How India’s largest private equity fund imploded

He was taken to the ED’s New Delhi office and questioned for a few days. On November 16, Goyal, 55, was arrested on charges of fraud and money laundering.

The story of IREO started much earlier. Sometime in 2004, Anurag Bhargava, a private equity (PE) professional who was employed with MSD Capital LP, a PE firm that manages the capital of Michael Dell, branched out with the intention of setting up his own fund.

At MSD Capital, Bhargava,now 55, was a principal and head of the private equity business for the Dell family and was credited with a portfolio of successful investments. An engineering graduate from Wharton School of the University of Pennsylvania, Bhargava had started his career at investment banking firm Wasserstein Perella & Co. in New York.

Bhargava’s planned new venture was intended to cash in on the growing real estate sector in India. He was backed by strong support from financial intermediaries and most importantly, an incubator and hedge fund called Reservoir Capital.

CloseReservoir was run by a seasoned Wall Street specialist called Daniel Stern, and Bhargava ended up closing a spectacular $100 million in his maiden fund-raising effort. The first piece in place, Bhargava then proceeded to recruit a non-finance person called Lalit Goyal as his vice chairman.

Forging an India connect

Goyal, a graduate of the Delhi College of Engineering, was unemployed at the time but was brought on board, and he became the India connect that formed the bridge to investing in the subcontinent for Bhargava’s new company, which was named IREO, and stood for India Real Estate Opportunities Fund.

The company was, as are many commercial entities, to be domiciled out of Mauritius for tax benefits and so Goyal and Bhargava set up two companies: one Indian and one Mauritius entity. Over the next three years, IREO would surprise the market by going ahead and raising an additional $1.6 billion, targeting the same business, over three or four different rounds. In just four years, IREO had become India’s largest foreign real estate developer and private equity player and had roped in a list of blue-chip investors.

That list included some of the most pre-eminent endowments and pension funds with over 400 investors from across the world with participants from Citadel LLC in Chicago, Temasek Holdings Pte. in Singapore, the Pritzker Family Office, Donald Trump Jr. and UK-based billionaire investor Sir Christopher Hohn.

Others included Dinakar Singh of Axon, Stanford University, Tiger Global Management LLC, Falcon Flight and Amherst College.

Going into top gear

The mission statement for IREO was to be the premier developer of commercial retail space and residences across the country with a focus on north India and the strategy to make that happen hinged on doing so by snapping up prime land banks and acquiring large tracts of land in Delhi, Gurgaon and Punjab.

In the months that followed, IREO shifted into top gear, started developing projects, at one stage had almost 25 million square feet under development, and 800 employees that included sales representatives, marketing teams, landscapers, and architects, professionally running the company.

The infrastructure had been built out for a development corporation and IREO was a real company that had been created with thousands of units of apartments and office space at various stages of construction.

There was one piece that wasn’t quite right. Promises that IREO had made were not matching the returns that investors were expecting and despite the glowing reports of business in India and the escalation in real estate prices, seven years later investors were getting anxious and wondering about the disconnect between promises and performance.

Ten years was more than a full PE fund cycle and IREO ought to have been delivering properties and commencing returns on capital to investors, says one former IREO senior executive who requested anonymity.

Investors balk over request for more funds

He added that instead of explaining why its fund hadn’t performed, IREO asked for an additional extension and additional management fees to the tune of 2 percent of the fund value.

“Investors balked at the idea citing (the fact) that IREO had already collected around $350 million in fees over a decade and hadn’t delivered. The customary norm in such cases is for the investment company to return the funds and waive fees,” the former executive added.

Vivek Sehgal, a Ludhiana-based customer who had invested in an IREO project in Ludhiana called Ireo Waterfront, says he had found defects and manufacturing issues in the property. When the dispute escalated, his electricity was disconnected after which he took on IREO by creating an association to help others like himself.

“Just for this project itself, IREO siphoned out Rs 300 crore of homebuyer and bank funds in 2014,” he said.

Blowing the whistle

IREO saw things differently and sent a notice asking investors for management fees, but investors responded with a lawsuit. Ramesh Sanka, a one-time IREO CEO, then blew the whistle, filed a case on behalf of homeowners and approached the Supreme Court.

As time went by, allegations would surface on how IREO’s management team had misled investors and pilfered funds for their own gains. Land banks had been bought at highly inflated prices and there were supposedly kickbacks galore according to real estate analysts and developers who track the sector.

The fault lines between promoters and limited partners started to appear and the relationship deteriorated rapidly from there on with both sides slinging accusations fast and hard at each other.

The timeline would indicate that IREO had in fact been run as a wholesale fraud and in addition to the land bank acquisitions there were inflated mark-ups on construction and diversion of home owner deposits. The lawsuits started.

From London to New York City to Mauritius and New Delhi, investors quickly huddled together to get a sense of what exactly had happened. In addition to the $1.6 billion that they had raised, the company went ahead and borrowed on leverage from Indian banks (Punjab Housing Finance Limited, LIC Housing Finance Limited, Axis Finance and Standard Chartered Bank) as well taking their total capital to well over $2 billion.

If IREO was perpetrating a fraud, the questions would surface as to why, when it was already the largest offshore PE entity in the field and could well have made handsome profits by just doing the business it had set out to do.

IREO’s management executives including Lalit Goyal, Anupam Nagalia, and Jaibharat Aggarwal did not respond to emails and messages asking them for their side of the story as of press time.

Seventeen years after IREO was set up, most of its projects have been hived off piece-meal to a mix of real estate entities. Bharagava, who was on the board of Wharton’s India chapter, State Bank of Mauritius, the Indo-US Business Council, SpiceJet Limited, the board of ChrysCapital and even Ashoka University, has been asked to step off them all.

Now, he’s set up an investment company called Duane Park that funds unusual start-ups; ironically, it has backed Woovly.com, a start-up that says it works to achieve the wish list of investors.

Why has ED raided the company now?

Basically, in 2019 when Sanka’s writ petition with the Supreme Court was disposed of with instructions to look into the matter, a lot of customers who were home buyers had filed complaints in Gurgaon and\ Panchkula. On the basis of that, the ED took cognizance of elements of fraud and money laundering and issued an ECIR against the accused, Sehgal said.

An ECIR stands for enforcement case information report. That report named Goyal and his associates, he said.

There was a settlement between IREO and investors in 2019 that involved Lalit Goyal getting the estate of Grand Hyatt in Gurgaon’s sector 58, and 40-acres of licensed land in sector 61 in Gurgaon and also $40 million in cash,

In return, the investors were to get control of the IREO group but that didn’t happen, according to insiders familiar with the case.

The question that has mostly gone unanswered to date is where all the money went?

“The money didn’t go back to the investors once it reached Mauritius,” a former employee said.