upfront with archana hingorani of il&fs investment managers (pei asia, june 2009)

7/26/2019 Upfront with Archana Hingorani of IL&FS Investment Managers (PEI Asia, June 2009)

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June 2009 Issue31Upfront

Growth on

demand

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June 2009 Issue31

It was very difcultto deploy capital from[our rst fund] as notmany people in Indiawere familiar with

private equity then

Upfront

IL&FS Investment Managers was the rst Indian private equityrm to raise an infrastructure fund and was among the earliestentrants into real estate. Executive director and CEO ArchanaHingorani talks to Siddharth Poddarabout its evolution into adiversied alternative asset manager.

Ina country where the private equityindustry is still nascent, IL&FSInvestment Managers (IIML) stands out

as a seasoned alternative asset manager

with a track record and experience. Sound

surprising? It shouldnt, considering IIMLs

roots date back to 1989, when it was

established as the Credit Capital Venture

Fund, an affiliate of Lazard Brothers.

However, the firm as it stands today

essentially started business in 1995 with

the creation of the $91 million AIG

India Sectoral Equity Fund, says Archana

Hingorani, the chief executive officer and

executive director of IIML.

Hingorani joined IIML parent company

Infrastructure Leasing and Financial Services

(IL&FS) in 1994 and has since been at the

forefront of the companys move into

private equity.

IL&FSs signature group strategy

has been to start businesses that cater

to under-served aspects of the Indian

economy, says Hingorani. With this

philosophy in mind, the parent group

set about establishing its private equity

business in 1995 to create a private equity

platform as the whole country was starved

of equity and still continues to be, she

says.

Simultaneously, IL&FS acquired the

Lazard affiliate, which wasnt performing

well, in 1996 and tried to clean it up and

delist it. However, it never managed to

garner enough shareholder votes to delist

the Lazard affiliate. The $25 million South

Asia Regional Apex Fund, the only fund

that the Lazard operation had raised, was

taken over by IL&FS, which restructured it

and invested out of it.

The IL&FS group then decided to

house all its private equity operations

under the listed company and renamed

it IL&FS Investment Managers Limited in

2002. Today, IIML is a subsidiary of IL&FS,

which has a stake of 53 percent in the firm.

The public owns 40 percent, while the

remaining ownership is in the hands of IIML

directors and employees.

The beginnings

IIML was one of the earliest domestic

entrants into Indian private equity, in the

market to raise a fund much before Indias

now fabled growth story began grabbing

headlines. Those were challenging times,

says Hingorani. Although the AIG India

Sectoral Equity Fund only had $91 million

at its disposal, it was the largest India-

focused private equity fund at the time.

The fund targeted infrastructure and

growth capital investments.

It was very difficult to deploy capital

from this fund as not many people in India

were familiar with private equity then.

Traditional entrepreneurs and even large

corporate houses were willing to accept

the investment, but not ready to give any

corresponding rights, Hingorani says.

Educating business-owners took time and it

took the firm the full commitment period

of five years to deploy the funds capital.

The AIG Sectoral Equity Fund was

followed by the $15 million India Auto

Ancillary Fund, which closed in 1998, and

the $16 million India Project Development

Fund, which closed in 2000. The $153

million Leverage India Fund, which was

focused on growth and opportunistic

investments and closed in 2004, was the

second generic private equity fund raised

by the firm.

Hingorani says that much in India has

changed since the firm started operations.

If you go back to 1995, there was no

concept of private equity. You basically

invested in whatever you could access

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through your relationships. There were no intermediaries operating

at the time, she says.

Of the small size of some of IIMLs earliest deals, Hingorani

says: Many might say that they were inconsequential, but it didnt

matter, because we were trying to establish an alternate asset class

in the country.

The firm felt comfortable with stakes as small as 3 to 5 percent,

says Hingorani, because even back then there were sufficient

minority protection rights for stakeholders.

Diversification

From the outset, with the AIG fund in 1995, IIML teamed its private

equity activities with overtures into infrastructure.

That the firm has chosen since to move into infrastructure

as a standalone asset class should not, says Hingorani, come as

a surprise. Given the focus of the IL&FS Group, a move into

infrastructure investing was an obvious choice, says Hingorani.

We have had long-standing experience in infrastructure

investing, Hingorani says, adding that all the people who moved

from the parent group to IIML when it was formed had prior

experience in infrastructure. So while structurally it is a new

vertical for us, we have been investing in infrastructure through

our general private equity fund and did not have to bring in new

resources as they existed in-house, she says.

