How are infrastructure funds doing? Venkatachari Jagannathan has a frank talk with IDFC-PE''s Luis Miranda.

Five years after the IDFC Asset Management Company set up shop, its private equity fund, IDFC-PE, is ready to take off.

IDFC-PE, a wholly owned subsidiary of Infrastructure Development Finance Company Limited, has raised two ten year funds- India Development Fund (corpus Rs840 crore) and IDFC Private Equity Fund II (Rs1990 crore).

Third line - IDFC-PE manages two funds. While the first fund was raised from domestic institutional investors, overseas institutional investors have contributed 75 per cent of the corpus of the second fund.

Today, IDFC-PE is one of the most active funds in the domestic infrastructure sector. "We have split infrastructure into seven buckets — power, oil and gas, telecom, urban infrastructure, rural infrastructure, transport and social infrastructure," says president and CEO Luis Miranda.

While none of its investments have turned bad, there are whispers that the internal rate of return (IRR) in respect of some of its investments is just around 40 per cent. But a tight-lipped Miranda says only that, "I am not at liberty to comment on the percentage you mentioned. The returns depend on being in the right place at the right time, with the right amount of money. We do hope to get as high returns as possible for our investors."

He says the investment philosophy of the two funds is the same; "growth equity to build world-class Indian infrastructure." domain-b''s Venkatachari Jagannathan spoke to Miranda at length. Excerpts from an interview:

Five years after the launch of the fund, could you draw up a score card on the performance of the company?
I think our biggest achievement so far has been to show that infrastructure investing in India is a profitable, growth story. When we started off in 2002, very few people believed it could work. Today, our team has built up a portfolio of 18 companies whose underlying assets include six power plants, nine ports / terminals, three airports, over 3,000 km of gas pipelines and 31 roads and bridges. We also educate over 70,000 students and manage over 4,000 hospital beds. We have successfully brought the private equity model to the infrastructure sector.

How much of your corpus has been invested, and when do you plan to invest the balance?
The first fund is totally committed. In the second fund, we have made 18 investments so far, accounting for about 30 per cent of the corpus.

You have already invested in some Indian companies. Are the returns satisfactory?
Our first investment was in GMR Energy. We subsequently moved that shareholding into the parent company, GMR Infrastructure, which had a very successful initial public offering (IPO) last year. Our second investment was in Gujarat State Petronet, which also had a very successful IPO last year. We are fortunate that our portfolio has done well so far.

How long do you stay invested, and what do you expect in terms of returns?
We normally look at holding periods of around three to five years; we are not short term, momentum investors. However, we could exit earlier or later, depending on specific market circumstances.

Do you usually demand board representation?
Yes. This is because as investors I believe that we add value. Our representatives play roles at various levels, depending on the needs of the portfolio, and what we believe are our strengths.

Your exit policy...
Our preferred exit is through a sale after an IPO. We have exited fully from Hotel Leelaventure and partially from Gujarat State Petronet and GMR Infrastructure. I cannot talk about the returns we have achieved so far; that would violate confidentiality norms.

How do you help the business growth of the companies you invest in?
We have played various roles in our companies, based on their requirements, from recruiting senior managers and independent directors to fund raising, improving corporate governance, management information systems (MIS), strategic advice, brand building and others. In the case of the Krishna Godavari Gas Networks (which is developing the gas grid in Andhra Pradesh), we were involved in creating the company with the AP government and bringing in a strategic partner, Gujarat State Petronet (part of our portfolio).

What challenges do you face in the business?
The biggest challenge is people — both in our firm and in our portfolio companies. That is what prompted us to look at the education sector. We have invested in Manipal Universal Learning. In a fast growing sector like ours, one has to learn to live with a high staff turnover, since there is a shortage of good quality private equity people in India. People leave because of a combination of pull factors, over which we have limited control, and push factors, which we need to do something about.

Have any of your investments turned negative?
Fortunately, we haven''t had that problem so far.

Any plans for a new fund?
It''s still early days for our second fund. We could be back in the market with our next private equity fund some time next year. Its size would depend on the average deal size we see going forward.