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We are not growth investors, we are value investors: Siddharth Yog

Q&A with Xander's managing partner

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The , the institutional investor backed by , among others, has been one of the most active investor in in the last two years. The group has has emerged as one of the top two realty fund managers in the country, with $2 billion (over Rs 10,000 crore) of capital under management in real estate and infrastructure. The group is also set to invest Rs 800 crore in real estate arm of Indiabulls group. In an email interaction, Siddharth Yog, managing partner of Xander discusses the investors strategy and plans with Raghavendra Kamath.

Xander group has made a number of private equity and debt deals in the current year. What is giving you the confidence to conclude so many deals when real estate sector is going through rough patches in many cities?

We have been actively investing in India since 2005.  Over the last 8 years or so, we have been evenly paced except in the latter part of 2007 and the early part of 2009, where we sat on the side-lines as we just could not see the value because the market was overheated and unrealistically (and unsustainably) buoyant. Perhaps your question arises because we are more visible as (except for a couple of other) most other players seem to have wound down because they have either lost capital for their investors, or are still to generate any meaningful returns from assets and portfolios that are illiquid, highly levered or caught (and rightfully so) in a regulatory quagmire because the law of the land was broken.

We are not growth investors. Rather we are value investors. As a result whether the market is slowing or heating up, we are always looking for opportunities where we believe there is a mismatch between fundamental base value and market price.  Sometimes this happens because of information asymmetry; sometime because of external issues like liquidity or excessive leverage; sometimes, because we are able and willing to make longer term equity commitments, which very few are; sometimes it happens because we are able to think out of the box to resolve distressed situations which requires hands on, hard work which others may not be willing to do.  And on occasion, its happened because people just like working with us!  Basically, if we are able to invest and release underlying value by either releasing triggers, easing pressure or simply by sweating the real estate, we will do so.

Generating investment returns from private equity investing in India requires a hands-on approach.  We don't think currently you can be a successful passive private investor in India.  Xander's advisory team in India is 80+ strong across multiple offices and in many cities built over 8 years, complemented by our international resources and offices.  We have experienced feet on the ground that work with our assets / investee companies and partners to help create and sustain value in our investment portfolio.  Our network, reach and experience in India gives us the comfort and ability to be involved in a manner that creates value holistically.

What will be Xander Finance's strategy when the cost of capital is expected to reduce and availability of funds is likely to increase for realty developers?

Xander Finance's ambit is not restricted to realty and the firm works across sectors and industries.  Given the pedigree of Xander Finance, it is but natural that the team started in a sector where it feels more comfortable pricing real estate risk since that is embedded in the DNA of the firm.  However, the mandate of the firm definitely spans multiple sectors and I am given to understand from our local leadership, that XF has already consummated deals in other sectors like ‘edutainment’ and is looking across sectors that are currently liquidity constrained.

I imagine that given the cyclical nature of different industries, and the generally liquidity constrained nature of the Indian market there will be attractive opportunities across multiple sectors from time to time. I am sure XF will be able to participate in such opportunities profitably.  The debt market in India is relatively immature and underdeveloped as compared to other economies of a similar size.  We think this will change over time even though this may be a slower process here because of the Reserve Bank's approach of taking measured steps (which we support). In the interim though, we see a huge gap in the institutional market which we are happy to part address.

Regarding cost of capital, a reduction works not just to reduce cost of capital for the borrower, but also for the lender. It's the spread that is important and I am sure that XF will be able to maintain a healthy spread given its substantial equity base and the evergreen nature of its operations which enables better planning and structuring.

How much are you planning to invest in Indian real estate in the next two years?

It completely depends upon the quantum and nature of opportunities we see.  If interesting and attractively priced opportunities continue being available, we will be active investors and if we believe valuations are unattractive or the pricing does not justify the risk being taken, we will adopt a wait and watch attitude or try to find opportunities that may be more complex, out of the box, or simply ignored by others.

How many deals you are looking to conclude in the rest of FY 2013 and first half of FY 2014?

