PE Investors are Amassing Unusual Stakes in Indian Real Estate companies. But given their Short Term Profit Interest, there is a Critically huge Potential threat for The Industry. A close look at these Unregulated Flip Artists in The Indian Real Estate space.
It was in 1988 that the world witnessed for the first time the true power and colours of private equity when Charles Hugel, RJR Nabisco’s Chairman agreed to a $25.08 billion leveraged buyout by Kohlberg Kravis Roberts (KKR – a leading PE firm); rejecting a rival bid of $25.63 billion by a consortium of Wall Street investment bankers. Rightly so, the media then exclaimed, “Seldom since the robber barons of 19th century has corporate behaviour been so open to question.” A little more than two decades later, the same private equity investors who were then tagged as “barbarians at the gate” and slandered by Hollywood’s Gordon Gekko (portrayed by Michael Douglas in the movie Wall Street), have managed to undergo an image makeover. Quiet surprisingly, they have been able to shed the erstwhile perception of being corporate raiders plundering for profit to a great extent. In the present context, the ilk of KKR, Blackstone, Bain, Baring, Red Fort, Sequoia et al are no longer feared. On the contrary, they are revered as deep pocketed saviours who are willing to invest in companies, which otherwise have been overburdened by the law of the land and have been misunderstood by the bourses.
Frankly, private equity has been put on an exalted status globally. A 2006 Wharton seminar on Private Equity tried to prove how private equity investment for shareholders was apparently more efficient than standard equity markets! The Economist, no less, once described private equity as the “sharp edge” of contemporary capitalism; later on, in another report they even confirmed that “in an odd twist, all the money going to private equity has helped buoy shares of public companies!” Bloomberg’s Venture Economic report showed that over a period of 10 to 20 years, private equity has outperformed the equity markets by 66% in some cases, to even more than 100% in other cases! The National Bureau of Economic Research, in a paper titled The Cash Flow, Return and Risk Characteristics of Private Equity, showed that private equity always generated “excess returns” relative to equity markets. Mercer did its own stuff in its 2007 PE study, which said, “Not only has the rate of return for PE firms overall been substantially greater than that of public corporations, but such companies – once returned to public ownership – have outperformed the market as a whole.” According to the European Venture Capital Association, while the US and UK had the “broadest and most developed private equity markets in the world (ranked at number 1 and 2),” such PE investments had led to strong innovation and economic growth!
Now, the important lesson to take away from almost all these research reports is that PE firms harbour a fanatic orientation towards maximizing the returns to their PE investors – in other words, it doesn’t matter to a PE firm whether the company in which they are investing could well be doomed if the PE investments were withdrawn; all that matters is the right stock price at which the PE firm makes a substantial return on capital employed. And if all the global reports are any evidence, PE firms and their Gekko managers are giving the full performance for the money being thrown at them by their high net worth investors.
Now again, how has India been viewed with respect to PE investments? Five years ago, the Economist Intelligence Unit’s 2005-06 worldwide survey rated India ‘second from bottom’ in terms of promoting environment for PE. Apax Partners, in their 2007 survey, Future Trends in Private Equity Investment Worldwide, confirmed the same, “India has the second worst environment for private equity!” One wonders then, for all that it is worth, how did private equity investments from the world over find their way into India in the last decade or so (According to India Private Equity Report 2010 by Bain & Company, between 2004 and 2009, private equity and venture capital firms began to acquire critical mass; so much so that PE investors invested approximately $50 billion in more than 1400 businesses), a period that resulted in one of the biggest contemporary asset bubble bursts in real estate history in 2008/9 – helped with a gracious push by the PE investors, who pulled out of the sector en masse just when it had reached its peak, and ensured a swift fall of the sector subsequently?
