A tightening of global liquidity markets has made private equity fund raising for the real estate and infrastructure sectors difficult with many funds expected to extend their closures or reduce the target corpus. According to people in the industry, the churn in the global equity markets has made investors wary of even private equity funds, although the two markets are in different categories with different quantum of risks.
“The situation has turned different and fund raising has tightened,” admits a senior executive with a UK-based private equity firm, with considerable exposure in India. “The targeted amount in many cases may have to be scaled down,” he added. India has recently seen a number of fund announcements. Pharma tycoon Ajay Piramal plans to raise $800 million from the international market for his recently-promoted real estate fund, while IL&FS is in the market for a $500-million infrastructure fund. Private equity firm Actis plans to raise $100 million, Mumbai-based investment banking firm Keynote is planning a $100-million off-shore PE fund. “Investors or limited partners are discouraged by the global credit and liquidity crises,” said a partner with another private equity firm, adding that the risks associated with private equity investments are high as an investor can lose all his investment if the fund invests in failing companies. Investors typically invest in a specific fund managed by a firm, rather than the firm itself.
According to people close to placement agencies – fund raising teams that raise capital for private equity funds current trends indicate that funds could close with lesser corpus due to lower interests from limited partners. Placement agents usually approach potential investors and have a direct pulse on the mood of the investing community. More investors will mean higher fees for the placement agencies who charge a fee of around 1% of the commitments that they collect.
Liquidity conditions started tightening since last year after risky residential mortgages in the US gripped global markets and banks shied away from lending money. Bear Stearns’ sale to JPMorgan was another blow to private equity bankers who were depending on the bank for increased liquidity for the buyout market.
But Mr Piramal is confident. “We feel this is the right time to launch a large-sized fund because banks and institutions tightened lending norms to the real estate sector and developers need funds to complete their project. We feel a large fund like ours can bridge the gap.” According to sources, 3i is a common investor in all India-focused real estate investment trust (REIT) funds and has so far committed $250 million.
Actis, too, is upbeat about the fund raising. “There is a huge potential for homes for middle class people who are willing to pay between Rs 50 lakh and Rs 80 lakh for residential apartments,” said Chanakya Chakravarti, head of Actis Real Estate Fund. Private equity firm Actis plans to launch a $100-million real estate fund to tap developers who are building homes for the growing middle class.
Private equity funds typically raise money from large investors such as pension funds, large corporates and individuals. But most of these investors are now holding back from investing which could raise accountability issues for funds. According to sources, funds that raise less than the targeted amount could also have to deal with issues that are akin to a company that gets undersubscribed in its initial public offer.
Keynote Corporate Services managing director Vineet Suchanti said, “Our experience shows that the investors are still keen to invest in India-focused PE funds as valuations in India are dropping and becoming more realistic. PE funds are long-term investors and cyclical changes in the world market will not hurt the sentiments of their investors.”
Source: Economic Times