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Discussion Materials
January, 2017
1
Table of Contents
Section 1 Introduction to Private Equity
Section 2 Private Equity Environment in India : Investment Analysis
Section 3 Global Scenario
Section 4 Private Equity Environment in India : Exit Analysis
Section 5 Process and Documentation
Section 6 Industry Challenges
2
Section 1
Introduction to Private Equity
3
Role of PE in different stages of Company Life Cycle
• Own Funds
• Family &
Friends’ funds
Idea
Generation
Venture Capital
• Start-ups and
early stage
companies
• High risk
investment
• Higher dilution
Buyouts
• Matured
companies with
stable cash flows
• Ideal for
promoters looking
for exit
• LBOs / MBOs
Pre-IPO
• Sets valuation
benchmark for the IPO
• Investors include
hedge funds, select PE
funds
Growth Capital
• Mid to Late stage
companies
• Relatively lower
risk
• Significant target
segment for PEs
in India
Mezzanine /
Structured Finance
• Dilution is based
on performance
parameters
• Provides comfort
to investor if the
execution risk is
high
Initial
Funding
IPO
• Private Equity
Investors invest
as anchor
investors in IPO
• In some IPOs
Private Equity
investors part exit
QIP
• Private Equity
investors invest in
listed companies
through QIP
• Higher liquidity for
the investors
PIPEs
• Higher level of
liquidity
• Less stringent
covenants
• Instruments
include
preferential
allotment
4
Why Should Corporates go for Private Equity?
+
Finance
Best practices in financial reporting
and systems control; building
budgets and forecasts; assistance
in additional capital raising
Imparts Credibility
Enhanced credibility and visibility
with clients, suppliers, banks and
competitors; strengthens corporate
brand identity
Global Network of Strong Relationships
Through other portfolio companies;
through people network
Value
Addition
Long Term Partnership
Offers guidance and exercises
oversight over strategic decision
making through active board
participation
Managing Growth
Optimal organizational structure
and development, counseling
management on important matters
Corporate Governance
Systems to enforce stricter
accountability and transparent
disclosure; stronger internal control;
effective functioning of the board
5
PE Funds in India: Select Players
Global PE Funds Home Grown FundsSovereign Funds / Family Office Funds
/ Pension Funds
DNA of Private Equity Funds
Limited
Partners (LPs)
• Pension Funds
• Endowment Funds
• Insurance Companies
• Family Offices
• Fund of funds
• Banks
Private Equity
Funds
• Structured as Trust /
Company / LLP
• Have a finite life -
typically 7 to 10 years
• Generally follows the
2:20 fee structure
• Cannot re-invest
proceeds from exit
6
Section 2
PE Environment in India: Investment Analysis
7
Evolution of PE Industry in India
• SEBI (Venture capital
funds) regulations issued
• International PE funds like
Warburg Pincus enter
Indian market
• Domestic Funds like
ChrysCap commence
operations
1995 – 2000
• Government Committee
highlighted the need to
foster venture capital as a
source of funding new
entrepreneurs and
technology
1973
• Guidelines for venture capital
funds (VCFs) announced in 1988
• ICICI venture (earlier called
TDICI) is set up
• Regional capital funds APIDC
Venture Capital and GVFL are
set up
1988 – 1989
• Deal activity picks up
slowly
• Warburg Pincus exits
Bharti with 6x returns
• Leading international
funds like Temasek,
GAP, Carlyle, TPG set
up operations
2001 – 2005
• Investments and exits
come to a standstill on
account of the global
slowdown
2009
• Consumer
Technology is the new
sector attracting huge
investments
• More than USD 10 Bn
invested in Consumer
Technology from 2014
onwards
2014 onwards
• Deal activity jumps up
significantly with USD 35 bn
being invested in 839 deals
• Leading international funds like
KKR, Bain, Blackstone, Apax,
Goldman, Providence set up
operations
2006 – 2008
• Deal making resumes
with USD 7.5 Bn
invested in 2010
• Investments gradually
form an increasing
pattern from 2012
onwards
2010-13
From a Modest beginning in 1973, PE has now been well established in India
8
Private Equity Investment Trend
USD Bn
Source JM Financial Database
PE Investment Trend in India
8.0
15.9
11.4
3.4
7.5
8.2
7.0
8.3
10.4
18.5
11.4
0
2
4
6
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
USD 110 Bn invested in India by PE in the last 11 years
9
41%
9% 9%5% 5%
3% 3% 2%
23%
0%
10%
20%
30%
40%
50%
IT/ITES Financial Services Healthcare Consumer Real Estate Power & PowerAncillary
Education Infrastructure Others
No. of Deals By Sector : Last 5 Years
Sectoral Analysis
Source JM Financial Database
22%
11% 10% 8% 7%4% 4% 4%
17%
13%
0%
5%
10%
15%
20%
25%
30%
35%
40%
IT/ITES Financial Services Real Estate Healthcare Power & PowerAncillary
Infrastructure Auto & Auto Ancillary Consumer Others
Consumer
Technology
35%
Deal Value By Sector : Last 5 Years
10
Section 3
Global Scenario
Private Equity Vs. World Assets Under Management$ Bn
Source PwC Report 2015
Private Equity AUM
3,272
7,400
64,300
1,02,000
0
20,000
40,000
60,000
80,000
1,00,000
1,20,000
2012 2020P
World Asset Under Mgmt.
