PRIVATE EQUITY INVESTMENT – FUND RAISING PROCESS 24 th January, 2012 Presented by – CA. Deepak Ladha © Copyright 2010. Strictly Private & Confidential. Not For Circulation.
PRIVATE EQUITY INVESTMENT – FUND RAISING PROCESS
24th January, 2012
Presented by – CA. Deepak Ladha
© Copyright 2010. Strictly Private & Confidential. Not For Circulation.
AGENDA
Where Do You Begin ?Where Do You Begin ?
Planning For PE
Role Of Advisors
Investment Process
Structuring The Business
Business Plan And Marketing collateral
Short List And Evince Interest From The Investors
l i d i iValuation and Negotiation
Term Sheet
Due DiligenceDue Diligence
Definitive Agreement
Exit Optionsp
Q & A
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WHERE DO YOU BEGIN?
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WHERE DO YOU BEGIN?
Planning Stage
Plan Negotiate ClosureRight
Get AdvisorDocumentation Plan Negotiate ClosureGet Advisor
^ and market
Implementation Stagep g
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PLANNING FOR PE
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PLANNING FOR PE
PLANNING FOR PEPrepare
for a partnerPrepare
for a partner
Value the experience and input potential of the PE FundExpect questions, information requestsFlexibility will be key virtue
Articulate businessArticulate business
Define niche or unique selling proposition (USP) for the businessDevelop growth plan strategy ‐ diversify customer base or product line / offering or
business strategybusiness strategy
geographic presenceDevelop implementation plan for the strategy
Structuring of the BusinessStructuring of the Business
Bring scattered businesses under one entitySimplify the Business Structure
Developing management
team
Developing management
team
Professional management in key functionsExperienced in scaling up and managing growth
Retain good advisors
Retain good advisors
Engage experienced advisors / bankersAttorney and Accountant are your business partners
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good advisorsgood advisorsBroad base your Board of Directors
ROLE OF ADVISORS
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KEY ADVISORS TO A PRIVATE EQUITY TRANSACTION
Company
Investor
Company
Due Diligence Agencies
In – house TeamLegalInvestment
B kAuditor Financial
Banker
Lawyer Technical
Business
Get the RIGHT Advisor!
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ROLE OF KEY ADVISORS
Pl i F l ti St t ith th P t f PE d lInvestment Banker
Investment Banker
Planning – Formulating Strategy with the Promoter for PE deal
Execution – Documentation and Marketing the DealClosure – Negotiating and closing the deal
AuditorAuditor
Long association and trusted advisor to the promoter
Crucial role in decision makingBusiness Restructuring and Due Diligence PreparationHand holds the promoter from start to end
In‐houseIn‐house Arranging documentation and necessary dataTeamTeam Supporting the advisors at all levels
Financial
Due DiligenceAgencies
Due DiligenceAgencies
LegalTechnicalBusiness
LawyerLawyerLegal Compliance and due diligence
Negotiating the legal terms of the dealDocumentation and legal compliance pertaining to the transaction
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Documentation and legal compliance pertaining to the transaction
ROLE OF INVESTMENT BANKER
Planning Stage ComplianceExecution
• Strategy Formulation • Auditing• PE Placement – Deal
• Business Restructuring
• Preparation of IM and
Business Model
• Legal Compliance
• Corporate Governance
• Review of Legal
making and Negotiations
• Co‐ordination for Due
Diligence
• Assessing the valuation
• Regular MIS
• Internal Audit
g
documents
g
• Co‐ordination for
Completion of CPs and CSs
• Internal Audit
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COST OF ADVISORS
Advisor’s fees (usually around 2 ‐ 4%, depends on the quantum of fund raising)
Fees to due diligence agencies (usually a lump some amount – finance/accounts, legal,
environmental, technical)
Fees for the legal documentation
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INVESTMENT PROCESS
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PE/ VC INVESTMENT PROCESS
Structuring the Business
Preparation of Business Plan and Marketing collateral
Short list and evince interest from
the Investors
Structuring, Valuation and Negotiation
Obtain Term SheetDue Diligence
Definitive Agreement Closing Formalities Funding
Time Frame 4 to 8 months
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TIME FRAME FOR INVESTMENT
Timelines
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7
Cumulative Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
f hRestructuring of the Business
Preparation of Marketing Collateral
Shortlist and Contact Investors
Business Discussion & Valuation Negotiation
Obtain Term sheet
Due Diligence
Definitive Agreement
Closing Formalities
Funding
Depending upon case to case total time frame would be 5‐8 months
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epe d g upo case to case tota t e f a e ou d be 5 8 o t s
h Preparation of Business Plan
Short list and evince interest
Restructuring the Business Preparation of Business Plan and Marketing collateral from the
Investors
