Introduction To PE by Sunil Goyal - Mar '10 - Final

INTRODUCTION TO PRIVATE EQUITY FUNDING IN INDIA
March28, ,2010
PresentedbyCA.SunilGoyal
Copyright2010.StrictlyPrivate&Confidential.NotForCirculation.
AGENDA
OverviewofPrivateEquity TypicalPrivateEquityFundStructure CurrentMarketScenario AdvantagesandDisadvantagesofPrivateEquity Q&A
OVERVIEW
OVERVIEW OF PRIVATE EQUITY

WhatisPrivateEquity? Anassetclassthatinvolvesvalueenhancementandhighreturnsgenerationby sharingbusinessexpertiseoftheInvestorcomplementingtheEntrepreneur
o TypicalvalueadditionsfromthePEFundHousecouldincludeStrategyFormulation Formulation,Financial ExpertiseandGlobal/DomesticNetworks(includingotherinvesteecompanies)
Offergreateropportunitytoexercisecontroloverinvestmentsascomparedwith otherpassiveassetclasseslikeequities,mutualfund,realestate,commodities,fixed income

o Activeinvolvementandinfluenceonthecompany,includingboardseat
Equityinvestmentsinrelativelymature,primarilyunlistedcompaniesrequiring growthcapital Eachinvestmentisbackedbyaninvestmentthesiswhichplaysoutoveraperiodof threetofiveyears
TYPES OF PEFUNDS AND STAGES OF INVESTMENT

StagesofBusiness SMEs Micro Business Mid Large Business Mature Business
Ideas
Incubation Fundsby Promoters
Family& Friends, Angel Investors& VentureCapital
VentureCapital PrivateEquity Mezzanine
CapitalMarkets/ PrivateEquity Mezzanine
BuyOutFunds/ CapitalMarkets
T Types of fPrivate P i t Equity E it Funds F d

Copyright2010.StrictlyPrivate&Confidential.NotForCirculation. 5
VENTURE CAPITAL
Sector
MajorTwosectors TechnologyorLife science
EarlyStage
Fundsstartupand earlyexpansion
KeyDriver I Innovation ti
Highlyskilled professional,scientists, innovators Innovative I ti business b i idea,developmentofa newproduct,new technology,etc.
Investment andExit
Upto$10mn; Exitsthrough StrategicSale/IPO
Success
High Hi hmortality t lit rate t andfewgreat successes;
GROWTH STAGE PRIVATE EQUITY
Success Investment andExit KeyDriver S l bili Scalability

CapacityExpansion, newproducts,new geographies,etc. From$5mnto $500mn ExitsthroughIPO Fewfailuresand greatsuccesses
Growthstage Sectoragnostic
Manufacturing f i to Consumergoodsto InfrastructuretoIT Investorsfundsat thegrowthstageof Company
BUYOUTS
Globally ymostimportant p strategy gyofPE;though g notavery yprevalent p strategy gyinIndia Generallybuyoutsdoneatmaturedstageofbusiness Takingacontrollingstakeinthecompanythroughleveragedbuyout(LBO)orthrough managementteamalongsidethePEfund(MBO) Maturecompanieswithleadingmarketposition,activemanagementteam,strong cashflow PEfundsprovidecapitalforexpansion,promoters/corporatedivestures,succession issues Developmentofabusinessplanover4to6yearsinordertoaddvalue Revenuegrowth+Marginsimprovement+deleveraging=addedvalue
Company FlextronicsSoftwareSystems GECapitalInternationalServices(GECIS) PhoenixLamps NilgirisDairyFarm WNSGlobalServices InfomediaIndia Nirulas G k ld E Gokaldas Export Financialinvestor KohlbergKravisRoberts&Co. GeneralAtlanticPartners,OakHill ActisCapital ActisCapital WarburgPincus ICICIVenture Navis CapitalPartners Bl k Blackstone Value(USDMn) 900 600 29 65 40 25 20 165 Type LBO LBO MBO MBO MBO LBO MBO MBO
MEZZANINE DEBT /STRUCTURED PRODUCT

