PEs give realty IPO exits a miss

Better gains after listing, avoiding pricing pressure on stocks key reasons.

Private equity (PE) investors are holding on to their investments and not opting for an exit in at least four of the upcoming public issues of real estate companies. They are expecting better gains once these firms get listed.

Initial public offerings (IPOs) are considered as one of the main exit routes for PE investors.
 

THE PLAYERS
Investor	Developer	Stake  (%)	Investment  (Rs cr)
Och Ziff	Nitesh Estates	25	230
Morgan Stanley	Oberoi Realty	10	675
Indiareit	Neptune Developers	15.8	212
HDFC Property Fund	Vascon Engineers	10	138.5

Though offshore investors cannot exit real estate companies due to a mandatory three-year lock-in for foreign direct investment and one-year lock-in if they do not intend to sell during IPOs, some of the domestic and international investors are staying on in the hope that they can improve upon the returns once the property sector picks up in coming quarters.

Global hedge fund Och Ziff with investment in Bangalore-based Nitesh Estates, Morgan Stanley in Oberoi Realty, Indiareit’s domestic fund, which is making a partial exit in Mumbai’s Neptune Developers, HDFC Property Fund in Vascon Engineers are some of the investors staying on for the moment.

Morgan Stanley invested Rs 675 crore in Oberoi Realty in January 2007.

Though global investor Citigroup was planning to swap its entity-level investment in Delhi-based BPTP with investments in some of its realty projects, the plans had been put on hold for at least one year, said a source close to development. BPTP recently filed its draft red herring prospectus with capital markets regulator Securities and Exchange Board of India (Sebi).

Some investors have put conditions for the realty companies going for IPOs. For instance, as per the agreement between German investor Deutsche Bank, which held stake in the key subsidiary of Mumbai-based Lodha Developers, the latter has to go in for at least a Rs 2,000-crore IPO if it wanted to go public, as Deutsche had invested Rs 1,640 crore in the company and it wanted ample liquidity in the stock of Lodha once it got listed on the exchanges. It was also agreed that Lodha would give a minimum 13.65 per cent interest on the debentures subscribed by Deutsche, and later raise it to up to 22.50 per cent on improvement in market conditions.

“Funds having completed the three-year lock-in might be staying because they are looking at better business prospects for the company once it lists and gets cash flow to reduce the debt burden. A lot of funds think that the worst is over and prices may actually shoot up after the listing, considering the revival in real estate,” said Avinash Gupta, national head, financial advisory services at consulting firm Deloitte.

Adds Indiareit Fund Advisors Managing Director Ramesh Jogani, “Though we are in the business of investing and exiting with good gains, we also believe in the growth prospectus of the company.”

Ajay Piramal group-promoted Indiareit Fund holds 15.8 per cent stake in Neptune through its domestic (4 per cent) and offshore (11.8 per cent) funds, and is part-exiting from its domestic fund. It will sell 2.7 per cent from its domestic fund stake and retain the offshore investment.

In January 2007, Och Ziff, through its fund AMIF, invested $51 million (around Rs 230 crore) in Nitesh Estates for 25 per cent stake. The three-year lock-in is coming to an end.

Nearly 10 property developers have filed draft red herring prospectus (DRHP) to raise over Rs 15,000 crore from the capital markets.

Bankers said a part of the reason for a deferred exit was the revival in the stock markets. As a result, investors can offload their investments in the secondary market at any time. “Exits generally happen in a bad market. Funds exit from their investments either when there is a redemption pressure, or they do not think that future prospects of these IPOs are bright. It is no more an issue now. They can anyway exit through the secondary market route after the one-year lock-in,” said S Subramanian, head of investment banking at Enam Capital Markets.

Some bankers said that PE players were also avoiding pricing pressure in IPOs by staying on. “Since most of these players hold a reasonable stake, it would result in a downward pressure on pricing if they tender it at one go. They would rather do it in small tranches or through part-exits,’’ said a banker who did not want to be quoted.