Private equity (PE) firms are learnt to be pulling out of real estate deals, citing condition precedents (CPs), which are part of a deal document. CPs are conditions that are required to be satisfied post signing of a deal, without which the deal cannot close. Conditions include getting permission in a specified time period, timeline guarantees.
An overseas PE firm based in Mumbai is trying to get out of a deal it had signed with a Delhi-based real estate developer in the third quarter of 2008. It is invoking the ‘no material adverse change’ clause, which is part of the CPs in the contract.
“PE firms are looking at various exit options to get out of partly completed deals. In transactions where the promoters have agreed that they will cause the company to effect a buyback, funds are assessing the exercise of such a provision,” said Akil Hirani, managing partner at law firm Majmudar & Co.
The past six months has seen a slowdown in the real estate market, and with valuations dropping, many PE firms are trying to find ways and means to get out. In some cases, valuations have dropped to almost 50% of the original valuation at which the deal was decided. “The ways for PE firms to get out of deal is, if either there is a breach of contract or CPs have not been fulfilled.
Citing material adverse change is the most common in this scenario,” said a senior lawyer at a Delhi-based law firm, who did not wish to be quoted. The law firm is working on a few such cases, where PEs are trying to pull out.
Many entities are citing material adverse change as a reason to get out of deals, but whether an economic recession can be classified as a material adverse change is debatable. “Such cases are new for Indian courts, and this may be a case of first instance for the courts,” said Mr Hirani.
But on the positive side, where relationships are important, PE and the real estate company are willing to reconsider the deal. “When PE commitments have happened or deal closures are in the last leg, investors and investees are not being averse to taking a relook at the project plans to assess, whether project size or mix needs to be pruned or phased out to protect their internal rate of returns (IRRs). Original project plans might not be completely viable in the current environment,” said Rajiv Sahni, partner, real estate practice at Ernst & Young.
If the excuses made by the PE is not justified, experts say the real estate company can take them to court or take them for arbitration, as provided in the contract. “Considering that most PE contracts provide for offshore arbitration, these issues will, first, end up being arbitrated upon outside India, and will come to Indian courts in the form of proceedings to enforce arbitral awards,” said Mr Hirani.
Source: Economic Times