Mezzaninefinancing gisprovided p by ymezzaninefundsandsometimeshedge g funds FinanceasDebtinstrument/structuredproductlikepartlyoroptionallyconvertible instrumentsetc.,immediatelysubordinatedtoequity Mezzaninefinancingmightinclude,besidescouponbearingdebt,anequitysweetener aswell Consideredasdebtinstrumentwithveryhighyieldwhichattimesinsubstitutionof equity Returnsgenerated dby b the h fund f dare
o Interest fixedrateorfluctuatealonganindex(e.g.LIBOR)ORapreagreedIRR o UpsidepotentialthroughEquity
Mezzaninefinancingnotfavoured beforecreditcrunchasseniordebtwaseasyto access SinceJuly2007andlackoffunding,mezzaninefundingisback Globallyin2008~70% 70%ofPEdealsusedmezzanine/structuredproductsv/s~48% 48%in 2007
ICICIVentures
BanyanTree
MezzAsia CapitalLP,CLSA
9
KEY DIFFERENTIATORS
Criteria Stageof Company LevelofRisk Assessment Focus InvestmentSize VentureCapital Private Equity Buyouts Mezzanine
Early
Growth
Mature
AlltheStages
High Mostly Technology < $10Mn
Moderate
Moderate
Moderate Diversified
Diversified
Diversified
>$10Mn
>$50 Mn
>$5Mn
10
TYPICAL PRIVATE EQUITY FUND STRUCTURES
11
TYPICAL PRIVATE EQUITY FUND STRUCTURES

Overseas/Domestic Investors (Institutional,Retail) Inden nture ofTr rust Investme ent Managem ment Agreeme ent
LimitedPartners (LPs) GeneralPartners(GPs)
Investee Company
InvestmentAdvisor/ Management
Identify,evaluatenegotiate, structureandpresentthe investmentopportunities
Investee Company
Foreign/Domestic Fund SEBI RegisteredTrust LocalTrustee Manager
Investments
Investee Company
BoardofDirectors And InvestmentCommittee
Investee Company p y
TrusteeCompany eg IL&FS, eg. IL&FS etc etc.

Usuallylifeofafundis~710years Donumberofinvestments,withadurationofaround threetofiveyears Fundmanagersusuallytakeanactiveroleinthe managementofthecompany
Investee Company
Fundmanagersgenerallyindicateanagreedtargetrateofreturn orhurdlerate,whichisusually8to10%compoundedperannum Fundmanagersusuallyreceiveanannualmanagementfeeof around1.5%2%ofthevalueofthefund Fundmanagersareusuallyentitledto20%oftheprofitabove thehurdlerate,whiletheinvestorswillreceivetheremaining 80%
12
CURRENT SCENARIO
13
CURRENT MARKET SCENARIO

Globally aggregate PE commitments ~$2 trillion (v/s $ trillion in 2003 and an expected $5 $1 $ trillion within 5 to 7 years) Globally ~1,500 funds are currently seeking to raise more than $800 Bn in funds PE is back with optimism about the Indian Story and looking for good investment opportunities Interest in investing in sectors supporting Indias domestic growth like education, healthcare, consumer g goods, , infrastructure, , Power,cleantech , etc. Looking at big size transactions and proven business models Various India centric funds are being launched globally to invest in India Evaluation of deals has become far more stringent Valuation has impacted substantially The total value of PE deals announced in India in the CY09 stands at $3.4 billion Average PE ticket size decreased from $34 million in 2008 to $17 million during 2009 and again increased to $37 million for first two months of 2010 Real Estate, BFSI, Power and Pharma, sectors were th leaders the l d as far f as sectoral t l values l are concerned d
PrivateEquity
D lValue Deal V l 20 US$ $Billion 302 10 7.86
2006 2007 2008
D l Deals 500 400 300 200 100
405 312 19.03 10.59 206 49 3.40

