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“Private Equity Will See More Of Controlled Transactions In Future”

15 December, 2008

At a time when fundraising is extremely difficult, IL&FS Investment Advisors, a 100% subsidiary of IL&FS Investment Managers Limited (IIML) announced the closing of its second real estate fund, IL&FS India Reality Fund 2 (IIRF-2), at $895 million (Rs 4,300 crore). Presidio Partners, a US based placement agent helped IL&FS raise the fund. With the current fund, IIML has become the largest real estate investor in India with a total of $1.4 billion under management exclusively for real estate. Although the real estate sector has taken a beating due to higher homeloan rates, IIML remains confident of delivering an IRR of 25% to its investors as it sees this to be the right time where developers are showcasing some of their best jewels because they know that those are the ones that will bring them enough capital to be able to take them to the next level.

VCCircle’s Shrija Agrawal talks to Archana Hingorani, CEO and Executive Director, IIML, to know more about their fund raising experience, and allocation plans for the fund. Hingorani believes that private equity in India will see more of controlled transactions and promoters will shed their non-core assets. Excerpts:

 

How was your fund raising experience? What was the reaction of the LPs?

The timing of this fund is a little different from what most people would think. We started raising fund sometime late last year in October. By December, we raised first half of the fund by primarily going to our existing LPs.

So they were all known LPs and they knew what we had done in fund one and they all came into the second fund. So, the first strategy was to bring in all our old LPs. Even though the investment climate had worsened since then, it was not as bad it is today. So it was easier to raise the money; also we had fuliflled all what we had promised in fund one. We had told them that we would make sure that we deploy capital by this date and we will do multi-location. That is the reason they all (old LPs) came again.

After the first close in December, 2007 (at $578 million), we went to new investors. We took almost eight or nine months to convince new investors to come one board. It was difficult obviously, because the climate had changed but because we had already deployed one fund, and had all our previous investors in the second fund, we did get significant traction in the sense that 50% money came at that point in time.

 

Any third party involvement or placement agents?

Yes. Presidio Partners which is a US based placement agent- they have been involved with us from the very beginning in real estate. They helped us raise fund I as well as fund II.

 

In these times when LPs are themselves struggling with stretched allocations and shortage of capital,  we often hear that LPs are trying to negotiate GPs on share of profits and the fee that the fund can take home back, so any such kinds of demands that you also faced?

Absolutely Not.

 

How are you seeing the institutional investors’ attitude towards private equity changing?

There is definitely a change. They are closely monitoring what is going on in the market which was not the case earlier. Earlier, they would get their investor report, and they would come back if they had any questions. Now it is a little more hands on, as every four or five weeks, one or the other LP will call to ask what is the progress on the projects, and if they are on track? It is because they in turn are also getting questions from their committees or whoever is assessing their performance as to how their investments are doing. So clearly that philosophy of how to manage your investments even from an LP perspective has changed. So, we are expecting a lot more interaction with them in the next one or two years compared to what was earlier.

 

So does that mean extra pressure on you?

No. I don’t think anybody is saying why you are not selling or why you are not doing this. I think it’s just that they want to be better informed because when they are asked in turn as to what is going on, they should have answers.

 

So how much of this fund has been invested?

As I said we did our first close sometime late last year, so we have been able to put out about $200 million out of the $895 million.

 

What are the opportunities you see now?

well, its definitely more amenable to investments this time around. That was not the situation almost a year ago when there was significant rise in valuations, too many people looking at the same investments and so on. The valuation is much more interesting (now).

Also, ability to look at assets is much better because you are getting to see better assets from developers. So now they are showcasing some of their best jewels as they know that those are the ones that will bring them enough capital to be able to take them to the next level. That was not the case earlier. You would get to see the transactions which where more capital intensive. Quick turnover transactions or advanced stage transactions, you would never get to see them earlier. You are getting to see those where the permissions are done, constructions are about to start. Those kind of transactions are coming now because they are stuck at some level.

 

So should you be looking at projects or developers at entity level?

As preference we don’t like entities. Almost everything that we do is at the project level.

 

This slowdown has impacted the real estate sector badly, so there are developers which are working in a stressed if not a distressed sort of an environment. So even big developers like Unitech are now trying to sell stake in their hotel projects. So would you be looking at these kinds of opportunities also?

