It was the last thing Indian private equity real estate needed. Having suffered widespread investor attrition after the country’s first vintage of internationally-capitalized property investment funds performed poorly, offshore capital was finally returning to the market. But when the founders of Red Fort Capital, the Delhi-based firm widely-regarded to be among the best managers of a bad crop, separated, it forced certain international investors and their advisors to re-think deploying their resources in the country.
“Why go through the brain damage of recommending to clients another Indian manager?” questioned one capital advisor. “This has implications.”
Parry Singh and Subhash Bedi worked together for 18 years. They founded Red Fort in 2005 and have since raised approximately $1.2 billion for investments in large residential and office developments across two opportunity funds and sidecar vehicles. Gaining a roster of blue chip investors along the way, the duo plowed their capital into high profile developments like Bangalore office park Exora Business Park, home to tenants including bank JPMorgan, equipment firm Juniper and networking website LinkedIn, and Delhi One, a mixed-use residential block and hotel for the well-heeled. In doing so, their firm became a poster child for foreign direct property investment in India.
“For sure, Red Fort had a big impact,” remarked one rival investment manager. “They put out a lot of money.”
A letter to investors in January, obtained by PERE, forewarned of the end of their partnership. Then, in October, a separation agreement was signed by both men, the tremors from which are now being felt by a peer group that is anxious to ensure India’s second wave of international, institutional investment is not as short-lived as its first.
“These guys splitting up could negatively impact investor perceptions of India in general,” commented another rival investment manager. “It certainly will have impacted the minds of a number of their LPs.”
Such concerns are understandable when considering the size and influence of the investors which backed Red Fort India Real Estate Funds I and II. They include Abu Dhabi Investment Authority, Qatar Investment Authority, Government of Singapore Investment Corporation, New Zealand Superannuation Fund, New York State Common Retirement Fund, Gothaer Insurance, The Townsend Group, Partners Group, Aviva Investors and Franklin Templeton among others. Combined, they account for a meaningful sample of private real estate’s institutional universe.
Accordingly, Singh and Bedi’s primary concern is to contain the damage caused by their separation. Having already disappointed their investors by parting ways, both men are adamant they will make amends and more via their respective current and future plans. To that end, each spoke exclusively to PERE about the separation and what it means for them, their investors and the firm’s assets.
But whether Indian private real estate has seen one manager replaced with two may well be a function of how effective Singh and Bedi’s messages are received by those groups that have capitalized or partnered their strategies.
By embracing PERE’s request for interviews, each has taken the front foot in that regard and immediately noticeable is their keenness to demonstrate that the breakdown of their marriage was not acrimonious.
“Subhash is my brother,” said Singh. “I have a lot of respect for him. There’s nothing I would do to impair his ability to do anything that he’d like to do.” Bedi said the split was for personal reasons, but insisted: “I have no interest in saying anything negative about Parry. We have been partners for 18 years. You can end a marriage in a good way or you can end a marriage in a bad way. Most mature couples figure out a way to coexist. I don’t want Parry to wake up and see an article in which he doesn’t come across as magnanimous as he wants.”
Terms of separation
After consulting with Red Fort’s investors, it was determined that Bedi buy and assume sole management of Red Fort Capital Management Company, a Mauritius-based entity charged with the management of the funds. He will be exclusively responsible for improving and maintaining the funds’ 26 assets and, ultimately, their sales by the time they are scheduled to wind up in 2018. This will be done in conjunction with Rising Straits Capital, a company which has become Bedi’s main business.
Singh, meanwhile, has retained his two-thirds ownership of Red Fort’s general partner and the funds’ co-investment, but essentially he has relinquished all management responsibilities. He has kept the Red Fort brand and has bought Bedi’s stake in a non-bank finance company they had jointly owned which issues debt to Indian investors and developers called Red Fort Capital Finance.
Singh and Bedi each have ambitions to build new empires, but both accept these are not likely to substantially materialize until deep into 2016 at the earliest. For now, the market is more focused on Bedi’s now lone stewardship of the Red Fort Funds. He has employed about 30 former Red Fort Capital staff based across offices in New Delhi and Singapore to carry out the work.
Remarked one Red Fort Fund investor: “The team has somewhat stabilized through this separation agreement but a daunting task remains ahead of them. The funds are fully invested but they will need to stick to the program and perform.” While Fund I, which attracted $400 million in December 2005 and is now partially exited, is understood to be performing a little better, the investor is projecting for Fund II a dollar-based net return of between 8 percent and 9 percent, far below the traditional 20 percent targeted by opportunistic real estate investment managers. Admittedly, an exchange rate which has seen $1 become almost 50 percent more expensive versus the rupee in the last five years has not helped matters. But the investor said: “Reading their assumptions, in order for them to achieve them, they need to carry out their business plan exactly as underwritten. They cannot afford mistakes.”
Neither Singh nor Bedi would confirm the Red Fort Funds’ current return projections. Bedi said: “In rupee terms, they’re top quartile but I’m not going to say more. The practical reality is investors are making money on the funds.”
“I would say the deals they did were pretty good, particularly out of the first fund,” commented one of the rival managers. But, in his opinion, investments made towards the tail-end of the fundraising of Fund II, which collected $500 million in fund and sidecar equity, have drawn their critics.
