PROJECT-4: Kotak Realty Fund Exit Lodha Group through

Buyback

Introduction

Private equity funds exit strategy can significantly impact the return on
investment. Irrespective of the exit strategy, exits are becoming more demanding.
The growing technological enhancements make it hard for sellers and buyers to
reach a common understanding regarding risks and potential sources of value.
When the basic valuation gears are pulled, owners find it difficult to generate
profit after one to three years of holding. Such issues make the exit process more
difficult to accomplish effectively, resulting in a wider spread between weak and
strong exits. The potential to enhance performance is determined by the market
situation and the type of valuation gears pulled. Whereas the organization's
primary focus should be on pulling the value levers that have an instant effect, it
should also strive to identify supplementary, long-term value creation
opportunities. This report analyzes the Kotak Realty Fund exit from Lodha's
Palava City.

Kotak Realty Lodha’s Palava City Fund

Lodha Group, a real estate developer in Mumbai, is on a fundraising spree.
Through a buyout of five-year non-convertible debt securities, Lodha raised
approximately Rs 540 crore from Kotak Realty Fund. While the profits of the
debenture will be used for repayment, the profits of the convertible debt will be
used to build Lodha’s Palava City, which spans 4,000 acres in the suburbs of
Mumbai. NCDs are unsecured debts issued by a corporation that cannot be
transferred into equity and typically have a higher rate of interest than
convertible debentures and bank credit. Due to the considerable gain rate of 15%
to 18% and the lack of fund usage restrictions, NCDs have become an attractive
investment option for private equity funds and property developers in recent
quarters. The offshore loans will be provided by subsidiary Lodha Developers
International, Mauritius, with guarantors as Lodha Developers International
Holdings and Palava Dwellers. The profits from the offshore debenture will be
 used to pay off the loan debt and underwritten in the international subsidiary
Lodha Developers International Holdings for expansion outside of India. For Rs
4,000 crore, the Lodha Group purchased two properties in London for
revitalization. In early 2014, the group paid approximately Rs 1,000 crore, for a
property on London's Carey Street. In November 2013, it paid more than 306
million pounds (Rs 3,120 crore) for MacDonald House in central London, which
housed the Canadian consulate in the UK. The company is presently constructing
43 million square feet of real estate projects, with most of its land assets in the
Mumbai metropolitan region. Till 2014, the organization had handed 25 million
square feet and had 28 pending projects in Hyderabad, Mumbai, Pune, and
London. Exited with Positive Return Kotak Fund exited the Palava City project,
which is situated in a Mumbai outskirt through a buyback (Purchase of shares by
founder/company itself). In 2015, the fund invested Rs 540 crore (approximately
$80 million at the time) from its $400 million offshore funds in the project.
According to a Mint report, Kotak has since exited the equity by withdrawing Rs
838 crore ($129 million) with holding period under 2.5 years. The company
(Lodha Group) paid back all high-cost debt in accordance with the stipulated
strategy. The exit was provided in accordance with the agreed-upon terms at the
end of the lock-in period. The exit was partially funded by internal accruals and
partially by refinancing. This exit has helped lower overall cost of funds of
Lodha Group.

Valuation

Parameters Amount in Rs. Cr

Initial Investment ₹ 540.00

Final Exit ₹ 838.00

Holding Period 2.5 Years

CAGR 19.22%
From above calculation, it is cleared that the rate of return for Kotak Realty Fund
is around 19.22%.
Conclusion

Kotak had committed a total of $ 356 million with the goal of investing in
Structured Credit in the Indian real estate market. The funds were spread across
various properties in Chennai, Mumbai, NCR, and Bangalore. Kotak has now
completely closed four funds as a result of the full exit of this account. Across
investments, the latest Fund generated a Rate of Return of 19.22 percent. This
reaffirms Kotak's leadership position and demonstrates performance in difficult
market conditions. Kotak has once again distinguished itself by ensuring full
exits from all investments in these difficult market conditions. With this incident,
Kotak lost its confidence of investing in the Indian market. India being one of the
strongest economic nation still has some block holes due to which investors don’t
gain the courage of investing in the Indian market, another example of it can be
the unsuccessful LIC IPO.