11
Global Private Equity Scenario
All Private Equity Assets under Management, 2000 - 2015$ Bn
370 356 460 548 668 892 1,256 1,202 1,414 1,791 2,056 2,361 2,583 2,718 2,822
374 402 401 404 556799
1,002 1,0751,066
1,0001,028
9661,240 1,254 1,343
744 758 861 952 1,224
1,691
2,258 2,277 2,480
2,791 3,084
3,327 3,823 3,972 4,165
0
1,000
2,000
3,000
4,000
5,000
Dec-0
1
Dec-0
2
Dec-0
3
Dec-0
4
Dec-0
5
Dec-0
6
Dec-0
7
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
Dec-1
4
Ju
n-1
5
Unrealized Portfolio Value Dry Powder
Global PE Capital raised$ Bn
93
207
349
538
666 681
318 299352
405
547 555 527
0
100
200
300
400
500
600
700
800
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Note
1. Includes funds with final close and represents year funds held their final close; distressed PE includes distressed debt,
special situation and turnaround funds; other includes PIPE and hybrid funds
Source Preqin Fund Manager Profiles and Performance Analyst 2016
Top Listed Private Equity Funds Globally Mkt Cap (USD) in Bn
Blackstone Group LP 30.8
Partners Group Holding AG 13.0
KKR & Co LP 12.5
3i Group PLC 8.2
Apollo Global Management 8.1
Oaktree Capital Group LLC 6.3
Carlyle Group 5.2
Ares Management 3.7
Source Bloomberg
12
Section 4
PE Environment in India : Exit Analysis
13
Value Creation Drivers
• Returns generated by operational improvement driven by:
– Revenue expansion
– Margin improvement
– Add-on acquisitions
– Organic growth
• Returns generated by timing the business cycle driven by:
– Buying low and selling high
• Multiple expansion: Difference between entry and exit multiple
– Multiple uplift x Exit EBITDA
• Multiple uplift: Exit EV / EBITDA – entry EV / EBITDA
• Returns generated by paying down debt
– Entry net debt – exit net debt
• Improves the Return on Equity for equity shareholders
EBITDA Generation
Multiple Expansion
Debt Reduction
1
2
3
14
Exit Options
• Listing Company on stock exchange, involves offering portion of the PE shares to the public and coupled with fresh capital raising
• This has traditionally been the preferred mode of exit
• IPO gives higher valuation as compared to the other exit options, so long as the markets are buoyant
• The main challenge is that valuation is dependent on prevailing capital market conditions
PE –
Public
Market
• Selling the PE fund’s stake through open market transactions on a public stock exchange
• It is one of the most common modes of exit in India
• It is the least time consuming and the simplest route of exit for a PE investor
• Similar to an IPO the main challenge here is that valuation is dependent on prevailing capital market conditions
PE – Open
Market
Sales
• Selling the PE fund’s stake to a strategic player or merger with another Company
• M&A transactions are less impacted by conditions in capital market due to their strategic nature
• Strategic buyers pay a higher premium due to operational synergies or to get a head start into a new market
• If a majority stake is on offer it is possible for the seller to get a high control premium
PE –
Strategic
• Selling the PE fund’s stake to another financial buyer or another PE investor
• Different funds have different expertise and may want to enter a firm at a later stage of growth that best suits their skills and target
• Companies that have had a PE investor for some time usually have better processes and corporate governance standards
PE to PE
• Purchase of own shares by the Company / Promoters from the PE fund at a mutually agreed internal rate of return
• Guarantees a minimum agreed return for the PE investor
• This exit option is considered difficult to implement due to lack of enforceability
• Option of last resort and is tried when the other exit routes do not give favourable valuations
Buyback
15
Private Equity Exit Trend
Source JM Financial Database
2.0
3.0
4.4
2.1
6.6
4.1
6.8
3.1
3.5
6.4
5.5
0
1
2
3
4
5
6
7
8
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
No. of
Deals42 68 123 88 115 848128
Private Equity Exits in IndiaUSD Bn
103 140 80
USD 48 Bn of PE exits in India in the last 11 years
16
Section 5
Process and Documentation
Process
• Materials comprise of Teaser, Information Memorandum and Financial Model
• Capture the right positioning which is key in generating investor interest
