AVCJ at 25: Luis Miranda of IDFC Private Equity

When Luis Miranda was first approached to run Infrastructure Development Finance Company's (IDFC) nascent private equity business, he had no idea what he was getting into. "All I knew was that infrastructure in India sucked," he recalls. "You had all these investors expecting 7-8% growth and the India story wouldn't work unless the infrastructure was fixed."

Most damning of all, no one thought it was possible to make money from infrastructure. As the newly installed CEO of IDFC Private Equity in 2002, Miranda faced an uphill task - he had to drum up interest in an unwanted part of a not widely understood asset class.

The concept of private capital investing in unlisted companies in India was first endorsed by government financial institutions in the 1970s and 1980s. A few specialist venture funds emerged, again with state backing, and it wasn't until the late 1990s that independent VC firms were set up, although the dotcom crash put some out of business.

As a banker at Housing Development Finance Corporation (HDFC), Miranda worked on deals with one of earliest movers, ChrysCapital Partners, and he ended up joining the firm in 2000, about six months after it was founded. The subsequent move to IDFC Private Equity arose because Miranda wanted a change of scene and IDFC needed an executive with a PE background.

The group was set up by the government in 1997 as a project finance lender intended to facilitate private sector involvement in infrastructure development. Five years later, the government asked why so little progress had been made and one of the reasons was limited availability of risk capital, which led to the launch of an infrastructure equity fund.

"I met up with the chairman of IDFC, who had been one of my mentors, and I said I wanted to do something different on the development side," says Miranda. "He told me that IDFC had this infrastructure fund mandate from the government and asked me if I would like to set it up and run it."

The new vehicle, named India Development Fund, had a corpus of INR8.4 billion ($192 million). Its parent provided some seed capital, but contributions were also sourced from the likes of State Bank of India, Union Bank of India, Bank of Baroda and Life Insurance Corporation of India. The fund reached a final close in January 2004 and announced its first deal - the acquisition of a 15.1% stake in GMR Energy for $22 million - two months later. 

Within 18 months, everyone was talking about India Development Fund, although not for the intended reasons.

"It stands out because it was an investment in the power sector, which at that time was in bad shape - even now the sector is in bad shape because it has gone through an entire cycle of boom and bust," Miranda says. "We invested because we thought the contracts they had were good and we liked the team. They were a small developer and had previously been involved in setting up a bank. Their partners had good things to say about them."

At the same time, GMR Group's infrastructure unit was nurturing big ambitions. It was keen to bid for the public-private partnership contract to develop Delhi International Airport (DIAL) and required financial support. The unit, already developing a greenfield airport in Hyderabad, was considered an outsider but IDFC PE thought the bid was impressive and agreed to participate. As part of the arrangement, its stake in GMR Energy would be swapped into another GMR unit that was planning an IPO.

GMR Infrastructure emerged victorious but the DIAL privatization process remains controversial seven years later. In August, the Comptroller and Auditor General of India published a report criticizing the government for awarding the GMR-led consortium a 60-year lease on the brownfield airport plus rights to surrounding land for well below market value. GMR and the Civil Aviation Ministry challenged this conclusion, noting that the process was cleared by the cabinet and the decision upheld by the Supreme Court.

"The entire legal process took about nine months and suddenly everyone knew about GMR," says Miranda. "We had a joke with the owner that this was the best pre-IPO free publicity one could get. With airports now a hot topic, rather than take one part of the business public, we decided to go with the holding company, GMR Infrastructure itself. We ended up with a 7x money multiple, which is pretty stunning for an infrastructure investment."

IDFC PE's second investment, a 20.5% stake in gas pipeline business Gujarat State Petronet bought for $19.9 million, was also exited via IPO with a 4.5x money multiple. One of the reasons for these impressive returns was minimal competition for deals. However, once others saw what IDFC PE was doing, they quickly jumped in. According to AVCJ Research, private equity investment in infrastructure and construction went from $105 million across five deals in 2004 to $774 million and $1.85 billion in 2006 and 2007, with nearly 30 transactions in each year.

"In 2002, infrastructure was in the dog house but by 2006-2007 it was the most exciting sector to be in," says Miranda. "Valuations went through the roof. It was great for exits, but not for investments. With all this excitement, infrastructure became mainstream and a lot of issues came up regarding land acquisitions and environmental damage that plague the sector to this day."

After the excitement

After an understandably disappointing 2009, investment rebounded to above $1.5 billion in each of the following two years, but the $303 million transacted so far in 2012 doesn't bode well. Miranda doesn't necessarily see this retreat as a negative development: infrastructure is traditionally a low-risk, long-term yield play; in the mid-2000s it became a refinance-driven growth story; now it has returned to the norm.

IDFC PE's second fund closed at INR19.9 billion in 2006 and its third came in at INR29 billion two years later. In 2010, Miranda stepped back from business, moving into the role of non-executive chairman.

Although he believes that Indian infrastructure funds haven't delivered in recent years, Miranda says that IDFC PE served its purpose, proving that the sector can be a money-spinner. The likes of 3i Group, Macquarie, Actis, Morgan Stanley and Warburg Pincus have all since arrived and are committing capital to power, roads, ports and telecom towers. But he warns that investors must appreciate how the sector has evolved and modify their expectations accordingly.

"The kind of companies we backed in those days, if we hadn't given them the growth capital they wouldn't be where they are today," he says. "We had four IPOs - how many infrastructure funds can say that? Now is a good time to invest but it requires discipline. Money management is going to be important in terms of the next chapter in India's growth story."

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• Topics
• Infrastructure
• Infrastructure
• Infrastructure
• South Asia
• People
• Luis Miranda
• Infrastructure
• India
• IDFC Private Equity