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Realty funds adopt new ways of raising capital

Realty funds adopt new ways of raising capital

Bangalore: Fund managers setting up their own real estate-focused funds are opting for new ways of raising capital from wary investors.

Moving away from conventional models, these new fund-raising structures offer flexible terms to investors and a choice of projects to invest in.

Arvind Pahwa said his firm Lavi Real Estate Advisors Ltd will follow a “managed account" route, allowing investors to put their money into the fund when investment opportunities in projects come up.

“Investors today are shy of putting money in a fund structure where they don’t know where the capital will be deployed. Unlike a typical fund where investors subscribe to an agreement and have little to say, in our case we will explore project opportunities and then go back to our investors," said Pahwa, who was formerly chief executive of South Asian Real Estate Group, an investment and development company.

Many realty funds are struggling to woo investors both because of the slowing economy and lacklustre returns from the earlier round of real estate investments.

Non-conventional models allow funds a better handle to convince investors to part with their money and a faster way to raise capital.

Another fund manager, who recently quit as the India head of a global private equity (PE) fund and didn’t want to be named, said he is adopting a mix of blind pool and project-specific fund-raising.

A blind pool fund is one in which a group of investors pool in money but wouldn’t know details of the projects in which it will be invested.

Offshore investors, particularly, are more comfortable relying on large PE brands than with testing new funds, said investment bankers.

Sharik Currimbhoy, chief executive, Element Capital Advisors, an investment advisory, said that in a few cases, some fund managers are willing to put their own capital into a fund to boost investors’ confidence.

“There are also a number of HNIs (high networth individuals) who want to invest directly," he said.

Balaji Rao, after quitting as managing director of Starwood Capital India Advisors Pvt. Ltd in 2010, set up Indic Capital Advisors Pvt. Ltd to invest in mid-market hotel assets.

Rao still plans to raise a $200 million fund, but is more actively looking at raising $100-150 million from a managed pool of investors, largely in the US and comprising rich individuals and family offices.

“However, this is a tedious process to look at individual projects and talk to investors and convince them every time," he said. Besides, “India as an investment destination is losing its sheen and blind pool fund-raising is getting increasingly difficult."

Larger funds, too, are adapting non-conventional models to raise funds, selectively opting for co-investments to get a larger corpus and more transactions to satisfy investors.

K.G. Krishnamurthy, managing director and CEO of HDFC Property Ventures Ltd, said there are a number of rich families that want to invest in real estate funds but seek the flexibility to be able to invest and exit where and when they want to.

“In co-investments, investors simply pick up a stake in a particular project, and they may exit when they wish to. For this, the fund manager only acts as an adviser in the transaction and gets a fee against it, but there is no profit-sharing with investors," Krishnamurthy said.

HDFC Property Ventures Ltd, which is raising a $500 million offshore fund from select investors, will top it with another $150 million of co-investments drawn from anchor investors in the fund.

ICICI Prudential PMS Real Estate Portfolio is raising a $127 million (around 698 crore) fund that will have a greater proportion of co-investments when compared with the current corpus of 700 crore that it has deployed.

“Large investors want that kind of benefit and this also helps in getting better deals and helps the current set of investors that you have on board," said Rahul Rai, head, real estate, ICICI Prudential Asset Management Co. Ltd.

According to Amit Goenka, national director, capital transactions at property advisory Knight Frank India, about a dozen real estate-focused PE funds are currently raising capital, largely domestic capital and some from overseas investors. Goenka warned that some deals have fallen through in the recent past, especially when fund managers took too long to showcase projects to investors, and developers called off the deals.

“However, some funds have strategically used this technique to do better and larger deals, bring in good co-investors alongside the current investors, where the former even offer a good fee," he said.


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