PEs seek fixed returns in realty sector

After burning their fingers with the real estate investments made in 2006-07, private equity players are now demanding deal structure where they have a first and assured share in the returns, people familiar with the development said.

The new deal structures come as real estate firms, saddled with thousands of crores of rupees in debt, struggle to generate cash and look towards private equity for the liquidity injection.

Industry experts said that in many recent deals, PE players have been going in for a fixed rate structure, whereby the PEs' returns are fixed regardless of the performance of the real estate developer. This is similar to fixed-rate loans by banks. The PE gets right to take returns before the developer in such cash waterfall structures.

"Based on their investment experience, a few funds are structuring their transactions as either fixed rate or preferred return structures using non-banking finance companies (NBFC) vehicles," said Varun Batra, Partner, Baring Private Equity Partners (India).

Although such structures are also happening in other sectors, they are more prevalent in real estate.

In a recent deal, a Mumbai-based PE player that has invested in Pune project has opted for cash water fall structure.

"When the returns starts coming, we (PE) will have the first right on the cash flows, and we would take the returns first," a senior executive with the PE fund said. "It safeguards our investment in a difficult time."

According to Liases Foras, a real estate consultancy firm, developers had promised investors a compounded annual growth rate (CAGR) of 37% but the actual returns were only 12%.


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