Business discussions & Valuation NegotiationObtain Term SheetDue Diligence
Definitive Agreement Closing Formalities Funding
STRUCTURING THE BUSINESS
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STRUCTURING THE BUSINESS
Companies need to structure their businesses in order to create investor interest
S d b iScattered businesses
Cross holdings in the business
Fragmented holdings
Value split across entities
Multiple businesses
Capture the entire worth of the business in one entity
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h Preparation of Business Plan
Short list and evince interest
Restructuring the Business Preparation of Business Plan and Marketing collateral from the
Investors
Business discussions & Valuation NegotiationObtain Term SheetDue Diligence
Definitive Agreement Closing Formalities Funding
BUSINESS PLAN AND MARKETING COLLATERAL
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BUSINESS PLAN AND MARKETING COLLATERAL
Overview ContentsOverview
It is the document that details the business’
history, current standing and future plans of
Contents
Executive Summary
Market and Competition
the company
It is a basic management tool that guides
Details of the Product or Services
The Management Teamthe future direction of a company and a
mandatory document to seek business
financing
Business Operations
Business Strategy and Future Plansfinancing
It provides a considered and logical
framework to set out a business’s short
Cost of Project and Means of Finance
Financial Model / Underline Assumptions
term and long term plans, shows how these
plans can be achieved, and demonstrates
Exit Opportunities for the Investors
that the plan addresses the requirements of
the target audience
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h Preparation of Business Plan
Short list and evince interest
Restructuring the Business Preparation of Business Plan and Marketing collateral from the
Investors
Business discussions & Valuation NegotiationObtain Term SheetDue Diligence
Definitive Agreement Closing Formalities Funding
SHORT LIST AND EVINCE INTEREST FROM THE INVESTORS
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IDENTIFICATION OF A FUND
Sectors
Domestic Foreign
Other than money ‐
Sectors that they focus on Corpus and Size
of Investments
Private Equity
money what else?
Current Portfolio and
Past Investments
Fund Investments
Expected
Investment philosophy
Expected IRR
Investment Horizon
Background of the
Management/ LPs Horizon
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PE DISCUSSION WITH MANAGEMENT AND PLANT VISIT
UnderstandingUnderstanding DNA
of the Promoter
Genesis of the businessOwnership
SuccessionOther Business Interest
UnderstandingBusiness
Industry and Business Process flow and value addition:‐ raw material to finish good
l bili f h b i
Risk and risk management Marketing and business development strategyManagement team and key decision makersBusiness
Scalability of the businessMargins and profitability
Management team and key decision makersCompetition Execution capability
Understandingfuture of the Business
Promoter’s view on future of the Industry and its businessCapex plan and utilization of fundS l bili f h b i
Margins and profitability post expansionTeam required and time linePosition in the industry
Scalability of the business post capex
Meeting Plant manager and other key members
Position in the industry
Quality and Test labs
Plant VisitInfrastructureUnderstanding step by step manufacturing processUnderstanding technology – machines
Q ySample of raw materials, intermediary and finish productsSafety measuresWorking condition and hygiene
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Understanding technology machines, suppliers
Working condition and hygiene
h Preparation of Business Plan
Short list and evince interest
Restructuring the Business Preparation of Business Plan and Marketing collateral from the
Investors
Business discussions & Valuation NegotiationObtain Term SheetDue Diligence
Definitive Agreement Closing Formalities Funding
VALUATION AND NEGOTIATION
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BROAD INVESTMENT STRUCTURE
Involves buying out the existing shareholders of the companyPromoter Buyback
Involves fresh infusion of capital in the company against issue of fresh
Private Equity Investment
Primary Investment
Secondary Investment
– Promoter Buyback
Ideal when promoter wants to cash out (fully or partially) or Buyouts
gshares to augment future growth
Ideal for early / growth or partially) or Buyouts– Promoter Buyback– Fund to Fund
companies
Instruments Instruments
Direct EquityConvertible
Preference Shares /Debentures
Warrants Direct Equity
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CASE STUDY ‐ DIRECT EQUITY
CASE A ‐ Hotel Industry Transaction characteristicsCASE A ‐ Hotel Industry
• Chain of hotels running 4 properties
• Managing 600 rooms across properties
• Running at 80% occupancy
Transaction characteristics
• Highly capital intensive
• Low growth
• Low RoI RoE and margins• Running at 80% occupancy
• Company intends to raise equity for setting‐up 4 new Greenfield properties ‐ (to be operational by FY13)
• Low RoI, RoE and margins
• Long gestation period
• Stable business model
Projected P&L Why Direct Equity ?
