Back in 1996 when IL&FS Investment Managers (IIML) was trying to set up a private equity (PE) fund for foreign remittances, the managers were unsure about how PE as a concept would work for India. Was there scope for aggressive acquisitions à la US funds? (KKR’s acquisition of RJR Nabisco in 1988 was the largest leveraged buyout of the time and had rocked the markets.) With no precedent in India, the IIML team was worried about working with promoters—how much should they participate in the companies?
Regardless, it went ahead with its fund, the AIG Indian Sectoral Equity Fund (AISEF), a joint venture between IL&FS and AIG. It was the first fund to be structured through the Mauritius route, a channel used by foreign investors putting money into India; it is the main provider of FDI in the country—today this has become a template followed by all funds. IIML has raised its entire funds from foreign investors.
“We started the private equity business in India when most people were not even aware of what private equity really meant,” says CEO Archana Hingorani. “Companies that we approached did not understand how to deal with us.” AISEF managed to raise $110 million, though it took almost 20 months before the first investment was finalised.
But that was then. Today, IIML is a listed company, managing $3.2 billion in assets for a fixed fee. It has raised and managed 13 funds since 1996 and has integrated two real estate funds into its operations during FY2011. What makes IIML interesting is that it is the oldest and the only listed player in the PE business in India.
According to Hingorani, there is no other team in the Indian market with an almost two-decade-long experience in asset management in the PE space. This, too, without any major changes in its key people. For instance, she has been with the company since 1994 and has participated in some of the most interesting deals of the last two decades. Some of her marquee investments include Indraprastha Gas, Hutchison Max, DEN Networks and Shoppers Stop—companies that eventually carved leadership positions in their respective businesses.
Hingorani says that now there are three areas that really matter: Real estate, infrastructure and traditional PE investment, which basically includes mid-size companies that are on a growth path.
IIML has invested around $1.7 billion in real estate, $800 million in infrastructure and $250 million in growth PE through its 13 funds.
The Big Deal(s)
Hingorani joined IL&FS in early 1994, and when the group decided to get into the PE business in 1996, she was made a part of the team. She began by assisting Shehzad Dalal, who was heading the investment process of the fund. Dalal is now vice chairman of IIML and, earlier, had served as CEO of IL&FS Asset Management Strategic Business Unit. It is here that Hingorani learned the ropes, gaining an understanding of different businesses. “Archana has been at the forefront of each of our new initiatives with undiminished vigour,” says Dalal. “Transitioning from an infrastructure DNA to breaking new ground in real estate, raising the then largest real estate fund in India, and now leading a team of over 50 professionals, is not easy. But Archana’s relentless ‘can-do’ attitude makes the difference. And more so now, when existing business models are being tested and re-moulded.”
It was the success of the first fund, AISEF, which made people notice Hingorani as a serious PE player.
The fund’s first deal, back in 1997, was with the Hutchison Max group. It invested around Rs 55 crore to acquire 10 percent of the company. But its biggest best-bet came in September 2000 with Indraprastha Gas, which was offering 50 percent of its equity to private players.
AISEF bought 20 percent of Indraprastha Gas. Its rationale: The company was planning to put up 100 gas stations in Delhi, covering transportation, residential, commercial and industrial segments. The assumption was that rapid urbanisation would lead to cleaner fuel and more piped gas in the city. The fund invested $6.1 million in the project in September 2000 and exited in 2005 with a return of 65 percent, annually.
This deal offered the training wheels for Hingorani’s team. A major portion of their time was spent in Delhi, and spread across all aspects of the project, including transporting machinery from Argentina to working with BPCL, which offered petrol stations for gas filling. Within a few years, they had gained expertise in the business of gas distribution.
“It was a highly tense period for everybody, but the learning was worth the while,” says Hingorani. “None of us had worked in an operating environment, so it helped us understand the company. Today, you will not get those kinds of opportunities. Not in the same format.”
The fund finally closed in 2007, generating a gross return of 27.2 percent per annum, or a 3.6 multiple for its investors.
Sanjay Mitra, managing partner, who has been with IIML since 2000, says of Hingorani: “It is her ability to adapt and work with different types of promoters that make her a true professional in the PE space. This is a far more important attribute in this industry than dealing only in numbers. Handling different industries and managing people without friction is critical, and Hingorani does that effortlessly.”
But it was the Leverage India Fund (LIF) launched in 2004 (it collected $153 million), which allowed the fund managers to test the waters with middle-level companies in India. These companies had crossed their initial startup phase, and were already on a growth path.
When Sameer Manchanda, the ex-CFO of NDTV, approached IIML to get them to invest in a news content company called IBN18 Broadcast Limited, it proved to be a big opportunity for LIF. Manchanda felt there was a huge gap between the No 1 and No 2 English news channels in India, and, in a way, the second position was up for grabs. LIF invested $10.1 million in IBN18 in January 2006. (Disclaimer: IBN18 is part of Network18, the publisher of Forbes India.) IBN18 generated a return of 34 percent on the investment by 2009 when LIF went for an exit.
The IBN18 deal brought another benefit—it led IIML to another project promoted by Manchanda, DEN Networks, a cable TV distribution company. IIML invested in it through the Tara fund (launched in 2008, it had a size of $225 million) and the Standard Chartered IL&FS Asia Infra Growth Fund (launched in 2008, with a size of $658 million).
