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ASIA NEWS: When LPs turn sour

 ICICI Venture, one of India’s largest private equity firms, has been under much media glare and scrutiny ever since news of the firm being sued by a group of disgruntled investors broke in late October. As many as 69 non-resident Indian and foreign high-net-worth investors have claimed $103 million for alleged losses in a realty fund run by the Mumbai-based firm.

The case was filed in Mauritius, where the fund in question – Dynamic India Fund (DIF) III – was set up in 2005 as a way for overseas investors to invest in India’s real estate. Within days, a separate case was filed in India. This time, 78 investors complained to the market regulator, the Securities and Exchange Board of India (SEBI), seeking a deeper probe into what they call “negligence, mismanagement of investments and misrepresentation and concealment of facts.” ICICI Venture has denied the allegations, and the outcome of both complaints has yet to be ascertained.

While similar disputes have happened internationally, this is the first time in India that a domestic GP has been sued by investors, according to an Indian lawyer, who requested anonymity but is familiar with the situation.
PERE obtained a copy of the complaints and the marketing document shown to investors during the fund launch to analyze the dispute brewing since early this year, when the investors first raised alarm.

The complainants claim to have invested $4.7 million in total in DIF III – floated by ICICI Venture and its parent company, ICICI Bank, as a feeder fund to pool overseas capital into what the marketing document originally called the “India Real Estate Fund.” Eventually, DIF III was invested in a venture capital fund called India Advantage Fund III.

The closed-ended fund, with a corpus of $220 million had 490 investors. The capital was to be deployed in completed and under-construction residential, retail and office properties.

The fund is now into its ninth year – its original seven-year term and two years of extensions – and only one out of 13 projects has been exited. Most others are still under completion, the investors claimed.

They also voiced concerns over the limited geographical spread of the investments. Some 60 percent of the capital was deployed solely in Hyderabad and Mumbai. This, they said, did not match the investment criteria in the marketing document, which sought to “invest in Delhi, Mumbai, Bangalore, Chennai, Hyderabad and Kolkata, among others.”

Prudent investment guidelines require fund managers not to put more than 15 percent to 20 percent of the total capital in one city, even though anomalies are not uncommon.

The defense

A spokesperson at ICICI Venture told PERE that 50 percent of investments were exited at a 1.5x multiple in nine years. To the claim that it failed to provide 25 percent returns, as promised in the document, ICICI Venture said in an official statement: “It is common knowledge that globally private equity is an asset class that does not guarantee returns given the equity risks involved. Also, projects in real estate have a long gestation period and hence returns accrue over a period of time.”

In fact, to optimize realizations, the firm decided to extend the fund’s life by another three years in April. The slump in India’s property market following the global financial crisis and delays in getting approvals for large projects were cited as reasons for extension.

A cash buyout option also was offered as an alternative to all investors during that time, which many accepted, according to the firm.

This did not appease Gulab Patil, a 71-year-old investor based in Dubai, who is leading the group of complainants. “After completion of nine years of investments, only 60 percent of the estimated NAV was being offered as the cash solution,” said Patil, who invested $250,000.

In the SEBI complaint, the group further alleged that the net asset value used to calculate the liquidation option was offered at INR 90.07 even while the fund’s NAV was shown to be INR 91.95 in a March 2014 investment report.

Most legal disputes in India tend to drag on for years, especially should ICICI choose to appeal SEBI’s pending decision, owing to what is described as India’s oftentimes convoluted and administration-heavy legal system.

Whatever the outcome, the case is a reminder of how institutional funds and private wealth may not always work in tandem.