PAG bet $1 billion on Indian real estate post NBFC liquidity crisis

Topics NBFC | liquidity crisis | Investors

Asia-focused investor PAG has taken a contra credit bet in Indian real estate over the past couple of years while most lenders have shied away from the sector in the aftermath of the NBFC liquidity crisis following IL&FS’ defaults in September 2018. What has been noteworthy is that PAG scaled up lending at a time when most of the big lenders such as Indiabulls, Edelweiss, and Piramal undersold their real estate loans. In fact, PAG significantly scaled up lending through the pandemic not just in India but in its core markets such as China and Australia. PAG did many big debt d.....
Asia-focused investor PAG has taken a contra credit bet in Indian real estate over the past couple of years while most lenders have shied away from the sector in the aftermath of the NBFC liquidity crisis following IL&FS’ defaults in September 2018.

What has been noteworthy is that PAG scaled up lending at a time when most of the big lenders such as Indiabulls, Edelweiss, and Piramal undersold their real estate loans. In fact, PAG significantly scaled up lending through the pandemic not just in India but in its core markets such as China and Australia.

PAG did many big debt deals in real estate, including a Rs 750 crore loan this year to Mumbai-based developer Kalpataru to refinance existing loans and help complete two projects in the city. Last year, it extended a similar loan to Shapoorji Pallonji Real Estate. Earlier this year, it extended a Rs 175 crore loan to Century Real Estate to develop a residential project.

In March, PAG bought a 61.5 per cent stake in Edelweiss Wealth Management for Rs 2,366 crore. PAG has invested over $1 billion in Indian real estate and looks to be planning to put in much more, according to its managing director Kanak Kapur during a recent seminar hosted by CII.

"Coming in and filling the space which banks were leaving and where the rest of the lending community was cautious, PAG has a track record of doing that not only in India but in Australia and China where we increased our presence and lending significantly during covid. It was a huge opportunity for us as much as it has been a mishap for some institutions, including the banks," said Kapur.

Industry watchers say that Hong Kong-based PAG’s presence here over the past decade must have also helped. It also has an office in Delhi and Mumbai. A PAG spokesperson did not offer any comment for the story.

PAG manages $45 billion for investors globally and deals in three segments: absolute returns including private debt; real estate investments; and private equity.

The game changers for PAG were three: the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016, the Real Estate (Regulation and Development) Act of 2016, and the NBFC shakeout.

"After these three developments, PAG decided we will be increasing our focus on some of the non -core markets including India and the expectation is that we will be doing multiple of that in the next 12-18 months,” said Kapur.

With the IBC, borrowers are conscious about returning the money they have borrowed. There is some recourse for foreign lenders now.

While NBFCs lend to developers at between 14-16 per cent, funds such as PAG charge about 20 per cent.

“But in the last three to four years, the money that we have invested collectively, not just us, has been very well-structured, it has been downside protected and we have seen results with regard to wilful defaulters. Everybody is taking it a lot more seriously,” said Kapur.

Kapur said one of the major changes in PAG’s strategy post-covid was to work with top developers. “Before covid and the NBFC shakeout, we were also working with the bottom tier of developers. But post-pandemic,  the market has consolidated in favour of top developers and we would like to work with them,” he said.   

Other funds such as Oaktree have also invested about $1 billion in Indian real estate, according to sources. Oaktree lent over Rs 400 crore to a Mumbai developer for a super luxury project in the Prabhadevi area. It was one of the highest bidders for DHFL which was finally taken over by the Ajay Piramal group.

But, say experts, PAG has some unique strengths and has done more direct credit deals with developers. “PAG is an Asia-focused fund manager, unlike Oaktree, Blackstone and Brookfield, which have done a lot of work in Korea, Japan and so on. It has a certain expertise,” said Vishal Srivastava, president, corporate finance, Anarock Capital.

Srivastava added that PAG is also in the process of raising an India-focused fund. “It has given money to many major developers and it has deep pockets, combined with a serious intent to put more money here,” he said.  

Balaji Raghavan, a senior fund manager, believes that PAG should do well given the kind of investments it has made. “PAG has ticked all the right boxes — picked better assets, got better asset cover, dealt with good developers. It should do well,” said Raghavan.

Despite its aggressive investments, PAG wants some things in India to improve. One is friction costs. 

“A lot of us raise capital in US dollars and are forced to hedge in Indian rupees. Friction costs in India have been challenging, compared to China and Australia. But we have been working on keeping them low and hedging costs under check. We have been exclusively investing from Singapore to save tax,” Kapur told the CII seminar.

On the IBC, Kapur wants its jurisdiction to work as it does in Australia. “When we saw that in Australia, we put in $5-6 billion. When we see it work in India, we will put in ten times that amount,” he said.

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