LPs seek co-investment with IDFC

It is just as well IDFC is more bullish in its outlook. "Fund I closed in 2008 and in those early days we were reluctant to make huge bets on a single deal," says M.K. Sinha, managing partner and CEO at IDFC Alternatives.

"Nowadays there is a lot more confidence. In Fund I our sweet spot was around $50 million. In Fund II, partly because of the larger co-investment slice, we are going after deals of $50-100 million."

Fund II launched in early 2013 and reached a final close of $644 million in September of that year. The final close includes a $90 million contribution from the GP's parent company, IDFC, with the remainder coming from LPs in North America, Europe and the Middle East. They include CDC Group, the UK government's development finance arm, which put in $200 million.

CDC was also an investor in Fund I, which closed at $927 million and is now fully deployed. The similarities do not go much further. First, the dollar numbers are deceptive. In 2008, $930 million was worth INR38 billion in the domestic market. Fund II was launched with a hard cap of $1 billion when the exchange rate was INR55 to the dollar. The currency has since appreciated slightly, which put the hard cap at $900 million on closing, but that is still INR55 billion.

Second, IDFC is prepared to make bigger bets, but it will not dabble in the kind of greenfield assets that featured in Fund I. The GP sees plenty of opportunities in brownfield, operating assets put on the market by investors who went in aggressively when the market was hot and now want out. IDFC's deal pipeline is large but negotiating with sellers and dealing with regulators takes time. However, Sinha expects to deploy $200-250 million over the next 3-4 months, not including the co-investment portion.

Roads and coal-fired power plants are the big draw. Existing investments in the former have struggled due to overleveraging and unrealistic traffic flow assumptions. As for the latter, overleveraging is again an issue alongside electricity boards' inability to pay for power because rises in fuel costs haven't been passed on to customers.

IDFC is looking to buy up portfolios of road assets but it prefers to remain a significant minority investor in power plants. "We would take a 49% equity stake in an operating power plant where the existing sponsor is looking to monetize rather than sell out. We don't want controlling stakes because that requires strategic operating expertise. We don't want to get into this yet."

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