is because of there are multiple stakeholders: the owner, who potentially wants to divest an asset; the banks that have to approve of the incoming shareholder; and the regulators that also have to approve the change in control. We are in the process of closing multiple such deals, and although it is taking a long time, the opportunity is there.

Q: How much capital has the fund deployed?

A: We have deployed about $200 million across three assets. Two of the three investments are thermal power assets - we acquired a 23% stake in a gas-fired power plant in northeast India, which is operational and owned by ONGC Tripura Power, and just under 20% of a thermal power station in central India alongside Dainik Bhaskar Group. The third investment is a $25 million commitment to a cargo-handling concession at Delhi International Airport. We will be more aggressive in acquiring road assets - we are currently looking at three, and in two cases we would take a controlling interest. We are looking at a solar platform, a wind platform, and a large renewables platform that includes solar and wind. We are also interested in transmission assets, ports and airports. We take minority interests alongside reputable sponsors; if we take a controlling interest then it has to be for an operating asset.

Q: What has been the nature of IDFC's real estate sector activity?

A: Our two real estate funds are both opportunistic. In 2010-2011 there were a lot of completed office buildings that had started construction pre-global financial crisis when absorption rates were high and the expectation was that this would continue. Post-financial crisis, the absorption rates fell off a cliff and a lot of developers had office buildings that were only 40-50% tenanted. They had their backs to the wall and wanted to monetize their investments. We believed in a long-term pick-up in the economy, so we put our money where our mouth was. IDFC is converting into a bank and so we couldn't hold such a large proprietary position on our balance sheet. This led to us exiting the office investments to The Blackstone Group last year, generating a 22% IRR. We are not as optimistic about the space right now. The acquisitions were made at close to the bottom. We sense now that we are not quite at the top for these kinds of assets, but we will get there in the next 6-12 months.

Q: The other real estate fund is a $125 million local currency debt vehicle. How was this opportunistic?

A: It was 2012-2013, the capital markets were dead for the real estate sector and private equity was off the radar. Developers didn't have liquidity and the banks were full up on real estate and not taking any incremental exposure to the sector. The only liquidity available was non-traditional sources of financing, such as the fund we have now and the NBFCs [non-banking finance companies]. The fund is about three quarters deployed and we target residential projects in the six major Indian markets. Mostly the debt taken is not used to complete buildings because they are more or less fully constructed. Rather, it is used to buy land and so we not only have the security of unsold apartments but also collateral beyond that.

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