India’s largest private equity fund IL&FS Investment Managers (IIML), which manages $3.2 billion, will join its partner Milestone Private Equity Advisory to sell its stake in their two joint venture funds, which invest in commercial properties that give rental income, a person with direct knowledge of the transaction said.

?IIML, promoted by India’s Infrastructure Leasing & Financial Services, has decided to tag along with its partner to sell off their stake,? the person said. He cannot be named as the deal is in the works.

IIML and Milestone Private Equity Advisory, promoted by the late Ved Prakash Arya, own and managed $229 million two rental income-based real estate funds ? IL&FS Milestone Fund I and IL&FS Fund II ? which primarily invest in income-generating commercial properties.

The Arya family, the promoters of Milestone, has decided to sell the company after the sudden demise of its main promoter Ved Prakash Arya in an accident last year and had appointed Standard Chartered Bank as advisor to the sale. ?We cannot make any comment at this point of time,? a Milestone spokesperson said.

The rental yields business, which is nascent now, is yet to develop for two reasons, an investment banker with a consulting firm said. ?One, the high tax structures pushes Indian real estate investment trust funds to list in Singapore and London stock exchanges and second, there is no stability of return from rental income as investors look at appreciation of properties.?

IIML’s public relations agency did not respond to a query regarding the development. Media reports said home mortgager Dewan Housing-promoted PE fund Arth Veda Star Fund is in the lead to purchase Milestone. Real estate PE funds, which had earlier shown interest in purchasing the fund, say the Milestone PE, which manages roughly R3,200 crore, will fetch R180-200 crore, much less than the R300 crore value sought by the seller. Milestone has a slew of funds managed independently and two joint ventures ? one with ILML and other with Religare Financial Services Group.

PEs purchase rivals for their global investor portfolio or a pool of limited partners (LPs) in industry parlance with global network and commitment. Unlike in mutual funds, PE funds attract better valuations as LPs commit funds for the long term whereas in MFs, investors can withdraw money after a shorter period. In PE, LPs invest money anywhere between 7 and 10 years. ?Many global and domestic investors are not ready to make bets now,? said a managing director of a domestic investment bank which runs a PE fund in an earlier interaction with FE.

Many new PE funds seek to buy out rivals as raising money has become tough as return on investments in India by PEs have been around 17% last year, lower among emerging markets. Chinese fund managers gave a return of 22%, overtaking LPs’ expectations of 20%. A slowing economy and the financial crisis in Europe mean investors are shying away from fresh commitments.

But, Milestone venture with IIML, has been giving better returns. Its first fund, a $117m, started in 2008 have invested $90 m in 6 companies and have given a 29.6% return. The fund, which its website says in exit mode, have made one disinvestment at 1.5 x, pointing to a one half a times return on its investment.. The second fund, a $112m, which had invested $69m in four companies is in investment mode.