Real estate-focused private equity investors who have been raising funds or are busy preparing their war chests for the next round of fundraising, seem to be set for a hard landing with market regulator Securities and Exchange Board of India (SEBI) stepping in with new guidelines for alternative investment funds (AIF). These norms disallow such investment firms to raise less than Rs 1 crore from an individual investor.

According to fund managers and consultants, individual investors contribute a significant chunk of the capital raised by domestic PE funds. Traditionally, this constitutes 50-60 per cent of the domestic fund size with most of them investing around Rs 10 lakh-Rs 50 lakh each.

As global investments started drying up since 2008, Indian realty funds raised over Rs 7,416 crore from the domestic market, as per VCCEdge, the financial research platform of VCCircle.

Amit Goenka, national director (capital transactions) at Knight Frank India, says, “At present, most of the domestic investors individually invest close to Rs 50 lakh or less. So raising more than Rs 1 crore from each will be a big challenge and it will affect the PE funds raising capital from local investors.” Although SEBI guidelines are crucial as a lot of funds are raising money from investors without explaining the risk element in such investments, raising the bar to Rs 1 crore is bound to hit the small funds and hinder their fundraising initiatives.

V Hari Krishna, director of Kotak Realty Fund, says, “The amount of the capital raised on an annual basis will shrink as funds won’t be able to raise money from investors who used to invest around Rs 10-20 lakh. Thus there will be a dramatic shift in how funds will be raised in the future.”

Also, SEBI has stated that none can have more than 1,000 investors per fund and that will make things even more difficult for the domestic PE funds.

“Although SEBI has clearly stated that only 1,000 investors would be allowed per fund, in most cases, there are more than 2,000 investors per fund. If the ticket size is bigger, they usually have more investors. But now, they may have to introduce multiple series funds to raise money from those investors,” adds Goenka.


According to Shailesh Ghorpade, managing director and CEO of Bangalore-based private equity firm Azure Capital Advisors, “If an investor has to put in Rs 1 crore, the surplus capital of that investor has to be around Rs 15 crore. It is true that governance has to be tightened but it is very difficult to top from Rs 20-25 lakh investment to Rs 1 crore at one go. We have to look at the fact that the real estate industry is now capital-starved and such a regulation will lead to shrinking fund sizes in the future.” Azure currently manages a fund worth Rs 50 crore and 75 per cent of its investors have contributed less than Rs 1 crore. This comes as double whammy for realty funds which have been facing rough weather in offshore funds.

An analyst with a domestic brokerage says, “It has been difficult for Indian realty funds to raise any significant amount of money in the last two-three years. Even though a lot of funds have gone offshore to raise capital, people have rarely come back with the targeted amount. The new regulations will make it even more difficult to raise money and investment will be very tight going forward.”

Indian real estate-focused private equity firms are gearing up to raise close to $5.3 billion, either in fresh funds or in follow-up funds, according to VCCircle estimates. However, analysts say that in spite of many successful exits recently, the going would be tough for fresh fundraising and only one-fourth of the estimated amount would make it from the drawing boards.

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