Under particular scrutiny was Red Fort’s 2011 investment in Delhi Heights, a residential-led development off Delhi’s Rani Jhansi Road. For the deal, the firm joined forces with developer Parsvnath to each buy a 50 percent stake in a 37.7 acre plot from India’s Rail Land Development Authority in a deal valued at INR1651 crore (today €234 million; $250 million) with a view to developing approximately 3.7 million square feet across multiple towers. “It was too large for them to chew on,” remarked the rival manager.
Neither Bedi nor Singh would divulge why Delhi Heights has underperformed. But the investor says a bone of contention arose when the firm followed up its initial investment in the asset with a repeat cash call without the unanimous support of investors. Red Fort did enjoy complete discretion over how its equity was deployed, but that has not appeased investors which must today contend with an asset that now accounts for more than 20 percent of Fund II’s equity. “Doubling down on under-performing investments. That was the issue,” said the investor.
Singh said: “I do make tough decisions but I stand by all of them. What I can say is that we’ve done 26 deals and lost money on one of them, from Fund I. Outside of that, Red Fort has never lost money.”
All about realizations
Nevertheless, the investor suggested that today’s separation constitutes a fresh start for Bedi’s Rising Straits. “Subhash needs to make sure we have realizations. Then we’ll see if he’s on the ball and we can start thinking about more leeway and in terms of his next fund” the investor said.
Bedi accepts his position: “For the next 12 to 18 months, the primary objective is do the best job by the vehicles. We put our LPs through a lot over the last year. While I’m not precluded from raising a fund right now, with the LP base we have I could make a living just serving them so if I do them right, I’m good. Hence that is my number one objective.” While a first Rising Straits commingled fund is on the cards, as the firm works on the Red Fort Funds, any near-term investments are expected to come therefore on a deal-by-deal basis.
“I have a REIT to run and the NBFC,” stated Singh, meanwhile. “That business made 33 percent IRR in the last four years.”
Some onlookers point to strategic differences being at the center of Singh and Bedi’s fallout. It was well known that Singh has been ambitious to raise a core strategy vehicle which would enable Red Fort investors still keen to hold assets such as Exora Business Park to do so. The plan had early support too. Indeed, it is understood an initial $150 million capital raising was on the cards when the co-founders initially wrote to investors about the possibility of a split. Latterly, however, with the arrival of Indian REIT legislation, something Singh said he has long lobbied government for, his focus has been on aggregating assets ahead of a REIT launch that could also float in the US. “It’s a goal in life and I plan to put everything behind it,” he told PERE.
By his reckoning, initial support for a listed vehicle has also been positive. He said: “The public investors I met say they want me to be the CEO of the public REIT. I couldn’t have done that while running the private funds. So I had to step down from being a key man of Fund I and Fund II to build this franchise. My REIT investors need to know I am no longer conflicted.”
New rivalry, new marketplace
Singh and Bedi have no non-compete agreement in place, meaning both may well be competing for the attention of the Red Fort Fund investors as they pursue their respective ambitions. As Singh said: “There is a point when he and I will compete against one another. But I’m the boy who loves competition so I’d love to compete with him.”
Whether the private real estate capital markets will support one, both or neither of their offerings, however, will be as much about investor appetite for certain real estate structures as it is about re-embracing their former fund managers.
A second wave of international, institutional support has now transpired after the gap that followed the first. Advisory group Macquarie Capital estimated there has been $4 billion of offshore investment in Indian private real estate in the last three years, for instance. However, this wave has come with distinctly different characteristics. It has largely been committed via limited discretion – not limited life – open-ended, separate accounts or joint venture vehicles with managers. Traditional blind-pool fundraises operated by the likes of Red Fort have scarcely been seen since the Delhi-based firm was last out capital raising. “That whole piece of the business – commingled fund structures with LPs backing – has been competed away,” suggested a third rival manager. “They are not popular, with offshore money anyway.”
While Indian managers have aired a nervousness that the Red Fort founders split could negatively impact investor sentiment towards the country’s real estate investment fraternity, there are those who believe the firm’s star appeal had in fact already faded. “If you picked out five names two years ago, you’d be picking Red Fort. But two years ago, India was a very different market,” said one.
Nonetheless, the Red Fort Fund investor insists the door for future investments in India, or with Red Fort’s leaders, is not closed. “Let’s look forward and figure out how to preserve and grow capital,” he says. “What is behind is behind.”
Dividing the estate
Terms of separation: Retains Red Fort brand and co-investment in Red Fort general partner and Funds I and II; assumes full control of New Delhi-based non-banking finance company Red Fort Capital Finance.
Present plans: Launch Indian REIT; grow Red Fort Capital Finance.
Future plans: Raise Red Fort India Real Estate Fund III
Terms of separation: Assumes sole management responsibility for Red Fort Capital Management; sells stake in Red Fort Capital Finance; retains general partner co-investment in Red Fort general partner and Funds I and II.
Present plans: Manage Red Fort India Real Estate Fund I, Red Fort India Real Estate Fund II; transactions on deal-by-deal basis.
Future plans: Raise Rising Straits Fund I