PEs to bring execution in-house

Economic Times has an article that discusses the plans of PE firms to execute projects in-house. Key points:

1. Funds such as Trikona Capital, South Asian Real Estate (SARE) and Yatra Capital have started to create in-house teams that can execute real estate projects on their own.
2. Kotak Realty Fund had recently made an enterprise level investment in Lalith Ganga Constructions. Kotak’s stake in the company has not been disclosed. Lalith Ganga Constructions is a start-up promoted by Kotak Realty Fund along with Girish Puravankara, the erstwhile deputy managing director of Puravankara Projects.
3. Apart from the cost advantage, this would also mean a lower dependence on construction companies in a scenario where execution capability bottlenecks are threatening to derail projects.

The trend of PE firms starting in-house development arms comes at a time when real-estate developers are facing tremendous pressures - with increasing input costs and slowing demand. Many developers (Eg. Unitech) have gone on record saying that they are looking for substantial PE investments in their new projects. With some PE firms disintermediating the developers, it would not be a surprise if developers are forced to sell part of the land-banks to PE firms (instead of participating in joint-ventures with them).

While PE firms are only now backward integrating by starting development divisions, most large developers have already taken the step of forward integration by raising large funds - on AIM or otherwise. We don't have a view yet of which model is better overall from an investor perspective. While conflicts of interest are lower with the PE firm adding a development arm model, it remains to be seen if the skill sets for execution can be developed quickly.