We have no such benchmarks. The constraints are finding attractive deals and the time it takes to structure and consummate any transaction in India.  Then we may also need to juxtapose this with the deals we may be seeing in other countries and the relative time it takes to work those.

I can however state that we are actively looking to invest in India right now.

Are you looking at any new funds for Indian real estate, hospitality or retail?

We have just closed a new fund focussed on more mature assets in the office segment and residential projects where approvals are in place and price discovery has typically happened.

Meanwhile, we have the Virtuous Retail platform which is actively looking for new equity opportunities either for JVs or 100% greenfield or even brownfield buyouts in the retail mall / shopping center anchored mixed use project space.

Finally, Xander Finance is cash rich and looking to undertake fixed return type deals where counterparties are cash constrained or are looking to pay high yield coupons for acquisition or take-out financing because they do not want to dilute equity.

Are you looking at any exit from your investments this year or next?

We are looking at exits at all times. As an investor we are in the business of making AND exiting investments. If we believe an investment is fully priced or where future risks do not justify a potential future uptick, or where there is simply a disconnect in what we believe something is worth and what (higher) price someone if ready to pay us for the asset / shareholding, we will look to exit.  Of course any exit would need to meet all regulatory requirements like lock-in restrictions etc., and prior approval of the relevant authorities. We also take into account the strategic nature of some of our investments / relationships.

You plan to invest $ 600 million to develop 12 malls. What is the idea behind this?

Let me clarify. We have already invested $ 600 Million into the Virtuous Retail platform. This is not a plan but rather a fact and we have been building out the platform since August 2007.  The platform, which is now one of the largest retail real estate portfolios in India, currently comprises approximately 10 MM sqft of shopping malls and lifestyle centers across 6 of the top 10 cities. These assets are at various stages of development (as foreign investors we can only undertake greenfield projects, and retail malls of this size and quality take 5-6 years at the very least to execute). Our first center, VR Surat is slated to open in March 2013.

Virtuous Retail has no debt and substantial uncommitted equity capital which we plan to use to acquire new greenfield and brownfield properties and assets. Our team is actively looking for such new acquisition / JV opportunities across the top 10 cities in India.

Our ‘glocal’ team allows us to tap into the best international talent while building on foundational local talent and experience to create centers that are international in style but Indian at heart.  We offer domestic and international retailers a pan-India institutional platform to work with across their key target markets, saving considerable management time and bandwidth, and to allow them to plan their operations more predictably. We offer investors like pension funds, endowments and charitable foundations an institutionally owned diversified Indian portfolio with the transparency and highest levels of corporate governance that they have struggled to find in India, that allows them to generate consistent annual income over a long term horizon; and finally and most importantly, we aim to offer customers an experience integrated with their local communities and culture, where shopping almost becomes incidental.

The idea that we have been executing on was simple - to build, own and operate a portfolio of retail malls and centers which any retailer, international or domestic, would like to be a tenant in. The platform offers centers which are planned and designed to international benchmarks, built to A-Grade quality, future-proofed to meet the changing requirements of India's rapidly growing organized retail market and operated to optimize the customer experience while becoming a community hub, hence helping retailers increase trading densities, and in the process generating consistent returns for all stakeholders.

What is your outlook for residential, office and retail spaces in the next one to two years?


India is too vast a country for me to be able to generalize across these asset classes for the entire country. We believe real estate is a local subject and while macro themes may become interesting or uninteresting at various times, there are always opportunities available.

Since 2005, the top 7 cities in India have seen the commercial office (third party tenanted) market grow from approximately 60 MM sqft to 310 MM sqft (a 5X) with net absorption between 30-40 MM sqft on average every year (compare this to 2 MM sqft in New York City last year) . In residential in the same 7 cities, there is approximately 250 MM sqft being absorbed every year.  Yet developers claim they are losing money and investors have been unable to generate returns.

As you can see the problem is not with the market. It's with the players in the market; developers who do not want to create value through actual development and see windfall arbitrage only in quick fixes and a nebulous entitlement process; and investors who instead of doing the hard work analysing fundamentals are just betting on leverage and growth (or usually both) to generate returns.

Growth in our opinion will not cover all sins.

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