Pioneering the ‘Margin of Safety’ approach to Real Estate investing

Bikram SenArthVeda Fund Management (AVFM), a subsidiary of DHFL, was established in 2005 and was earlier known as DHFL Venture Capital India. The strategic vision of ArthVeda is to include (but not limited to) alternative asset classes, including, private equity, infrastructure, debt and fixed income funds, listed equities, and traded markets besides real estate.

Mr Bikram Sen, director and chief executive of ArthVeda, says, “The Company’s second fund, the ArthVeda STAR Fund, is probably the only fund that focuses on the principal of Value Investing in the real estate investments. ArthVeda has a unique strategy of launching only ‘alpha oriented funds’ ie delivering ‘high risk adjusted returns’.”

DS: What is the structure of your fund?
BS: ArthVeda STAR is a newly launched fund with a targeted corpus of Rs. 300 Crores (Rs. 200 Crores +Green shoe option of Rs. 100 Crores). This is a unique fund as compared to the typical real estate fund its lifecycle is only three years. Its strategy of focusing on small ticket investments (analogical to mid and small cap investing) provides it with a high chance of generating high IRRs.

ArthVeda STAR Fund– The Features
Fund Life 3 years (1+1 yrs extension).
Fund Size Rs. 200 crore (greenshoe of Rs.100 Crores).
Minimum Commitment Rs. 10 Lakh one time, or Rs. 25 Lakh with drawdown.
Hurdle Rate 12%  pre tax p.a.
Target Return 30% (Gross IRR).
Carried Interest 20% with catch up.
Management Fees 2% p.a., charged quarterly.

DS: What is your targeted client base?

BS: Our target client base is institutional investors, high net worth individuals (HNIs/UHNIs) and professional investors. Our focus primarily is middle income housing projects across 16 Tier-II /III * cities and Metro outskirts where DHFL has an experience and exposure to the housing markets through providing housing and construction finance.

DS: What is your approach towards managing risk?

BS: The risks are mitigated due to the experience of DHFL in these markets, superior deal making capabilities of Arthveda, project execution skills, and access to various financing capabilities from financial institutions and backed by collaboration agreement with DHFL that has a wide network throughout India in which ArthVeda STAR will operate.

DS: Is the current environment conducive for raising funds?

BS: We have had a positive discussion with our existing and targeted investors and we are very confident about meeting our target. We are of the opinion that if the product is built on extremely strong premise coupled with an efficient and experience management team then there is no reason for the product to fail.

Returns from investing in ArthVeda STAR vis-à-vis Direct Investment In Real Estate
Investor Real time cost at time of sale (after 3 years)
Price drops by 10% Price drops by 20% Price rises by 20% Target Sale price
Normal investment IRR 0% -4% 10% 4%
Arthveda Star IRR 38% 26% 65% 48%
Normal : Assuming a normal investment in real estate – investing directly by purchase of units from developer (say developer sells at a 10% discount to targeted sales price.

Arthveda Star : Invests in equity with developer for purchase of land at Rs 400 per sq ft. Target Sale Price is taken at Rs 2500 per sq ft for both

- The Arthveda Star Model is a highly robust to severe price drops and even a 35% drop in prices will result in safety of capital. Margin of safety is 35%.

- A Normal Investment Model is highly sensitive to sale prices and any drop in prices by even 10% will erode the capital. Furthermore, a rise in prices by 20% would generate an IRR of not more than 10%