Venture Intelligence recently spoke to Anita George, Director Infrastructure of International Financial Corporation (IFC) regarding the institution’s latest views on investing in India. The full version of this interview appeared in the latest Venture Intelligence quarterly Private Equity Roundup report.
IFC, a member of the World Bank Group, has been making PE-type investments in India since the 1980s. Even now, when India is choc-a-bloc with PE investors, IFC remains among the most active investors year-after-year. In 2010, IFC has already consummated/announced about 15 investments, across various sectors including healthcare (Max Healthcare), Financial Services (Cholamandalam Investment & Finance, AU Financiers, Aadhar Housing Finance) and Clean Energy (Azure Power, AD Hydro Power, Bhilwara Energy, Auro Mira Energy, Applied Solar Tech and Husk Power).
IFC is also a very sought after investor (or “Limited Partner”) among India-dedicated PE/VC funds. More recently IFC has set up an Asset Management Company (AMC) which has been mobilizing funds from governments, other donors and sovereign wealth funds.
Venture Intelligence: Can you first talk to us about IFC’s macro view on investments in India?
Anita George: We consider India as an attractive destination for private sector investments and we have our own strategic pillars that we follow in this region: climate change (which means investments in Renewable Energy, Energy Efficiency, Cleantech, etc.) and inclusive growth. Recently, we have started to systematically focus on the low income states like Rajasthan, Bihar, Jharkhand, Madhya Pradesh, Orissa, the North Eastern states, etc.
Even from a financial returns perspective, our experience globally has shown that the lesser developed markets and regions, have given us higher returns than investments in bigger projects and in bigger countries. It’s logical because with bigger countries and bigger projects, competition is greater and you tend to pay a higher premium and your entry price had already factored in a lot of the upside. Where as in smaller countries or more riskier markets, the investments are made at a more reasonable price and there is a upside to be had if there is high growth in those sectors and the investments scale up as market demand grows.
VI: What specifically is attracting you to the Financial Services and Clean Energy sectors?
AG: These are part of our development mandate and they are also, in our view, high growth areas and areas of great innovation in India. For example, our investment in FINO (a technology platform for microfinance companies), enables financial services to reach those parts of population that do not have access to normal banking services.
IFC started investing in Cleantech and clean energy much before it became fashionable. We also see models here - such as in distributed generation and innovative use of solar power - that we feel can be replicated in other countries as well.
VI: IFC is different in that you also provide debt financing. How does that work?
AG: We have our own capital for equity investments and then we raise funds for debt investments from the market. IFC has been a pioneer in tapping the global bond markets - we have been doing local currency bonds in different markets and raising resources in a way that also helps develop the local bond markets. In India, IFC can provide long tenor, fixed interest, rupee debt ideally suited to long term financing for infrastructure assets.
VI: IFC’s investment sizes vary quite widely. How do you manage that?
AG: Yes, this year in fact we have done an investment of $350,000 in one firm and we have done equity investments of up to $150 million as well, so the range is very wide. We have to have a right balance since, in addition to return, we need to look at impact. So when we see a model that has the ability for scale and there is innovation, we don’t look at just the size. In fact, there are more challenges in doing due diligence on smaller deals than in doing a big deal with an established company.
The reason why we have done these little deals is that it has worked well for us in the past. We have made early investments in what are today big companies like IDFC, IL&FS, Moser Baer and Bharti. Typically, we start pretty modestly and grow with the companies. We tend to make serial investments as their growth demands.
Of course, we can’t do 80% of our portfolio in small deals, but we have the flexibility to do 10-20% in such deals which make us closer to a VC fund. Specifically, for Cleantech IFC has a dedicated team that focuses on early stage investments.
VI: Some of IFCs investments are in large or even listed companies (like Max Healthcare, Apollo Hospitals, Jain Irrigation, Himadri Chemicals, etc.) which can easily tap other sources of capital. What is the thinking behind such investments?
AG: It depends on which area they operate in – for example, if it has a high development impact and if they are doing something which is touching on some of our strategic priorities. Our involvement with these companies will be to encourage them to innovate more in their knowhow and technology. For instance, we are working closely with companies like Jain Irrigation to help them expand into other developing countries in Africa, Turkey, etc. Similarly, we are working with Atul on water conservation.
Healthcare is a big area of focus for IFC. Partnering with companies like Max Healthcare and Apollo helps us to reach healthcare to the lower income states and the base of the pyramid.
VI: How does IFC view the need for exits?
AG: We have a lot of flexibility and have stayed with companies in certain cases for over 10 years. We use a portfolio approach and exit companies - especially if they are listed - over time. In some cases, we have a put option to the sponsor (promoter) and we can exercise that put.
In general, we don’t have any hard and fast rule that we have to exit in three years, etc., but we try and manage it based on the needs of the company and our own portfolio management needs.