’Offshore LPs Still Not Ready To Invest In Indian Realty’

Kotak Realty Funds Group, a division of Kotak Investment Advisors Ltd focusing on real estate investment opportunities with $771 million under management, has three funds under management, Kotak India Real Estate Fund I ($103 million), Kotak Alternate Opportunities India Fund ($387 million) and the $281-million offshore fund Kotak India Realty Fund Limited. S. Sriniwasan, who was part of Kotak's investment banking joint venture with Goldman Sachs, is the CEO of KRFG since it was set up in 2005. Srini, as he is known, talks to VCCircle about the current investments, exit scenario and LP-GP dynamics particularly in the light of growing base of domestic investors. Excerpts:-

How do you assess the current realty scenario vis-à-vis PE investments?

The market has made a comeback but few cities will see a major correction. Though the residential sector holds good potential for investment, there is oversupply in commercial projects particularly in Delhi and Mumbai. In the next 12-24 months, the oversupply will get absorbed. So, somebody who has the holding power for 3-4 years can make return. Also, realty investment is not as competitive as PE investments in India since there are only a handful of realty funds active in India compared to 100s of PE firms.

What is your view on investment potential in Tier II and III cities?

One of the lessons we have learnt (after the recession) is that the market staged a recovery in tier I cities not in tier II and III cities. There are opportunities in tier II & III cities. Since ours is a large fund, we have to put at least $30-40 million in any transaction. We feel smaller cities cannot absorb this.

What do you think of the investment opportunity in shopping malls in India?

We are negative on shopping mall investments but positive on residential or commercial projects. Compared to world markets, in India, there is no restriction on constructing malls. Second, there is a lack of expertise on starting a shopping mall. Third, the Indian shopper is a unique animal and shopping experience varies from individual to individual. It is not easy to know which kind of shopping experience will work. We see lot of trial and error kind of retailing happening in India. We don’t want to put our cash in that.

Though Indian PE firms have received a good response from global LPs, there is still concern about investing in realty funds. What is your view?

Limited partners, especially offshore LPs, are still not ready to invest in Indian realty. Offshore LPs who have disbursed money are not ready to deploy any additional money. They are keenly watching the performance of the funds.

Also, offshore LPs do not understand the Indian market the way they do offshore markets. LPs want to see the cycle of investment–-investment, performance and return. That has not happened in Indian real estate sector yet. In PE sector, it did happen over 10 years which makes LPs invest more money. They are waiting for it to happen in Indian realty.

What is the domestic LP-GP relationship in Indian realty funds?

Except one or two, none of the other foreign investors have invested a single dollar in last 12 months in Indian realty. Only domestic capital, belonging to HNIs and institutions, is invested here. So the responsibility is higher as a lot of domestic LPs are not mature players in private equity. They are committing without understanding the mathematics of investments.

Domestic LPs need to understand that not all investments will perform well. Global LPs rarely disburse further funds until GPs deploy the first round of fund entirely as opposed to domestic LPs.

Also, domestic LPs are not much concerned about the track record of the fund manager whereas foreign LPs do due diligence for six months and GPs have to face 100s of questions. About 90% weightage is given to track record by global LPs.

Tell us about your investments and fundraising plans.

We are not in a fund raising mode. Our Opportunity India Fund is almost 75% deployed. Real Estate Fund I was invested completely and we are one of the few firms which started giving the money back to the investor. We have paid more than Rs 250 crore back to the investor from the fund. There is no time frame and we continue investing our offshore fund together with the Indian fund.

How are the exits lined up for you?

We have already exited four investments including Phoenix Mills and NDR Warehousing Private Limited, while partial exit has been made from its recent investment in Dheeraj Insignia. We are in active talks for more exits such as two IT Park investments in Mumbai and Delhi -- Peepal Tree Properties, a green field IT park building in Goregaon, Mumbai and Green Boulevard, a project in Noida IT Park.

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