Bangalore: New York-based private equity fund AIG Global Real Estate has decided to buy out developer RMZ Corp.’s stake in a proposed Hyderabad project, potentially ending the dispute with its joint venture partner, said a person familiar with the development.
With this settlement, the joint venture between AIG Global and RMZ will also be dismantled. AIG and RMZ formed the venture a few years ago, with the PE firm committing an investment of $200 million (around Rs.1,100 crore) in five real estate projects. Ties turned sour because of a delay in the Hyderabad project, in which nearly half the value of the joint venture was locked.
The venture has in any case been nearing an end with the two firms parting ways in their other projects as well.
The dispute became public recently when AIG Global sent a legal notice to Bangalore-based RMZ, demanding that the real estate firm sell its 50% stake in the Hyderabad project as it had been unable to develop it the past few years.
“The settlement between the two parties is at a final stage. This is the only surviving project under the JV, and once the buyout happens, the project will be revisited,” said the person mentioned above, who declined to be identified. “The matter could have either been settled through a prolonged legal procedure or this way, where AIG is buying out the stake at a substantially discounted price.” He didn’t give more details on the terms.
The Hyderabad project was initially planned as a 2 million sq ft. residential development.
RMZ managing director Raj Menda confirmed the company is selling its stake in the Hyderabad project and ending the venture with AIG. He didn’t elaborate.
This year, as the investment horizons of many realty-focused private equity (PE) funds come to a close, several instances of legal or arbitration proceedings have been initiated against real estate partners in India over delays in exits. Property consultants blame skewed investment shareholdings between real estate funds and developers for such spats. In the AIG-RMZ case, for instance, the PE fund had to put in about 80% of the investment and the developer the balance 20%, but the stakeholding and the profit were to be shared equally.
This is known in the industry as the ‘promote’ structure—essentially an incentive given to the developer by the fund usually in terms of higher profit share on achieving a target.
“This structure, where profit-sharing doesn’t match the investment sharing ratio later proved tough for the investor because it was skewed in favour of the developer. Transaction structures today are more balanced,” said a property consultant, who didn’t want to be named.
The consultant said the aim for AIG should be to salvage whatever it can from the Hyderabad project, but added that this will depend on how soon it can launch it, the pricing, and market conditions.
AIG is already exploring options: roping in a minority development partner or contracting out project development.
Not all such disputes are expected to be settled amicably, property consultants said.
More disputes are expected to arise in 2013 because funds need to return money to investors, said Ambar Maheshwari, managing director, corporate finance, at property advisory Jones Lang LaSalle.
PE funds typically invest four-five years in a project before looking to sell their stakes and seeking returns as they need to repay their investors. India’s real estate sector saw a surge in PE investments during its prime in 2006-07, after which the market has been mostly depressed.