The firm is currently in the market for the Standard

Chartered IL&FS

Asia Infrastructure

Growth Fund, a

50-50 partnership

with Standard

Chartered Bank.

The partnership

is targeting

commitments of

$800 million and the

fund saw a second close on $601 million in March this year.

Hingorani says infrastructure, like real estate, requires

significant investment in India. She expects that in the long term,

infrastructure will play out for the firm the way real estate has and

will probably match the real estate assets under management over

time.

There are also a lot of similarities in terms of investment

sizes, gestation periods, government interface across the two asset

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June 2009 Issue 31Upfront

I dont think we hadconsciously plannedto become the largest

real estate player inthe country

Key:

uSCI Asia Standard Chartered IL&FS Asia

Infrastructure Growth Fund (target $800bn)

uTara India Fund III($225m)

uPAPDF Pan Asia Project Development Fund ($45m)

uIIRF II ILFS India Realty Fund II ($895m)

uLIF Leverage India Fund ($153m)

uIIRF I ILFS India Realty Fund I ($525m)

uSARA South Asian Regional Apex Fund ($25m)

uAISEF AIG Indian Sectoral Equity Fund ($91m)

uIPDF India Project Development Fund ($16m)

uIAAF India Auto Ancillary Fund ($15m)

IL&FS Investment Managers Funds

EstablishmentSCI Asia

Active InvestmentTara India Fund IIIPAPDFIIRF II

Active MonitoringLIFIIRF I

Active DivestmentSARA

Capital DistributedAISEFIPDFIAAF

Fund Raising Fund Management Fund Exit

Source: IL&FS

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June 2009 Issue 31

classes and, like infrastructure, there is a

huge gap between the requirement and

what is being built.

IIML took the plunge into real estate

investment in 2005 when the rules

prohibiting foreign investment in real estate

were abolished, although Hingorani says

the firm had always been aware of the need

and potential opportunities presented by

this asset class in

India.

Aside from the

dynamics of supply

and demand, twofurther factors

persuaded them to

act, says Hingorani.

The first was that

no other firm was

trying to access

international capital

for domestic Indian

real estate.

Secondly,

since before 2005

regulation had

previously impeded

investment in

real estate, few

managers in India

had been able

to build up their

management

expertise. Hingorani

is convinced that IIML

got a good response from institutional

investors as they felt the firm had the right

combination of infrastructure and long-

standing fiduciary experience.

The firm closed IL&FS Realty Fund

I, its maiden vehicle for real estate

investing, on $525 million in 2006. It took

IIML less than two months to get soft

commitments, and six months to formally

complete fundraising.

The firm was then back in the market

within a couple of years for Fund II,

such was the demand. The second fund

was raised on the back of the first onebeing fully invested. All the firms investors

in Fund I returned for the second fund,

which closed on $895 million in December

2008, comfortably exceeding its target of

$750 million.

With the close of the second real

estate fund, IIML became the largest private

equity real estate fund manager focused

on India. Was this by design? I dont think

we had consciously planned to become the

largest real estate player in the country,

Hingorani answers. She says that the firms

strategy to be the first to enter the asset

class helped it stay ahead.

Regional expansion

The Standard Chartered IL&FS Asia

Infrastructure Growth Fund invests in

China, India and Southeast Asia across

traditional infrastructure sectors such

as toll roads, power plants and power

distribution.

This fund marks IIMLs first real foray

into pan-regional investing. The firm did,

in 2006, raise a small fund called the Pan

Asia Project Development Fund, a $45

million vehicle providing seed funding to

infrastructure projects in Asia.

Says Hingorani: The basic rationale

was to match the IL&FS Groups foray into

Asia. As infrastructure is a genre that we

completely understand, we wanted to see

how well we could replicate this expertise

in Asia.

While the firm was able to showcase

its understanding of infrastructure, access

to transactions in non-Indian markets was

a challenge, she admits. As a result, the firm

decided to jointly work on a pan-regional

infrastructure fund with Standard

Chartered.

Venturing outside of India is not a

strategy the firm is looking to replicate with

its real estate and private equity activities.

On the real estate side, this is because the

asset class is very new to India itself, so

the firm is still learning about it. Moreover,

Hingorani: IIML grew as fast as the market demanded

Upfront

IL&FS Investment Managers Limited (IIML) at a glance

What:

Private equity subsidiary of Infrastructure

Leasing and Financial Services (IL&FS)

AUM:

$2bn managed across nine funds

Team:

50 professionals working out of Mumbai

and Bangalore, of which 33 make up the

investment team

Key professionals include:

Shahzaad Dalal (vice chairman);

Archana Hingorani (CEO & executive director);

Alok Bhargava (executive director);

Mark Silgardo (senior managing partner);

Manoj Borkar (CFO);

Sanjay Mitra (company secretary).