• Key target investors to be identified based on deal size, sector interest, orientation and
hunger for the deal
• Optimum set to ensure bandwidth of the management is utilized well and also good
enough to create competitive tension
• IM and Model to be shared post signing the NDA
• Meeting with investors to bring investors up the curve to save management time
• Deal contours explained
• Management meetings to focus on strategy and partnership related aspects
• Indicative term sheets from investors will outline the deal and rights parameters
• Shortlist based on terms, level of engagement, high probability of closure, potential
value add and importantly chemistry with the investor
• Diligence could be aided by Vendor Due Diligence in order to economize on
management bandwidth
• Final negotiations, transaction documents
• Conditions precedents to be complied with
• Funding
Preparation of Materials
Targeting the Correct
Investor Universe
Meetings with
Investors
Term Sheets
from Investors,
Shortlist and
Diligence
Closing
17
18
Documentation – Typical Rights covered
CommentsClauses
Lock-in Period
Investor Director
• Lock-in for substantial sale of Promoter shareholding for minority investments by a PE investor
• Ability to appoint director(s) on the board of the Company
Anti-Dilution • Protection for an Investor from dilution resulting from later share issuance at a lower price than the originally investment
• Right to Investor to subscribe to the fresh issue of shares before the same are offered to any third party
• Obligation of seller to negotiate the sale of the shares with the ROFO right holder before offering them to third parties
• If the ROFO right holder is not interested in purchasing the shares or cannot reach an agreement with the seller, the seller has no further
obligation to the ROFO right holder and may sell the shares freely
Pre-emption Right
Right of First Offer (ROFO)
• Right but not the obligation to buy the shares being offered by another shareholder for sale after the seller has received offers from third
parties and the offeree shall be entitled to purchase such shares if he can match the price being offered by the third party
Right of First Refusal (ROFR)
• Right for minority shareholder to join the transaction and sell his stake in the Company in case the majority shareholder sells his stake in the
CompanyTag Along
• Right to force the other shareholders to sell their shares in the Company along with the right holderDrag Along
• Investor exit obligation on Company through (i) IPO (ii) Third Party Sale (iii) Strategic (iv) Company / Promoter Buy-backExit Options
• Right to receive preference over the shareholders in case of Liquidation Event
• Liquidation event is winding up of the company, a voluntary liquidation, a merger, acquisition, amalgamation, change in control, consolidation,
transfer in any manner of all or substantially all of the Company’s assets
Liquidation Preferences
19
Section 6
Industry Challenges
20
Challenges facing the Private Equity Industry
Challenges facing the PE Industry
Investments
Exits
Fundraising
• Investors are cautious with investments and
invest only after thorough reference checks
about the promoter and proper due diligence
• The deal closure time has increased
significantly
• Though the PE investment activity has shown
a healthy uptrend, the ability of the
investments to be converted into profitable
exits still remains difficult
– Volatility in Indian capital markets and
other economic challenges has made exits
difficult
• LPs are becoming more selective about the
funds in which they will choose to invest
– Their greater scrutiny makes it imperative
for PE funds to differentiate themselves in
their investment approach and portfolio
management skills
Potential areas of conflict between PE firms
and Investee companies
Investee Company
• Companies may find PE firms too intrusive in
their business affairs
• Bringing alignment amongst family members
can be challenging to implement changes
expected by PE firms
• The leadership team may find it challenging to
work in new ways
PE Funds
• Expect compliance with covenants
• Push for change in management style,
business model, cost structure etc.
• Set up strict management information and
performance evaluation system
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