Climate, infra will dominate India investments, says BII's Asia head Srini Nagarajan

Srini Nagarajan, managing director and head of Asia at British International Investment

"India is very important for us and comprises around 20-22 percent of our balance sheet size and going ahead, you will find a lot more investments happening in climate and infrastructure, in different forms, debt, equity or mezzanine."

That's the word coming in from Srini Nagarajan, managing director and head of Asia at British International Investment (BII), the UK's development finance institution and impact investor that has invested around $2.5 billion in India so far across firms ranging from Mahindra Electric, Big Basket and Care Hospitals to Tata Capital, Ayana Renewable Power and Aavas Financiers.

Earlier this year, in a mega transaction, BII along with Eversource and NIFF agreed to sell their renewable energy platform Ayana to a joint venture of ONGC and NTPC for an enterprise value of $2.3 billion.

In an exclusive chat with Moneycontrol, Nagarajan, who has had earlier stints with Standard Chartered Bank and Actis, elaborated on BII's investment priorities in India, the impact of the ongoing volatility on IPO markets and valuations and much more. Edited Excerpts

Can you elaborate on the investment philosophy and exit strategy of a development finance institution like BII? How does it differ from traditional PE funds?

Our investment philosophy is completely predicated on the fact that are we being additive or not. Are we really crowding out others? That's the most important thing. Second thing is, whether it (target firm) fits into our whole development impact framework, particularly in terms of the productivity and sustainability inclusion framework. We also measure it (target firm) on a scale of one to ten and see where it scores.

The third important aspect is what are we really bringing to the table in terms of our investment thesis, in terms of our ability to add value. The contribution thesis. So that could be in the form of better business integrity practices along with our sectoral knowledge.

What is developmental capital doing in a certain investment opportunity is the key question raised by our investment committee. There are three sectors of focus for us - climate and infrastructure, financial services and services and manufacturing, what we call industrial technology and services. We are much more product agnostic and it doesn't matter whether we do debt equity, or mezzanine.

In terms of exits, one advantage we have is we are a balance sheet investor, we are not a fund investor. So, we don't have any fund life constraints. That's a huge luxury to have, right? Our exit timelines which are enshrined in the investment agreements are normally between five and eight years. But I think we stay in investments as long as we stay relevant as a DFI. If more and more commercial investors keep coming in, we will exit the business. I think exits are important for us because it will allow us to recycle the money. But they don’t happen because we are constrained by fund life, they happen more because we completed our mission.

As Head of Asia, how does India look as an investment destination when compared to its Asian counterparts amid the ongoing volatility due to the global tariff action by the US government?

India is very important for us and comprises around 20 to 22 percent of our balance sheet size. We are basically a counter cyclical investor. We are not running to the hills when there is a problem, and we are meant for emerging markets. We are not alternating between developed markets and emerging markets. India is focused on net zero by 2070 and the British government is focused on meeting the target by 2050.

In India, we have a dual mandate - at one end of the spectrum is inclusion and at the other end of the spectrum is climate. In terms of the impact of the more recent economic trends, and what's happening globally on the emerging markets, one has to gauge that and see what impact it has on markets and be extremely vigilant. But India has got a nice balance between the domestic economy and exports. So, it's not going to shackle the economy completely. On the other hand, we have to be watchful what's happening globally. But it will remain a very important market for us.  Outside London, (India) is one of our biggest offices.

BII has deployed $2.3 billion in India so far across sectors, with the lion's share going to multiple sub- segments of financial services, be it bank's, NBFCs or micro finance institutions. Will this trend continue going ahead and will there be any fresh bets on the insurance sector which has seen M&A action involving global players and Indian partners in the recent past?

Financial services will be an important part given our inclusion thesis. But climate and infrastructure will probably be a much more dominant part in what we will do in future ( in India). I think that's where our capital is much more relevant and additive. So I think you will find a lot more investments happening there (climate and infrastructure) in different forms, debt, equity or mezzanine.

In terms of our inclusion thesis, where we focus on that geography, which is $6.8 per day, micro insurance could have made much more relevance for us. But we didn't find opportunities on micro insurance companies at scale. And the business/investment thesis wasn't stacking up. So, we didn't do this at that stage. The chances of us doing insurance, looking at insurance, through a catalytic lens is much higher. What do I mean by that? We'll probably be specifically working on insurance sectors to meet a certain section of population. For example, we can use our kinetic pool of money, like a climate innovation facility, to try and build insurance for smallholder farmers to where they are able to sell through the crop cycle. We have done that in Africa.

I would love to see whether the models which we do in Africa can be introduced to the smallholder farmers in India as well. So those kinds of micro insurance products will be much more palatable for us as opposed to the large insurance segments which are being chased by a lot of international money.

BII launched Ayana in 2018 to accelerate the adoption of renewable power in India and mobilised over $1 billion along with Eversource Capital and NIIF. Then came the mega $2.3 bn sale to the ONGC-NTPC JV. Tell us a bit about the returns that BII made and your future plans in the clean energy sector?

