Verticals -- Infrastructure
Globally, investments in infrastructure have provided returns similar to that offered by 'growth capital' investing, at a lower volatility
. The low degree of correlation between infrastructure and other asset classes means that infrastructure investing is a ideal portfolio diversification tool for risk reduction, without impacting returns. IIML, over the last 15 years, has been able to consistently validate this theory by its experience.
Given its parentage, IIML undertook unique and path breaking investments in the infrastructure space. IIML emerged as one of the first investors in infrastructure in late 1990s when it invested in the telecom space through the US$ 91 mn AIG Indian Sectoral Equity Fund (AISEF)
. This was followed by other 'firsts' - first road sector investment, first energy investment, first in the rail sector.
Though the AIG Indian Sectoral Equity Fund was a general purpose growth capital fund, five of the six investment made by IIML through the fund were in the infrastructure space. These investments, spread across the telecom, roads and energy sectors, were successfully divested by 2005, generating a gross return of 29% p.a., in line with the returns generated by its general-purpose private equity funds.
IIML continued its focus on infrastructure investing and invested over 30% of the corpus of the US$ 153 mn Leverage India Fund across various infrastructure sub-sectors. This strategy has also been replicated in Tara India Fund III, which seeks to invest in infrastructure services, with an investment size of US$ 10-25 mn.
IIML has made 37 infrastructure investments, aggregating US$ 580 mn, across all infrastructure sub-sectors.
The key impediment to attracting private participation in infrastructure projects has been the absence of a focused and rigorous project development framework. The output of the project development exercise is the project documentation that could be used to implement the project on a commercial basis. While the opportunity in India and across a number of developing nations has resulted in a large number of projects being conceptualized, these infrastructure projects need seed capital funding for converting the concept into a bankable document that incorporates various aspects such as the conceptual basis for privatisation, project cost, financial and legal structure, and the financial viability.
Realizing the importance of project development activities, IL&FS had set up the India Project Development Fund
in 2000. The Fund's seed capital investment has helped projects conclude project development activity and thereby achieve financial closure to be taken up for implementation. India Project Development Fund
successfully divested its investments from a cross section of sub-sectors - a water supply project, a surface transport project, a power generation project and a SEZ project, with a realized return on completed exits of 21% p.a.
IIML will continue its focus to support seed capital funding for infrastructure project development and has, in continuation of this strategy, established the Pan Asia Project Development Fund
in 2006, a successor to the India Project Development Fund
Typical investments for seed capital funding are in the region of US$ 2-10 mn.
IIML is leveraging its competencies in the Infrastructure sector by building a Pan Asian infrastructure investment practice in a joint venture with Standard Chartered Bank. The US$ 658 mn Standard Chartered IL&FS Asia Infrastructure Growth Fund (SCI Asia)
is invested across infrastructure assets in the Asian region, with specific focus on India and China.