Manchanda wanted IIML to buy a PE stake in DEN Networks to help it build back-end networks. The cable TV subscribers market was a hugely unorganised market, and DEN Networks wanted to buy out the small players and become a big entity. It was also banking on the assumption that, eventually, new regulations would favour cable TV providers. The regulations came into effect in 2012. Today, IIML, through these two funds, holds around 5 percent of the company; it has not sold any of its stake yet.The Method behind the Luck
So, is there a style to IIML’s investing?
The success of Indraprastha Gas, Hutchison Max, IBN18 or DEN Networks indicates Hingorani has been investing in these businesses by design. After all, these are annuity businesses with predictable revenues, as they are based on subscriber fees. To grow, they have to increase subscribers and not capital costs.
But Hingorani doesn’t want to read any patterns in the style of investing. She feels that if there is a pattern, it is coincidental. Yet, it is a fact that her team has gained expertise in these businesses and has ended up putting more capital into businesses organised along similar lines. For example, after Indraprastha Gas, the fund invested in similar businesses like Central Gas in UP, and Maharashtra Natural Gas in Pune, through the Pan Asia Project Development Fund. In June 2013, Indraprastha Gas itself purchased 15 percent stake in Central Gas, UP, held by IIML through its various funds, thus allowing IIML a gross return of 17 percent per annum, or a 2.6 multiple.
Hingorani has now turned to realty to capture the growth in Tier I cities.
The first IIML real estate fund, India Realty Fund I, was launched in 2006 with a size of $525 million. The second, Fund II, came in 2008 and collected $895 million. The size of these funds is huge compared to general PE funds because the asset class typically requires lump-sum investment. Real estate investment is done through special purpose vehicles, or SPVs, where the funds invest in particular projects of a developer which are easy to monitor. Fund I has invested $48 million in IG3 Ltd, a company engaged in state-of-the-art infrastructure to support sunrise industries in South India. Fund II has invested $42.31 million in October 2008 with the Kohinoor CTNL Infrastructure in Mumbai.
All the major real estate investments are in Tier I cities, and largely in residential projects; they’ve avoided commercial and retail projects where capital can get locked for a long time.
Recently, IIML came out with its own development company called QVC by putting aside $100 million. It has purchased four parcels of land in NCR and Bangalore and is developing them from scratch.Taking Stock
Yet, despite IIML’s general success, it’s stock performance has been a mixed bag. From 2005 to 2008, its share price went up by 77 percent annually. This was at a time when its fee-earning assets under management (AUM) moved up by 50 percent annually. In the 2008 annual report, Hingorani said it was the best year the company had had in a long time. “Total assets under management, raised cumulatively, at the end of March 2008 stood at approximately $1.7 billion. Last year, we had articulated an emphasis on larger investments. FY2008 saw the average growth private equity deal size move to Rs 753 million versus Rs 273 million in FY2007,” she wrote in the annual report.
But after 2008, despite total fee income and profits growing by 22 percent annually till March 2013, the stock price has refused to budge. Over the past five years, the Sensex has clocked a return of around 17 percent annually, while IIML’s share price is down by 10 percent.
The third quarter results for FY2014 show income from consolidated revenues fell by 7 percent to Rs 54 crore, and net profits by 4 percent to Rs 18.7 crore. Hingorani blames the macro environment for the poor performance, and feels there is ambiguity in the investment environment because of the coming elections.
Hingorani says shareholders understand the company; it is the analyst community that constantly looks for growth and has not been able to figure it out. “The business model requires new monies to be raised as and when current funds get exhausted. Accordingly, IIML grows in spurts and growth in fee income is a natural outcome of this business model,” she says. According to her, IIML is a consistent dividend-paying stock and has maintained a dividend of 70 percent for the last five years. The stock trades at Rs 12.65 and the overall dividend yield is 8 percent, which attracts a lot of investors.
PPFAS Long Term Value Fund is the only mutual fund that holds the company’s stock (it holds 3.63 percent of the company). Since the fund managers have a position on this stock, they declined to comment on the company.
Investors and analysts need to understand the industry doesn’t have a smooth growth anymore, says Hingorani. It witnesses supernormal growth in certain years, which is offset by no growth—this is an accepted outcome. Thus IIML had a flat AUM between 1998 and 2004. Then there was a period of supernormal growth between 2007 and 2011, and then a largely flat AUM again since 2011. “The last two years have presented a challenging macroeconomic environment, with funds raised for India falling around 70 percent compared to 2008,” she says.
The exponential growth between 2007 and 2009 had been across real estate, infrastructure and traditional PE investments. Most of these investments are now maturing. The team’s focus has, therefore, also been to divest these investments and to showcase attractive returns. The company expects these divestments would, in the short to medium term, result in a fall in fee-earning AUM; however, successful exits lay the foundation for a strong next round of growth.
But sceptics believe IIML has too much competition, and chances of its asset size growing quickly are slim. Investors who want to buy the stock for the dividend yield may benefit; growth-oriented investors will be disappointed.
Today, Hingorani likes to look at the world as two eras. The pre- Lehman Brothers era—before the financial crisis—and the post-Lehman Brothers era, the one we live in. The good formulas that worked for investments in the pre-crisis era don’t work anymore, she says. “In the pre- Lehman era, we were happy to let our companies go public at the right time even though we were not ready for an exit. Because markets understood the companies and rewarded them,” she says. “Post-2007 in listed markets, fundamentals are not the sole driver for market valuation, making stock prices more uncertain.” Is she talking about her own company? We can only speculate.
(This article is excerpted from the Forbes India 07 March, 2014 issue. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)