Mumbai, Nov. 19: Private equity partners are seeking to sweeten the proposition for real estate developers who are loath to strike deals with them. Enter a new concept in the realty sector: it’s called promote structure deals.

When realty venture funds or private equity investors cut a deal with a real estate developer, they are promised a certain rate of return. If the returns are higher than that originally promised, the profits are shared with a greater percentage going to the developer under the promote structure deals.

“It is the best way to incentivise a developer. The internal rate of return (IRR — the rate needed to convert the future uneven cash flow to your initial investment) at the moment hovers between 20 and 25 per cent with minimal risk. But, a promote structure deal incentivises the developer to try and go beyond 25 per cent,” said Sanjay Dutt, ED (transaction practices) of Cushman & Wakefield.

“It is a performance-linked deal that aims at incentivising the entrepreneurial effort of the developer. If the developer is able to get a higher return from the investment in his land, the profit is split; the ratio could be 40:60 or anything in favour of the developer. There has been an increase in such deals,” adds Ankur Srivastava, MD of DTZ Lebenham TieLeung, a global real estate advisory and consultancy firm. Some of the venture funds and equity investment players who have looked at promote structure deals are Citigroup, Trikona Capital, Sun Apollo, and Merrill Lynch, said industry insiders.

One of the biggest reasons for investors looking at such deals is because project valuations are highly stretched. “Land valuations are very high. As a result, project valuations are highly stretched. By entering such a deal, the developer is inclined to perform better and he tries to squeeze the most out of his land and development. Two things are very important here: time and realisation. It crucially depends on how quickly the developer is able to get maximum benefit and how effectively he is able to realise revenue,” said Dutt.

“By entering such deals, the developer puts in an extra effort to reap maximum returns, and is thus rewarded for the same. These deals are on the rise,” pointed out a Citigroup official.