Structured as well as mezzanine debt has found flavour with Indian private equity funds in real estate. Reason: poor returns from the past investments and assured returns from the debt deals.
Structured and mezzanine debt deals are transactions which involve the elements of a debt - a fixed interest rate and equity component in the form of warrants.
Fund managers such as Ajay Piramal's Indiareit, Kotak Realty Fund are focussing on structured or mezzanine deals in real estate. Fund managers say nine out of 10 deals in real estate take place through structured and mezzanine deals now, compared to five to six deals, which used to happen via this route two-three years ago.
"Our earlier funds were predominantly focused on investing by means of equity exposure. Given the current mismatch between the availability of capital and the demand for it, Indiareit has been focusing on the structured space particularly through its more recent funds and the latest domestic fund-V offering," said Khushru Jijina, managing director of Indiareit Fund Advisors.
In the recent Rs 200-crore deployed by Indiareit in a slum redevelopment project by Omkar Realtors and a Pune-based Marvel group, both were structured deals where it had an interest rate component and equity kicker (a type of equity incentive).
"We still continue to put a great deal of emphasis on the quality of the project, visibility of cash flows and track record of the development partner so the extra layer of structuring and security merely enhances the risk return profile," Jijina added.
Recently, Subhash Chandra's Essel group launched its Rs 1,000-crore PE fund, which does debt deals with realtors. It is also looking at launching a $200-million offshore fund. According to PE executives, Abu Dhabi Investment Authority (ADIA) has appointed Kotak Realty Fund as its fund manager to do debt deals in residential real estate.
"Certainty of returns is limited in equity deals in today's market. But in debt deals, there is a minimum return guaranteed," said Sanjay Dutt, managing director at property consultant Cushman & Wakefield, South Asia. According to the managing director of US-based PE fund, these days all domestic funds are doing structured deals. "They raise money from high networth investors who want regular income from their investment. In structured deals, the funds can make fixed interest from their investments."
If funds get 20-22 per cent internal rate of return, then "they are more than happy", he added.
However, some like Amit Bhagat, managing director of ASK Property Investment Advisors, which manages realty funds, claimed they are the only fund managers doing pure equity deals in real estate.
If PE funds do debt deals, then what is the difference between venture funds and non-banking finance companies, asked Bhagat. "When you give debt, you do not get risk management tools and controls. You are not there to add value, but extract your pound of flesh." Foreign funds such as Blackstone do equity deals in completed assets like Information technology parks, because they are barred from doing debt deals in real estate.