• The state of business gives good visibility and to a certain extent confirms ability to scale up
InvestmentConstruction
Comm. Start
a certain extent confirms ability to scale up which can provide comfort to an investor
• Investor community prefers conversion within 18 to 24 months (stretched)
I t t i i t j t ith l t ti
Particulars FY 09 FY 10 FY 11 FY 12 FY 13 Revenue 100.00 110.00 124.30 144.19 209.07 Y‐o‐Y Growth 10% 13% 16% 45%
• Investment is into projects with long gestation cycle beyond 24 months horizon
• Thus direct equity makes sense…..
EBITDA 22.00 24.20 27.97 33.16 49.13 EBITDA Margin 22% 22% 23% 23% 24%
PAT 12.00 15.40 18.02 21.63 25.09 PAT Margin 12% 14% 15% 15% 12%
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Future growth lower than expected discount by investor, early conversion on existing business or direct equity preferred
CASE STUDY ‐ CONVERTIBLE
CASE B ‐ Education Transaction characteristicsCASE B ‐ Education
• Chain of coaching classes operating in multiple locations
• Total enrollment for FY10 in excess of 23,000
Transaction characteristics
• Low capital intensive
• High growth
Hi h R I R E d i,
• Expected enrollment for FY11 is 32,000
• Well established brand
• Company intends to raise equity for setting‐up a d d d d l
• High RoI, RoE and margins
• Small gestation period
• Proven business model
dedicated residential campus
• By FY13, projected batch strength in excess of 80,000
Projected P&L Why Convertible ?
• The business is growing, generates good cash flows and scale up from current levels can reap
Investment
Construction
Comm. Start
flows and scale up from current levels can reap huge benefits – provides comfort to an investor
• There is lot of demand‐pull, hence selling additional capacities would be easier
I t it f i ithi
INR Crore FY 09 FY 10 FY 11 FY 12 FY 13 Batch Strength 15,500 23,500 32,000 54,100 80,000 Revenue 55 00 77 00 115 50 161 70 242 55 • Investor community prefers conversion within
18 to 24 months (stretched)
• Investment is into projects with gestation cycle of 12 to 24 months
Revenue 55.00 77.00 115.50 161.70 242.55 Y‐o‐Y Growth 40% 50% 40% 50%
EBITDA 24.75 34.65 52.55 74.38 112.79 EBITDA Margin 45% 45% 46% 46% 47%
PAT 13.75 15.40 23.68 33.96 41.23
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• Thus convertible structure makes sense…..PAT Margin 25% 20% 21% 21% 17%
KEY ASPECTS OF NEGOTIATIONS
Valuation
Deal Negotiation
Exit RoutesParticipatory Rights
Commercial Rights
N ti ti i lti t l ti f “Gi ( )” d “T k ( )”
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Negotiation is ultimately a summation of “Give(s)” and “Take(s)”
VALUATION NEGOTIATION
Hard Aspects Soft Aspects
Structure of proposed investment – Equity /Convertible
Valuation benchmarking vis‐à‐vis
Appetite for investment in the sector
Comfort on the promoter pedigree
Comfort on the promoter’s integritycomparable transactions, peer analysis, etc.
