A ‘housewarming’ for Blackstone in India?

That there is buoyancy and strength in the Indian residential sector and the regulations under the Real Estate (Regulation and Development) Act are working to bring in accountability have been affirmed by US-based private equity firm Blackstone Inc’s acquisition of real estate company Kolte-Patil Developers.

It was a transaction that took everyone by surprise.

Consolidation in the real estate sector, especially an acquisition, is unheard of in the country.

Specific projects may be acquired or joint development agreements signed — but a merger and acquisition? No.

So when the over $1-trillion asset manager announced that it would buy out the Pune-based real estate developer in a three-step process, it created a stir as well as history.

It was all the more surprising because Blackstone has so far stayed away from the residential segment in India.

Until the advent of RERA and, barring some top builders, the sector was infamous for delays and sometimes even non-delivery of projects.

The country is riddled with incomplete projects as developers frequently run out of funds, are unable to sell houses or struggle to get approvals, leading to cost escalations.

“…what Blackstone can do, not everyone can. They would probably have realised the potential of the value creation happening on the residential side,” said an investment banker who declined to be named.

“There are forward-thinking people, like those at Blackstone, who can execute it,” he added, while also seeing it as a one-off transaction, rather than a trend.

Post-Covid, the residential sector has seen a boom and the upturn in the housing cycle seems to be set.

The deal

The acquisition will give Blackstone a dominant, up to 66 per cent, stake in Kolte-Patil.

In the first step, Kolte-Patil will issue 1.27 crore equity shares in a preferential allotment to a fund managed by Blackstone, which would get a 14.3 per cent stake in the target company.

The company would be raising a little over ₹417 crore in this exercise.

In the second stage, Blackstone would acquire 25.7 per cent from the promoters of Kolte-Patil, taking its stake in the company to 40 per cent.

Under the SEBI takeover code, the company has to make an open offer for at least 26 per cent; if the entire open offer is fully subscribed, it would take its stake to the intended level.

Under the terms of the agreement, if the preferential issue does not go through, then Blackstone would acquire more stake from members of the promoter family, ensuring it gets the majority stake it needs to run the company.

Last Thursday, Kolte-Patil obtained shareholders’ approval to issue the shares preferentially to Blackstone.

With the controlling stake, Blackstone would be classified as a promoter, but it would run the company in joint control with existing promoters.

The entire transaction would cost Blackstone around ₹1,800 crore (around $209 million), small change for the firm with a global real estate portfolio valued over $600 billion, as of September 2024.

It has invested in residential real estate in North America, Europe and Asia, but remained stuck to commercial assets in India — offices, warehouses and logistics, hotels and data centres. Commercial properties are safe because they generate rent and steady cash flow.

Market access

What’s in it for the investor?

Blackstone will gain access to the residential sector in India, starting with the major markets of Pune, Mumbai and Bengaluru.

Kolte-Patil has been growing at a steady pace, while also investing in processes and people, says Aditi Watve, President-Investment Advisory and Capital Markets, Anarock Group.

“This is a phenomenal story of continuity in an organisation, irrespective of the founding family. It hasn’t happened in Indian real estate that often wherein the perpetuity of the company is going beyond the founding family,” she says, referring to the deal.

Legacy business

Kolte-Patil was founded by Aniruddha Patil in 1970 in Jalgaon, Maharashtra. It began with plotted developments, row houses and bungalows. In 1989, Patil established a base in Pune, and it was here that the real estate business really took off, with both his sons joining the company.

It has remained with the Patil family for over three decades now. “While Kolte-Patil may not be the largest in the listed space, they have genuinely paved the way for what can be done,” Watve says.

With the transaction, they have ensured they can get to the next level of growth, because Blackstone, with its formidable record in the real estate space globally, will bring in its expertise.

“Blackstone will be able to attract talent of the kind that a local developer cannot,” says an analyst with a brokerage.

Will it also pave the way for similar transactions in the segment?

“If Blackstone does it, five other PE funds will want to do it. Of course, they will first watch how this one progresses,” Watve says.

It is also being seen as an experiment by Blackstone; if it succeeds, it may provide hope to developers looking to exit or monetise their real estate business.

“They can experiment… It’s not going to break anybody’s back,” explains Watve. It will be a test of real intent.