IDFC launches $1bn India infra fund

IDFC Alternatives, the alternatives asset management arm of Indian finance company Infrastructure Development Finance Company (IDFC), has launched its second pure infrastructure fund with a target of $1 billion, and hopes to hold a first close soon, according to MK Sinha, chief executive of IDFC Alternatives.

The fund has only done a limited launch as of now, however – Sinha explained that to raise capital for India Infrastructure Fund II, IDFC is only targeting its existing limtied partners (LPs) and a select few large institutional investors at this point, and is not spending much time on marketing.

This India-focused fund is slightly larger than IDFC’s 2008-vintage $930 million India Infrastructure Fund, but, like its predecessor, Fund II will be closed-ended with a fund life of 10 years, targeting an internal rate of return in the mid-teens. It is expecting an average investment life of about eight-to-nine years for its assets, Sinha told Infrastructure Investor.

Fund II will target traditional infrastructure assets, looking to make direct equity investments in everything from oil and gas pipelines, to roads and airports, Sinha said. Investments will also be made through public-private partnerships, with leverage to be decided on a project-by-project basis, Sinha said. The firm will continue working through the pipeline it built up for Fund I, which is now 84 percent invested.

The firm is hoping to hold a first close on this fund “soon”, but the exact timeline is not set, Sinha added. Fund II will officially go to market after its first close, opening it up to new LPs, but IDFC will not be using a placement agent for it.

IDFC’s past LPs have included domestic and international players. The investor base for Fund I comprised the INR1.3 trillion (€16.7 billion; $21.8 billion) domestic Andhra Bank, the International Finance Corporation, and UK government investment arm CDC Group, according to Infrastructure Investor Research & Analytics.

So far, IDFC’s Infrastructure Fund I has been tracking well on returns, Sinha said – it has averaged a 5 percent yearly return, despite a very depressed infrastructure market in the country. Sinha credits most of that success to “prudence”.

“We’ve been providing lower-end but steady returns, with investors being able to check up on our progress every year – which is why we can go to our existing LPs for this fund,” Sinha said.

India’s infrastructure need over the next five years will add up to about $1 trillion, 50 percent of which is planned to come from the private sector. That translates to about $35 billion of market opportunity for equity funds specifically, Sinha said – “which means we have our choice of projects,” Sinha said.

While there have been concerns about infrastructure returns in India as investors struggle with regulations and development, Sinha pointed out that the issues are all surrounding the execution of infrastructure projects, which is something that can be fixed. Regulations in particular are already being revised, and Sinha believes a large number of the problems could be resolved within the next year or so.

First set up in 2002 as IDFC Private Equity, IDFC Alternatives now has $2.2 billion asset under management across four funds, all focused on India’s infrastructure sector.