Market regulator Securities and Exchange Board of India’s (Sebi) norms for alternative investment funds (AIF) are likely to make life difficult for real estate fund managers, forcing them to adopt new ways to attract investors.
Early this week, Sebi notified AIF regulations for private equity, hedge funds, venture capital funds (VCF) and real estate funds, among others. The norms say the funds should not have more than 1,000 investors and the minimum investment amount should not be less than Rs 1 crore. Previously, Sebi had mandated a minimum investment of Rs 5 lakh for investors under the VCF guidelines.
Realty fund managers say fund sizes will shrink due to the new norms and they will have to tweak their strategies. Experts say real estate funds will be hit hard, given that many fund managers were raising smaller amounts like Rs 1 lakh to Rs 10 lakh from investors. “I think fund raising will become difficult and fund sizes will now shrink. There may not be many people with a kitty of Rs 1 crore to invest in funds,” says Ramesh Jogani, managing director of Ajay Piramal group-promoted Indiareit Fund Advisors.
| WHAT’S IN AIF NORMS FOR REALTY FUNDS |
| CORPUS: Minimum Rs 20 crore |
| NUMBER OF INVESTORS: Maximum 1,000 |
| INVESTMENT THRESHOLD: Minimum Rs 1 crore |
| TENURE: Minimum 3 years |
| FUND TYPE: Close ended |
| SPONSOR’S OBLIGATION: Minimum 2.5% of corpus or Rs 5 crore |
| INVESTMENT IN SINGLE FIRM: Not over 25% |
“We could have raised Rs 500 crore to Rs 900 crore as our minimum investment threshold was Rs 25 lakh. With a Rs 1 crore threshold, we can look at Rs 250 crore to Rs 300 crore,” Jogani said. Though Indiareit is planning to raise two funds — one a Rs 500-crore slum redevelopment fund and the other, a $150-200-million (Rs 840-1,120 crore) rental yield fund, Jogani says the new guidelines do not apply to these funds as they have already applied under the earlier VCF guidelines. By the new norms, funds already registered under VCF norms, would continue to be governed by them, including raising commitment up to its targeted corpus.
V Hari Krishna, director, Kotak Realty Fund, believes the “quality of investors” and “product mix” will change with the new guidelines. “An investor who is putting in Rs 1 crore is different from one investing Rs 5 lakh in a fund. He is more aware about investment strategy, returns from investments and so on,” Hari Krishna says.
Bikram Sen, chief executive of ArthVeda Fund Management, the fund management arm of Dewan Housing Finance, agrees. “Following the change in threshold, the private equity industry will witness more well-researched products and weed out non-serious players,” he said.
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Indian fund managers have raised about 13 funds with a total size of $1 billion (Rs 5,600 crore) so far in 2012, compared to 25 funds totalling $3.3 billion (around Rs 18,000 crore) in 2011. The year 2007 saw most number of funds (29) raised — $6.7 billion (Rs 37,500 crore), according to data from VCCedge.
Some like K Madhusudan, co-CIO of Bangalore-based Azure Capital, says fund managers will have to tweak the strategy of raising funds from retail investors to high net worth individuals (HNIs) or ultra HNIs to comply with the norms. Azure plans to raise a Rs 200-300-crore rental yield fund and a development fund of Rs 400 crore and is awaiting Sebi notification of AIF norms. “We need to change our strategy and give private deals to HNIs and ultra HNIs who do not prefer the fund route as they are expensive and transparency levels are low. We have to pick and choose some projects and allow investors to directly invest in them,” he adds.