3E’s of private equity real estateSeptember 18, 2011 / By
Private Equity (PE) in Indian real estate has penetrated deep over recent years and is today a much fragmented industry, with both domestic and foreign players as key industry participants. With strong fundamentals in place, the private equity industry thrives as one of the preferred funding options to Indian real estate developers along with other sources such as banks, equity markets, non-banking financial companies and end-user advances.
As we discuss this industry, I would like to touch upon the 3E’s [Entry, Execution and Exit] of the Private Equity real estate market that constitute a typical PE Lifecycle in India.
Entry: Timing market entry is the key to succeed and sustain as a private equity player. The entry phase forms the crucial initial years when the fund looks at a viable investment opportunity depending on the risk profile subject to market conditions. A typical investment strategy followed by a fund manager could be Core Plus, Value-Added, or Opportunistic depending on the whether the risk appetite is low, medium or high, respectively. While select PE funds have exhibited success stories of opportunistic entry strategies, the majority of PE players have created a “low risk-optimal return” portfolio, especially during the aftermath of economic downturn.
Execution: Once a strategy is in place, it is the involvement of the private equity players with other industry stakeholders during the execution phase of the projects that will ensure a profitable realisation of investment. More than mere returns and realisation, the emphasis on value creation leads to a sustained relationship with the investing partners, which in turn chalks out a sustained long term success recipe for the PE firms. Since the global turmoil during 2008, the thrust on collaboration to ensure hassle free execution of the project has emerged as a winning formula for the stakeholders of Indian real estate, especially during times of uncertainty.
Exit: Similar to an entry phase, exit is an equally crucial phase of the private equity lifecycle. A good return on investment leading to a greater value perception among the investor community as a trend indicates the growing maturity of the country’s real estate market. While a downturn could force an early exit from a PE fund, a well planned timely exit could lead to an opportunistic realisation, which in turn could become a compelling case study for subsequent rounds of fund raising.
PE funds that entered the Indian market during 2006–08 with an investment horizon of three to five years are now strategising at the exit phase of the PE lifecycle. Also, a good number of fund houses are in the process of timing their investment right through their specialized investment vehicles that spans across different asset classes within Indian real estate.