Mumbai: Saffron Asset Advisors Pvt. Ltd, a $440 million (Rs2,046 crore) real estate focused private equity (PE) fund, is set to be absorbed by IL&FS Investment Managers Ltd (IIML), in the first sign of consolidation in the PE industry. The acquisition will make IIML India’s largest PE firm.
IIML is the only listed PE firm in the country and is the subsidiary of financial services provider Infrastructure Leasing and Financial Services Ltd (IL&FS). IIML currently has $2.8 billion of assets in three business segments—$400 million for growth capital, $700 million for infrastructure and $1.6 billion for real estate.
The PE business may be set for a shakeout given the number of entities that have proliferated in the Indian market.
“There are 540 firms in the market today and not all will survive,” Rahul Bhasin, managing partner at Baring Private Equity Partners (India) Pvt. Ltd (BPEP), said on Thursday. In 1998, there were 36 PE firms, which came down to six. This number rose to 78 with the Internet and dot-com boom and then with the crash fell to eight, pointed out Bhasin, whose firm was one of the early funds to set up an India office.
The capacity in the market is much larger than demand, said Arun Duggal, chairman of Shriram Capital Ltd and senior adviser to PE firm TPG Capital Lp. “I expect such transactions to happen more, so smaller funds who are unable to raise money will be opportunities for bigger funds to acquire.”
Saffron Asset Advisors, which has two funds, has deployed $260 million across 16 transactions since 2005. Yatra Capital, listed on the Euronext Stock Exchange, has committed to invest €158.65 million (Rs963 crore) across 15 projects. The second fund is the unlisted Saffron India Real Estate Fund 1.
“Yatra Capital is an open-ended fund and hence it will help us tap a set of investors, which we have never tapped. If we have to do that from the start, it will not be easy,” said Shahzad Dalal, IIML’s vice- chairman and managing director.
Real estate PE funds are finding it difficult to raise and deploy money, said an investment banker who advises on real estate transactions. Limited partners (Lps), the investors in such funds, are not keen on real estate due to the lack of exits and low returns, said the banker, on condition of anonymity as he’s not authorized to speak to the media.
Saffron deferred its fund-raising plans in February as Lps shunned real estate. In September, Saffron had announced it would raise fresh funds to invest in firms that run hotels and logistics businesses, and build infrastructure projects in India by 2010. “We have always said that we would raise funds at the appropriate time and the appropriate time is a function of many moving parts. For now, we are absolutely focused on ensuring that we create value for the current funds that we manage,” Ajoy Veer Kapoor, founder and managing director of Saffron, had said in February.
The deal will also lead to growth in IIML’s assets under management, and hence earnings and fees, Dalal said. Calls made to Kapoor’s mobile phone went unanswered.
IIML runs a dedicated real-estate fund and has a fund jointly managed by Milestone Capital Advisors Pvt. Ltd. Saffron has a tilt towards retail assets, giving IIML exposure to an area it doesn’t have a presence in.
The employees of Saffron, including Kapoor, will be retained by IIML. “Talent is scarce in this industry and they have a good pool of people,” said Dalal. “We have met three Lps (of Saffron) and they are happy with the merger.”
Amit Goenka, national director (capital transaction) at Knight Frank (India) Pvt. Ltd, said: “Many fund lives are coming to an end and people are finding it difficult to exit, so the best way is to merge with bigger players and ride it out.”
However, there are PE funds still coming into the real estate sector. BPEP said on Thursday that it will invest in real estate apart from other sectors. “Real estate will be our new focus,” Bhasin said.