Emergence of a robust new asset class of high yield credit investment opportunities

Real estate means different things to different people. For the average joe, it is home. For a builder, it is raw material. For users, it can be office, property, warehouse, hotels and what not. From an investing perspective, Real Estate or RE makes imminent sense for Indian HNIs, family offices, NRIs and offshore capital pools. Real Estate asset backed investments bring something very refreshing to the table for investors. In fact, RE backed investing is emerging as a robust new asset class when you combine them with High Yield (HY) credit investment opportunities.

21 Jun 2021
Emergence of a robust new asset class of high yield credit investment opportunities

Sundaram Alternate Assets is in the market to raise Rs 1,000  crore through its third series of real estate fund—High Yield Secured Real Estate Fund III. It is a five-year close-ended Category-II Alternative Investment Fund and is currently open for subscription. To talk about the AIF and also the space, PMS Bazaar hosted Vijayendiran R - Director & CEO and Karthik B. Athreya - Director in a special knowledge session. Here is a round-up.Sundaram Alternate Assets is in the market to raise Rs 1,000  crore through its third series of real estate fund—High Yield Secured Real Estate Fund III. It is a five-year close-ended Category-II Alternative Investment Fund(AIF) and is currently open for subscription. To talk about the AIF and also the space, PMS Bazaar hosted Vijayendiran R - Director & CEO and Karthik B. Athreya - Director in a special knowledge session. Here is a round-up.

About Sundaram Alternate

Sundaram Alternate Assets Ltd. (SA) is a wholly owned subsidiary of Sundaram Asset Management Company Limited (SAMC), that caters to the investment needs of high net-worth individuals (HNIs). SAMC is a wholly owned subsidiary of Sundaram Finance Limited, a leading non-banking finance company in India. Sundaram Portfolio Managers (SPM) and Sundaram Alternative Investment Funds (AIFs) are the divisions under the SA umbrella.

Sundaram Alternate Assets runs 6 strategies on the AIF platform. Under Category II, they have High Yield Secured Debt Fund, High Yield Secured Debt Fund II and High Yield Secured Real Estate Fund III. Under Category III, they have Nano Cap Series II, Sundaram India Premier Fund and ACORN.

"The AIF business we started in 2017. Post 2018-19, the PMS and AIF business was spun off into Sundaram Alternates. Essentially, this was to bring a more focussed, dedicated team to manage funds. We manage almost Rs 3600 crore across PMS and AIF. We believe in launching more strategies in AIF and growing the existing winning strategies and PMS. That's the way we plan to grow in the coming years," says Vijayendiran, who returned to India in 2016 to expand the PMS business and set up Sundaram’s AIF business vertical.

Real estate credit

Talking about the real estate opportunity, Vijayendiran said the existing two debt funds, which are called high yield secured debt funds, are managed by Karthik and his fund manager Kumaran Chandrasekaran.

"We have developed a very strong credit policy and that has really helped us succeed in the last two real estate funds, in spite of so many challenges such as RERA, Demonetisation, Covid-19, etc. These two funds have performed better in spite of the trying circumstances in industry. And we know that real estate itself has been a very difficult industry for the last 7-8 years," adds Vijayendiran.

With a gross portfolio Internal Rate of Return of ~19 per cent, the first series of High-Yield Secured Debt Fund-I has repaid 61 per cent of capital in less than 3 years since final closing. The fund has been distributing interest income quarterly to investors despite the challenging Covid environment. The second series of the fund was recently closed and is currently in the phase of active portfolio construction. It distributed income amounting to 10.3 per cent of drawn capital to its investors as interest coupons over the last one year.

New high yield AIF

So in the backdrop of the success of these two real estate funds, Sundaram Alternates launched a new offering. The capital value erosion situation in real estate has stabilised, with recovery expected to take place.

"With the interest rates being lower and lower in the last 12 months, we see a significant opportunity in the real estate housing side, especially the residential space, where we see more number of people upgrading their houses or buying new houses. So that's where we see a potential for long-term growth  in the real estate space. And the industry is also turning around. And thus we thought that it's a time to launch our third fund," says Vijayendiran.

High Yield Secured Real Estate Fund III is a 5-year close-ended fund investing in high yielding debentures and mezzanine securities1 of Indian entities involved with real estate, logistics, hotels and healthcare businesses. About 70-75 per cent of investments will be focussed on self-liquidating residential real estate projects, while 25-30 per cent will be in special situation deals backed by commercial assets / other physical collaterals. The AIF seeks to make regular pay-outs to investors based on individual deal structures.

Talking about the real estate opportunity, Karthik B. Athreya gave a good presentation on the topic.  He began by talking about the simple fact that despite all the noise on the negatives, close to 50 billion US dollars has gone into real estate as a sector. This is just by fresh money across the capital spectrum, such as from banks, funds, AIFs, private investors, and so on and so forth.

"...money has never stopped to come into real estate. The sector goes through its volatility and the micro volatility of real estate is far more visible, because it's a very glitzy, glamorous, high decibel space. It's (sector) a favourite whipping boy for most people. But at the end of the day, in my career, in investing, I've always found real estate asset backed investing, whether that's towards development, whether that's towards a corporate credit, whether some sort of backstop from an equity standpoint, as good. Which is why I think real estate is actually one of the first credit teams that Sundaram Alternate Assets and alternate credit business decided to get into," says Karthik.

Real Estate financing is attractive for various reasons today. One, bank scandals, NBFC ALM issues are opening up non-bank alternate asset financing to large private capital, according to Karthik.

Two, private capital pools such as AIF funds, prop capital, SPACs etc. have started to make in roads, early stages of credit, price and risk reward buckets.

Three, residential and commercial reflect the largest spectrum of HY high yield opportunities among all RE backed asset classes and this is Sundaram Alternates existing credit focus also, says Karthik.

With senior/secured financing backed by tangible assets at 1.5 - 2x covers, real estate opportunities allow the fund to access a wide range of hard asset-backed high yield credit opportunities.

A good track-record

Given the risks and headline noise about the real estate sector, it is surprising to see that Sundaram Alternates’ not facing a major issue so far in its 2 existing real estate credit funds on the AIF platform.

'Investment in securities is a function of structure, environment and the availability of the deal.

"Credit quality has been intact post pandemic. LTVs (loan to values) sustained through Covid. In fact, portfolio collected over 90 percent contracted cash through lockdowns. Just 2 deals i.e. 7 per cent saw delays/defaults and are under resolution," adds Karthik.

Good underwriting is necessary. Sundaram Alternates’ investment is focussed on:

*Refinancing for project cash flow mis-matches

*Construction funding

*Select incremental approvals that adds to security value

Karthik mentioned about cash flow sweep where all project cash goes into escrow accounts and there is a significant incentive for the developer(s) to play ball.

The AIF real estate strategy is to go after mid to late stage profitable projects and brownfield projects (which avoid all the issues faced by greenfield projects). This leads to more of PE (private equity) relationship type approach while being a python on project cash.

Also, a strong governance framework ensures good investing. Senior Sundaram group involvement remains in the AIF business, thus bringing accountability and oversight.

"The new fund's main investment focus is de-stressing, de-bottlenecking identified assets or corporate situations via a combination of existing financiers, last mile funding, rescue financing etc. with the goal of realising value and cash from such businesses or companies," says Karthik.

A lengthy question-and-answer session followed among potential AIF investors and Sundaram Alternates representatives.

Those who missed the opportunity to hear from the experts directly can listen to the entire session through the link appended below:

For more information, please contact info@pmsbazaar.com

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