I am not too comfortable saying that I want to look at stressed or distressed assets. What we want to rather look at are transactions where you have a developer who knows what he is doing, who has execution skill set and he is offering you a better piece of his portfolio so you get lot of comfort. So those are the transactions we are seeing. Let’s say I was to get a developer who has a land bank and is trying to give it to me at cheapest valuation, I would not take on that kind of a project because I also need to worry about how it would get executed.

 

 

How many investments would you be looking to make and the ticket size of investments?

The ticket size is going to be anywhere between $25-75 million so it depends on how many we end up doing. Perhaps 15-20 transactions. In terms of the kind of assets we continue to be partial to the residential given its low cash turnaround requirement. We are also looking at offices in large cities as well as we are trying to diversify into what is not traditional real estate, for example, industry-specific industrial parks, warehouses etc. 

 

What is your view on real estate now? Do we see a correction yet?

I think some pockets have corrected and some pockets continue to correct so I think there will be pain in certain pockets at different levels at least for an year or so. 

  

What are the trends you see emerging in the wake of the credit crunch now?

India is known as a market for private equity with limited or minority stakes. But, due to credit crunch, there is going to be a lot of family houses or entrepreneurs who will try to focus on their core strengths rather than continuing to do whatever number of projects they are doing – real estate or otherwise.

I see a huge potential and possibility for private equity in India to get to the next level- which is to get controlled transactions. I think that will happen sooner rather than later.

If this credit crisis had not happened, it probably would not have surfaced for another two to three years, but because of the situation it will surface a whole lot earlier because like real estate guys looking for liquidity, other parts of the economy also people will start focusing on what is integral to their core operations and shedding non-core assets. I see private equity playing an important role there.

 

That goes for you as well … looking for controlled transactions?

We will look at controlled transactions, but it has to match the skill set that I have within my group or my resources.

 

We hear a lot of PE funds finding it extremely difficult to raise funds now. Any reactions?

I agree. If I were to start fund raising today it would be tough. It’s no longer a question of your reputation or your track record. It is what has happened to your investor base. They themselves are rationalising their allocations. So, today if you were to start fund raising, it definitely is very difficult and very challenging.

 

You are also raising an infrastructure fund with Standard Chartered Bank?

Yes. I am not allowed to talk about it at this point in time.

 

What is your view on PIPE investing?

Traditionally we have not been PIPE players if you look at our reputation in the market nobody comes calling on us for PIPE. We did a few PIPEs but they were not short term one year investments. They were meant to be three to four year investments. So we have been not that positive on doing PIPEs through a private equity route.

However, you can get good value deals if you are able to work with management. If you work with them for three to four years in bringing their growth plan to fruition, I think that itself would be an interesting strategy.

 

Would you be looking at PIPE transactions for this fund?

As I said it’s not a major part of our portfolio. Any fund that we do on the private equity side, we do about 10-15% of our portfolio in PIPE so we may look at a few.

 

Do you think it’s a very timely fund from your side, as you can do bargain hunting? Also, promoter expectations have come down.

You are right, we have the capability to fund a lot of different types of   transactions in a lot of different sectors today and from that perspective it’s good. Yes, promoter expectations are coming down but I think everybody needs just one more quarter to realise that it’s down and it’s not coming back up quickly and therefore transactions will definitely happen at a lower level than what they expect today.

 

Where are your LPs from?

We have LPs from all over the world, from Japan to the US, and some Middle East.


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3 Comments
Tom Davis . 6 years ago

Take a look at this revealing case study of an IL&FS sponsored deal: http://infrastructure.gov.in/pdf/NOIDA.pdf

R . 6 years ago

Investments in PIPE include Leela (sold in 1 year), Alok Industries, Spice Jet, Eastern Silk (this is all about 50% of previous fund). Pre IPO includes CNN IBN, Sasken and ABG.

Rupinder Singh . 6 years ago

Controlled Transactions : That’s a good description for your plan. In last few months/quarters investments became synonymous with burning your capital.

Investing should mean value which you create on the day you buy!!! It’s all about timing also.

Good interview/article..

“Private Equity Will See More Of Controlled Transactions In Future”

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