Entity-level PE investments could make a comeback in real estate

The recent investments by Warburg Pincus and Temasek Holdings in Piramal Realty and Oberoi Realty, respectively, are rare instances of private equity (PE) investments in real estate entities. PE funds are usually content with investments at the project-level in real estate space.

A quick look at the PE investments in real estate companies show that PE fund managers are struggling or have struggled, with exits at the entity level.

Although global investor Morgan Stanley has part-exited its holdings in Oberoi Realty, it is yet to exit its investments in Pune-based Panchshil Realty and Mantri Developers of Bengaluru. These investments were made in 2006 and 2007, respectively. Morgan Stanley Real Estate invested Rs 300 crore in Mantri Developers and pumped $130 million into Panchshil Realty in 2007.

BITTEN, YET NOT SHY

RECENT ENTITY LEVEL DEALS

• Warbug Pincus invested Rs 1800 crore in Piramal Realty
   
• Temasek Holdings invested Rs 324 crore in Oberoi Realty

ENTITIES WHERE PEs ARE YET TO EXIT

• Morgan Stanley invested $130 mn in Panchshil Realty in 2006
   
• Morgan Stanley invested Rs 300 crore in Sushil Mantri group in 2007

ENTITIES WHERE PEs EXITED AT LOSS

• HDFC Property Fund exited Vascon Engineers at 70-80% loss in 2015
   
• IL&FS Private Equity exited Phoenix Mills with a 12.4% haircut in 2014

"Since IPO (initial public offering) markets are yet to pick up, they have to find some other options for the exit," says a person who is aware of the global investor's plans.

Recently, HDFC Property Fund, sponsored by HDFC, distributed a majority of its stake in Pune-based Vascon Engineers to existing investors at a loss of 75-80 per cent.

Last year, IL&FS Investment Managers exited its holdings in Mumbai-based Phoenix Mills at a loss. IL&FS PE had an investment in the project through Yatra Capital platform, a Euronext-listed firm. It came under IL&FS PE's fold after it acquired Saffron Asset Advisors, the investment manager of Yatra Capital, in 2010.

"Exit from such investments in the unlisted space is extremely challenging, and projecting exit through the IPO route is extremely uncertain and challenging. Value unlocking on an entity level takes an extremely long time, which is typically beyond the tenor of the real estate funds," says Sharad Mittal, head, real estate fund, at Motilal Oswal Real Estate.

According to Mittal, very few firms are witnessing participation at the entity-level at this point in time. "Firms that have a differentiated story, have demonstrated strong corporate governance, and have created a niche and strong brand for themselves, might see entity-level investments. Also, firms that have an affordable housing story, which is very high on the current government's agenda, will see some interest from investors."

Rajeev Bairathi, executive director (capital transactions) at Knight Frank India, believes only quality developers with a strong track record and corporate governance standard attract long-term entity-level investments.

Bairathi lists platform deals such as Godrej-APG, Standard Chartered-Mahindra Lifespaces, Peninsula Brookfield as the instances of such investments. "There aren't too many entities which have high levels of corporate governance standards. So you will see very few such deals."