Fund-raising by realty-focused PEs dips 70% in 2009

During 2009, a total of 93 funds reached a final close receiving commitments of $40.50 billion, while last year, 228 funds raised an aggregate $134.30 billion

Funds raised by realty-focussed private equity (PE) firms declined significantly by 70% so far this year as investors exercised caution over making fresh investment commitments, reports PTI.

A total of 93 funds reached a final close in 2009, receiving commitments of $40.50 billion. Last year, 228 funds raised an aggregate $134.30 billion, according to global research firm Preqin.

As the credit crunch sent property prices into a downward spiral throughout 2009, many investors turned extremely cautious about committing money in the asset class. Also, declining returns of many real-estate funds made it difficult for managers to raise funds in 2009.

"Fund-raising to date in 2009 has reached its lowest point in recent history. 2009 has also seen an increasing number of funds closing below original target, with a number of them closing with less than half the capital they were initially targeting," Preqin said.

Of all the funds that have closed during 2009, around 77% have closed below their original target size. While in the corresponding period in 2008, the figure was 46% and in 2007 just 21% of the funds fell short of their fund-raising goals.

The report said that in contrast to 2008 when fund-raising never dropped below $20 billion in a single quarter, no quarter in 2009 to date has raised this amount.

According to Preqin, the second and third quarters of 2009 saw fund-raising levels continuing to fall, with only $6.80 billion being raised in the third quarter, representing the lowest fund-raising total since the same quarter in 2004. To date, during the fourth quarter of 2009, 15 funds have raised $6.80 billion.

"2009 has been a challenging year for the private equity real-estate industry. After years of uninterrupted success, the industry has hit difficult times; fund-raising is down and fund managers have struggled to raise capital," the report said.

However, the report noted that despite the declining trend in investment in 2009, the outlook for 2010 remains brighter.

The report said that despite declining returns over 2009, many investors did not lose confidence in the long-term benefit of investing in private equity real estate.

In fact, many PE real-estate investors, including some rather prominent institutions, decided to delay investing in the asset class until the markets had settled. Some delayed until Q4 2009, whilst others suspended programmes until 2010 or later.

"Despite (and in many ways because of) the global recession, real-estate enters into the New Year with a significant amount of funds on the road seeking large amounts of capital,” said the report.

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    Mutual fund trading on bourses fails to attract investors

    The NSE and the BSE recently launched mutual fund trading platforms. However, after the initial euphoria, trading volumes on both the bourses are on a decline.

    The National Stock Exchange's (NSE) new platform for mutual fund trading has still not gathered volumes; in fact, there has been a decline in volumes since the platform was launched on 30th November. According to data from the NSE's website, on 22nd December, the exchange recorded 11 subscription orders valued at Rs2,40,000 while for redemption, there was just a single order worth Rs4,877.77! Compare this with the opening day's transactions and one can see a huge drop in volumes. On 30th November, there were over 300 transactions, valued at around Rs78 lakh.

    The Bombay Stock Exchange (BSE) launched its BSE StAR MF platform on 4th December. On 22nd December, BSE StAR MF recorded 23 subscription orders worth Rs6,25,500 while there were two redemption orders valued at around Rs52,82,565, taking total trades for the day to Rs59,15,565. On 4th December, BSE StAR MF recorded 251 orders worth Rs8.44 crore.

    Out of the total 37 asset management companies (AMCs), only 10 AMCs have registered on the NSE-Mutual Fund Service System (MFSS) platform. On the other hand, BSE StAR MF has seven AMCs with a total of 103 schemes, and it has received confirmed participation from more than 20 MF houses. The Association of Mutual Funds in India (AMFI) is also planning to come up with its own MF trading platform by March 2010.

    Describing the difference between the two rival platforms, an analyst said, “The BSE platform is mainly browser-based, providing access anywhere, while the NSE operates on the NEAT system, a dedicated point-to-point connectivity-based system.” Could this be the reason for lower transactions on the NSE’s platform?

    MFSS is an online order collection system provided by the NSE to its eligible members for placing subscription or redemption orders on the MFSS, based on orders received from investors.

    Market regulator Securities and Exchange Board of India (SEBI) banned entry load charges on MF units with effect from 1st August. With no income, many distributors almost stopped selling equity schemes of MF houses. The platform offered by bourses was seen as an alternative to investors to buy or sell units. However, looking at the fall in transactions, it is clear that investors have not yet adopted the new offering from the two bourses.

    Like the NSE, the BSE has waived all charges till April 2010 to attract investors. After that, investors will have to pay the stipulated brokerage as well capital gains tax if they sell the units within 12 months. If the units are held for 12 months or less (short term), the same would be liable to tax at the rate of 15% plus cess.

    While SEBI’s move to allow brokers to deal in mutual fund products was meant to serve investor interests, it looks more likely that investors may end up shelling out more than they bargained for, if they were to buy or sell units through stock-exchange brokers or depository participants.

    This is evident from the huge difference in transaction costs an investor would incur under the existing and new models. Under the present model, where investors approach distributors or apply to funds directly, only registrar and transfer agent (R&TA) costs are incurred by the investor. This boils down to per folio cost roughly amounting to Rs70 per annum. Whereas, industry sources reveal that under the depository or stock-exchange trading-member model, costs will shoot up to between Rs540-Rs790 per folio per annum. In other words, the cost per folio would be eight times higher under the new model!

    Industry experts indicate that brokers could charge between 0.25%-0.50% of the value of any buy and sell transaction involving mutual fund units. However, it is not yet clear how additional costs such as securities transaction tax and stamp duty would be levied. Brokers may even charge separately for investors who want advisory or support services.

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    Radhika Giri

    1 decade ago

    I don't think so. As it is very early to comment on such a new model. However, in any business finance/consumer / or any thing ... distributor plays vital role to make the business sucessful for manufacturer as well as consumer / customer and if he doesn't get farily for whatever he is doing that industry will not grow. No one is here for charity. I hope, this is good tool for retail investor to invest in the market specially small town people.

    Ashit Kothi

    1 decade ago

    It will be very helpful if you can give comparative cost for investment of say Rs.1.00 lac by an investor. Pls also consider what was the cost incurred by investor before the ban on upfront commission. Also provide the info as to the view on costing is whose? of MF AMC , RTA / TA or Author of the article? Also request you to cover cost benefit to AMC if any and whether the same would translate into lower AMC trans. charges and higher NAV. awaiting your response

    ADB grants $150-million loan for India’s khadi reforms

    The move is estimated to benefit around 60,000 artisans, and will allow khadi institutions to sell their products at market-determined prices

    The Indian government has signed a loan agreement with the Asian Development Bank (ADB) under which the multilateral funding agency will provide $150 million (Rs717 crore) for developments and reform of about 300 khadi institutions across the country.

    This loan is expected to benefit around 60,000 artisans who in turn will allow khadi institutions to sell their products at market-determined prices. The artisans will be directly benefited by this programme and the setting up of a marketing organisation will also help in improvement in the sales of khadi products in the country.

    Under the agreement, ADB will provide the loan to State-run India Infrastructure Finance Co Ltd (IIFCL) in four tranches.

    During FY09, the khadi and village industry employed around 1.03 crore people with a production value of Rs1,733.90 crore.

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