Growth on demand

IL&FS Investment Managers was the first Indian private equity firm to raise an infrastructure fund and was among the earliest entrants into real estate. Executive director and CEO Archana Hingorani talks to Siddharth Poddar about its evolution into a diversified alternative asset manager.

In a country where the private equity industry is still nascent, IL&FS Investment Managers (IIML) stands out as a seasoned alternative asset manager with a track record and experience. Sound surprising? It shouldn’t, considering IIML’s 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 company’s move into private equity.

IL&FS’s 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 wasn’t 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 India’s 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 fund’s 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 through your relationships. There were no intermediaries operating at the time,” she says.

Of the small size of some of IIML’s earliest deals, Hingorani says: “Many might say that they were inconsequential, but it didn’t 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.


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 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, two further 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 one being fully invested. All the firm’s 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 don’t think we had consciously planned to become the largest real estate player in the country,” Hingorani answers. She says that the firm’s 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 IIML’s 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 Group’s 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, “the enormity of the task at hand in India is so large that we don’t 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 India’s – are slowing down, is the firm growing too fast too soon? Hingorani doesn’t 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 firm’s 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 don’t think we’re 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 India’s 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