Given this context, it was perhaps least surprising that when the real estate sector – both industrially and in the stock markets – crashed, one again saw a sudden spring in the PE step, running back towards India, to grab hold of stocks and equity at the undervalued rates. In the immediate periods succeeding the last asset crash, PE firms started forming investment vehicles left and right to invest in the Indian real estate sector, focusing on townships as well as infrastructure that surrounds communities. PE investors returned to investing in Indian real estate through projects rather than equity (as at the project level, the exit route is easy, even with the residential sector). Currently, statistics and market reports show that the PE investment proportion is heavily skewed towards residential projects; because as an asset class, the residential sector is seen to be self liquidating, while commercial and retail have exit related issues primarily due to non-availability of REIT and REMF (real estate investment trust and real estate mutual funds) vehicles.
Frankly, private equity has been put on an exalted status globally. A 2006 Wharton seminar on Private Equity tried to prove how private equity investment for shareholders was apparently more efficient than standard equity markets! The Economist, no less, once described private equity as the “sharp edge” of contemporary capitalism; later on, in another report they even confirmed that “in an odd twist, all the money going to private equity has helped buoy shares of public companies!” Bloomberg’s Venture Economic report showed that over a period of 10 to 20 years, private equity has outperformed the equity markets by 66% in some cases, to even more than 100% in other cases! The National Bureau of Economic Research, in a paper titled The Cash Flow, Return and Risk Characteristics of Private Equity, showed that private equity always generated “excess returns” relative to equity markets. Mercer did its own stuff in its 2007 PE study, which said, “Not only has the rate of return for PE firms overall been substantially greater than that of public corporations, but such companies – once returned to public ownership – have outperformed the market as a whole.” According to the European Venture Capital Association, while the US and UK had the “broadest and most developed private equity markets in the world (ranked at number 1 and 2),” such PE investments had led to strong innovation and economic growth!
Now, the important lesson to take away from almost all these research reports is that PE firms harbour a fanatic orientation towards maximizing the returns to their PE investors – in other words, it doesn’t matter to a PE firm whether the company in which they are investing could well be doomed if the PE investments were withdrawn; all that matters is the right stock price at which the PE firm makes a substantial return on capital employed. And if all the global reports are any evidence, PE firms and their Gekko managers are giving the full performance for the money being thrown at them by their high net worth investors.
Now again, how has India been viewed with respect to PE investments? Five years ago, the Economist Intelligence Unit’s 2005-06 worldwide survey rated India ‘second from bottom’ in terms of promoting environment for PE. Apax Partners, in their 2007 survey, Future Trends in Private Equity Investment Worldwide, confirmed the same, “India has the second worst environment for private equity!” One wonders then, for all that it is worth, how did private equity investments from the world over find their way into India in the last decade or so (According to India Private Equity Report 2010 by Bain & Company, between 2004 and 2009, private equity and venture capital firms began to acquire critical mass; so much so that PE investors invested approximately $50 billion in more than 1400 businesses), a period that resulted in one of the biggest contemporary asset bubble bursts in real estate history in 2008/9 – helped with a gracious push by the PE investors, who pulled out of the sector en masse just when it had reached its peak, and ensured a swift fall of the sector subsequently?
Given this context, it was perhaps least surprising that when the real estate sector – both industrially and in the stock markets – crashed, one again saw a sudden spring in the PE step, running back towards India, to grab hold of stocks and equity at the undervalued rates. In the immediate periods succeeding the last asset crash, PE firms started forming investment vehicles left and right to invest in the Indian real estate sector, focusing on townships as well as infrastructure that surrounds communities. PE investors returned to investing in Indian real estate through projects rather than equity (as at the project level, the exit route is easy, even with the residential sector). Currently, statistics and market reports show that the PE investment proportion is heavily skewed towards residential projects; because as an asset class, the residential sector is seen to be self liquidating, while commercial and retail have exit related issues primarily due to non-availability of REIT and REMF (real estate investment trust and real estate mutual funds) vehicles.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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IIPM: Indian Institute of Planning and Management
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