Ownership structure:

IL&FS owns 53%, IIML directors and

employees 7%, and the public 40%

Investment remit:

Private equity (sectors include telecoms,

gas distribution, shipyards, retail, media);

real estate; infrastructure

Track record:

96 investments since 1998; 47 exits/

liquidity events (realised gross $ IRR > 27%).

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the enormity of the task at hand in India is so large that we dont

have aspirations to become a pan-Asian player, Hingorani says.

On the private equity side, although the firm is an established

player in the domestic market, there are already too many firms

investing across the region for IL&FS to want to join the fray. It is a

very crowded space in Asia, Hingorani says.

Growing too fast?

Last September, IIML closed its third generic private equity fund

on $225 million. Tara India Fund III was targeting commitments

of $400 million, but a tough fundraising environment convinced

the firm to close short of target rather than fundraise for a longer

period of time.

The close of the second real estate and third private equity

fund last year demonstrate the pace at which the firm has been

growing. The firm today manages assets of about $2 billion,

excluding the capital it has already raised for its infrastructure fund

in partnership with Standard Chartered.

At a time when global economies including Indias are

slowing down, is the firm growing too fast too soon? Hingorani

doesnt think so. I would say that we grew as fast as the market

demanded, she says. If one were to look at the sizes of funds

raised by the firm, clearly those sizes have only come about

because of the needs in those sectors.

The firm started with roughly $115 million in 1996. She says

that if one were to look at the growth of IIML from a beginning-

to-now perspective, the firms growth has been measured.

However, she is quick to add, Growth was faster when investors

had a keen appetite to contribute, so yes, we have grown faster in

those periods.

IIML has come a long way since its inception, but seems to

remain grounded. Management is aware of the opportunities that

continue to remain available in the Indian market and has not got

carried away trying to establish an pan-Asian presence or sign

big-ticket deals.

In the areas of real estate and infrastructure for instance, the

firm is still reluctant to invest large sums of money into a single

deal. We are still not the type of fund manager that will put in

$100 million plus in a single transaction. I dont think were ready

to do that yet. In most instances, the firm still invests between $30

million and $40 million per transaction, though in some cases, it is

willing to invest to a maximum of $75 million.

The road ahead

In the near future, Hingorani expects private equity investments in

India to be different because of the global downturn. The primary

change has come about in the way people will run businesses in

India, with scandals such as the Satyam fraud case putting corporate

governance high on the agenda.

A lot of private equity managers are going to be more

hands-on now, she says.

Also as a result of the global downturn, Hingorani says that

there has been a significant change in the relationships fund

managers have with their limited partners, with LPs becoming more

vigilant in their supervision of GPs. Communication is high on the

agenda. Hingorani sums it up thus: Going forward, one would need

to expend a lot more energy to do the same things.

But she adds that neither deal flow nor the ability to deploy

money in India has changed. Despite everything, the impact of

the global financial crisis on India has been less pronounced than

elsewhere, she says, with the Indian economy still growing at about

6 percent.

Hingorani admits certain pockets of opportunity are more

popular than others, but says the greatest part of Indias growth

story in the last five years has been that every sector has been

growing. There are some lags and leaps that have happened,

but every sector continues to provide an immense level of

opportunity, she says.l

Compensation matters

In recent years, a number of Indian private

equity firms have lost professionals to

either new domestic firms that have beenset up or to large global private equity

firms trying to establish a footprint in the

sub-continent.

Hingorani says that in the past, IIML could

not match the salaries other private equity

firms were offering their employees as

they often had teams of only two or three

people. Looking at how IIML is structured

today, the firms employees can be paid

through four components: salary, annual

performance-related bonus, carry and

periodic stock option plans.

Management fees go towards expenses for

all employees running the business across

the three verticals of real estate, private

equity and infrastructure. We have atypical institutional model, with roughly 40

percent of the management fees being used

for covering employee related expenses,

Hingorani says.

In terms of a share of carry, the firm has

evolved from a system whereby no carry

was shared with employees to one where

70 percent of carry from its funds goes to

employees, while the remaining 30 percent

goes to the house, which includes all

stockholders in the company.

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upfront with archana hingorani of il&fs investment managers (pei asia, june 2009)

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