On the returns part, whatever is publicly disclosed is what I can disclose. I won't be able to say anything more than that. On our future plans, transmission, that's an interesting area for us to start investing in energy. Secondly, smart metering in terms of EV infrastructure and cooling solutions as well. So those are the new frontier areas where we will start investing.

Also, there are adjacencies to climate like food and agriculture, mostly in the form of conservation of soil, conservation of fertilizer and seeds and improving the soil efficiency. Through our climate tech investing, we are finding a lot more opportunities. But they are slightly sub-scale now, we are anticipating those businesses will scale over a period of time to serve multiple markets even beyond India. So food and agriculture is one area where we are quite focused because it also helps from the point of view of food security in most countries where we operate.

Have any of your portfolio companies paused their IPO plans due to the ongoing uncertainty in the markets and do you think valuations have been reset significantly?

Well, there are three to four companies that have received the SEBI's approval. Still, we will have to wait and see the external market conditions.

In terms of resetting the valuations, financial services companies that were aspiring to go at four times book will moderate now. There will be some amount of moderation in terms of valuations, given where the markets are and the overall volatility. We are also supporting a company launch an InvIT ( infrastructure investment trust) for warehousing. This is industrial warehousing, the TVS Industrial and Logistics park. This is one of the first few of its kind in India where a company we have supported is floating InvITs to increase the number of square feet from 10 million to around 20 million plus. So, I think pioneering some of these aspects is important for us.

One of your portfolio companies, IPO-bound Ecomm Express, surprised the startup space with a sudden fire sale to rival Delhivery and that too at a 80 percent drop in valuation as compared to its last round. Analysts blame the markdown to client concentration risk, with 52 per cent of revenues in FY24 coming from a single client according to its IPO prospectus. What are the learnings of BII from this episode?

I am afraid I can't answer that specific question on a specific company.

What about more bets in the startup space? Any other new age companies or segments in new age that BII is exploring?

We have a very active VC program, under which we have done a lot of VC co-investments, but those are smaller cheque sizes, and we have to see how they all pan out. In the overall VC environment, what is critical is demonstration of exits and demonstration of path to profitability. Otherwise, the fundraising environment is not going to be easy for any of these companies.

You exited Manipal Hospitals earlier, which is now gearing up for a mega IPO, potentially India's biggest ever in the healthcare space. You have had presence in a few other healthcare assets. What's your take on the segment?

As far as healthcare is concerned, we did not invest in Manipal Hospital. We invested in a separate structure with Ranjan Pai and Manipal, where we would do more of early-stage VC investing jointly with them. We did a few investments and afterwards, interest from both parties drifted, and then we exited. So, we didn't invest in the hospital itself. We did invest in Rainbow, Narayana Health, Care Hospital and few others.

Healthcare, as a segment, if you're willing to be patient, has done quite well for us, and for other investors in the country. And you will find that there's a lot more M&A, which will happen in healthcare.

As far as our philosophy on healthcare is concerned, I don't think the tertiary healthcare, which we did in 2013, 2014, 2015, requires DFI’s anymore because the private equity funds are very much on the forefront of doing this. So we moved out, and we are looking much more at healthcare ancillaries, diagnostics and rural healthcare, which resonates much more to us as a development financial institution.

By when do you think BII could look at doubling its exposure to India?

What we had committed to India is that we will definitely focus on the area of climate finance, where we said that we will invest a billion dollars during the strategy cycle of 2022-26. I think that is something we have accomplished. Going forward, at least a scale and ambition of keeping $500 million to $700 million in India, on a steady state basis will be maintained.

On top of that, we do have ambitions to build what we call British climate finance and mobilization. We will try and bring in third party commercial investors into transactions and our overall ambition is to build this up as well. I think our ambition in India will be to maintain the current steady state, subject to our next strategy being agreed with our shareholders. Fundamentally, India will continue to remain a mainstay for us, it’s our largest contingent outside London and it's a market which has delivered returns to us over the last many years.

There are enough commercial lenders in the country. So, I think where our capital will be more additive is in more equity or mezzanine type transactions, along with selective plain vanilla debt where we are able to bring a differentiation to the table. We are not going to crowd out commercial banks and say,  I will undercut you and do this transaction. That's not the kind of institution we are.

What's the sweet spot for BII in terms of typical deal sizes? And are you open to majority deals, if at all?

Our sweet spot is anywhere between $25 million to $100 million. As far as control deals are concerned, it's avoidable. But in circumstances, if that's the only way in which we can deploy the money, like we started Ayana as a 100 percent subsidiary, we are not averse to that.

We must give credit to India for having matured over a period of time, where I think international investors, including the bulge brackets are bold enough to take controlling stakes in the country and run businesses today. Relatively speaking, how many emerging economies in the world can be credited for that?