2009
1.83
20102M
PESectorDealSummary
IT&ITeS,6% Bankingand Financial Services,11% Pharma,Healt hcareand Biotech,4% Powerand Energy,12% RealEstate andInfra Management ,26% Mediaand Entertainment ,6% Education,3% Hospitality,2% Retail,1%
Others,21%
Telecom,4% Shippingand Ports,5%
14
RECENT DEALS
Investors BainCapital ,Indivision andOak GoldmanSachs, India Sequoia CapitalIndia InternationalFinance Corporation FungCapital ICICIVentures Franklin kl Templeton l MatrixPartnersIndia SequoiaCapitalIndia MilestoneReligare ApolloManagement International FinanceCorporation Investee Himadri Chemicals& IndustriesLtd Tikona Digital g Networks Stovekraft Pvt Ltd AuraMiraEnergyCompany FutureSupplyChain Solutions Lavasa CorporationLtd CareerPoint FIITJEELtd JustDial KrishnaInstituteofMedical SciencesLimited DishTVIndiaLtd JainIrrigationSystemsLtd Sector Plastic&Chemicals IT&ITES FMCG,Food&Beverages Power&Energy Logistics RealEstate&Infra Education d Education Media,Entertainment& Publishing Hospital Media PlasticsandChemicals Investment (USDMillion) 54 106 11 10 30 53 10 22 9 13 100 16
15
INVESTMENT PROCESS
16
PEINVESTMENT PROCESS
Preparationof BusinessPlanand Marketingcollateral Shortlistand evinceinterestfrom theInvestors
Structuringthe Business
DueDiligence
ObtainTermSheet
Structuring Structuring, Valuationand Negotiation
Definitive Agreement
ClosingFormalities
Funding
TimeFrame4to8months
17
ADVANTAGES AND DISADVANTAGES OF PRIVATE EQUITY
18
ADVANTAGES OF PRIVATE EQUITY

MeetFinancialObjective j CorporateGovernance NetworkingandGlobalIntegration p Orientation Operational CorporateStrategies LongTermCapitalCommitment Easieraccessothersourceoffinance Experience&ExpertiseinRiskRewardAnalysisandCapitalallocation BuildConfidencein Customers,Employees,Suppliers,Banks&otherlending institutionandMarkets RelativelylessexpensivefundraisingexerciseincomparisontoIPO
19
DISADVANTAGES
OF PRIVATE EQUITY
Raising gPrivateEquity q yfinanceisdemanding, g timeconsuming; g attimesthebusiness maysufferifpromoterdevotesmoretimeforthetransaction Dependingontheinvestor,promotersmayloseacertainamountofpowertomake managementdecisions Willhavetoinvestmanagementtimetoprovideregularinformationfortheinvestorto monitor MightcreateconflictordifferingopinioninlongtermstrategyduetopressuresofEXIT fromtheinvestor Thecostofcomplyingwithregulationscouldberelativelyhigher NonalignmentofInterestoffundmanagerontheboardandentrepreneurcould hamperthegrowthofcompany
20
Q&A
21
CONTACT
SunilGoyal
Phone Email : +919821120591 : sg@ladderup.com
22
THANK YOU
23

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INTRODUCTION TO PRIVATE EQUITY FUNDING IN INDIA

OVERVIEW OF PRIVATE EQUITY

Offergreateropportunitytoexercisecontroloverinvestmentsascomparedwith otherpassiveassetclasseslikeequities,mutualfund,realestate,commodities,fixed income

Equityinvestmentsinrelativelymature,primarilyunlistedcompaniesrequiring growthcapital Eachinvestmentisbackedbyaninvestmentthesiswhichplaysoutoveraperiodof threetofiveyears

TYPES OF PEFUNDS AND STAGES OF INVESTMENT

Incubation Fundsby Promoters

Family& Friends, Angel Investors& VentureCapital

VentureCapital PrivateEquity Mezzanine

CapitalMarkets/ PrivateEquity Mezzanine

T Types of fPrivate P i t Equity E it Funds F d

GROWTH STAGE PRIVATE EQUITY

Success Investment andExit KeyDriver S l bili Scalability

MEZZANINE DEBT /STRUCTURED PRODUCT

Mezzaninefinancingnotfavoured beforecreditcrunchasseniordebtwaseasyto access SinceJuly2007andlackoffunding,mezzaninefundingisback Globallyin2008~70% 70%ofPEdealsusedmezzanine/structuredproductsv/s~48% 48%in 2007

High Mostly Technology < $10Mn

TYPICAL PRIVATE EQUITY FUND STRUCTURES

TYPICAL PRIVATE EQUITY FUND STRUCTURES

Foreign/Domestic Fund SEBI RegisteredTrust LocalTrustee Manager

BoardofDirectors And InvestmentCommittee

TrusteeCompany eg IL&FS, eg. IL&FS etc etc.

CURRENT MARKET SCENARIO

D l Deals 500 400 300 200 100

405 312 19.03 10.59 206 49 3.40

Telecom,4% Shippingand Ports,5%

Structuring Structuring, Valuationand Negotiation

ADVANTAGES AND DISADVANTAGES OF PRIVATE EQUITY

ADVANTAGES OF PRIVATE EQUITY

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