Potential returns analysis in terms of RoCE RoE investor IRR
Comfort on the promoter’s integrity and the overall intent
Hard negotiations should not give a negative impression – hence should be of RoCE, RoE, investor IRR
Sector / company growth potential and other economic aspects
Entry and Exit PE multiple as viewed
g pin a subtle and structured manner
Investor’s interest should be kept in mind during the process of
ti ti hi h ld l thEntry and Exit PE multiple as viewed by the investor
Committed IRR in favor of investor
negotiations which would clear the thought process to a large extent
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VALUATION METHODS
There is no right or wrong way of valuing a businessThere is no right or wrong way of valuing a business
There are several ways in which it can be done
Capitalized Earning / Peer Comparison
Valuation methodology that applies a multiple to the earnings of a business to capitalize those earnings into a value of a businessp g f
Acquisition Comparables
Valuation methodology that Compares with similar transactionsValuation methodology that Compares with similar transactions
Discounted Cash Flow
Valuation methodology that based on Expected Cash Flows Discounted at the Weighted Average Cost of Capital
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h Preparation of Business Plan
Short list and evince interest
Restructuring the Business Preparation of Business Plan and Marketing collateral from the
Investors
Business discussions & Valuation NegotiationObtain Term SheetDue Diligence
Definitive Agreement Closing Formalities Funding
TERM SHEET
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TERM SHEET
Private equity firm sends an Offer Letter setting out general terms of the proposalPrivate equity firm sends an Offer Letter, setting out general terms of the proposal,subject to the outcome of the due diligence and other enquiries and the conclusion ofthe negotiations
Negotiating deals with terms that are satisfactory to both sides and ensuring thatstakeholders’ interests are properly aligned
A Term Sheet is a brief preliminary document designed to facilitate and provide ae S eet s a b e p e a y docu e t des g ed to ac tate a d p o de aframework for negotiations between investors and entrepreneurs
Generally focuses on a given enterprise’s valuation and the conditions under whichinvestors agree to provide financinginvestors agree to provide financing
Usually contains certain conditions to be met before the investment is completed andthese are known as Conditions Precedent
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TERM SHEET
Term Sheet IncludesTerm Sheet Includes
About Company, Promoters, Investors and Proposed TransactionCost of Project, Business Plan, Current Share Holding PatternValuationCondition PrecedentPrincipal Covenants
– Utilization of Fund & Fresh issue of Capital
– Anti Dilution Rights– Anti Dilution Rights
– No Pledging Investor’s Share
– Tag Along Rights
– Drag Along Rights
– Right of First Refusal
– Liquidity Preferenceq yBoard of DirectorsExit
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h Preparation of Business Plan
Short list and evince interest
Restructuring the Business Preparation of Business Plan and Marketing collateral from the
Investors
Business discussions & Valuation NegotiationObtain Term SheetDue Diligence
Definitive Agreement Closing Formalities Funding
DUE DILIGENCE
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DUE DILIGENCE
Analyses and validates the financial, commercial, operational, and strategic
assumptions underpinning the company through:
– Historical financials
– Contractual document provided by the company including all legal documents
– Publicly available industry and competitor information, and
Due diligence is linked to the investor’s corporate strategy
Goal of due diligence is to determine whether a transaction with a given target is in line what was communicated to the investor
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what was communicated to the investor
TYPES OF DUE DILIGENCE
Legal BusinessFinancial
CorporatePermits and ConsentsContracts & Agreements
Market & Business potentialCompetition & Peer
l i
Assessment of Historical / Current Financial numbersTax benefitsd b d Insurance
Legal ProceedingsEmploymentProperty
AnalysisAssumption of Financial ModelSupplier & Distributors
IndebtednessEstimating unforeseen liability out of past performance Property
Trademark, Patent and Other Intellectual PropertyEnvironment Safety Public H l h
Supplier & Distributors Customers
performance Management Information System
Health
Time Frame 2 to 4 weeks
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h Preparation of Business Plan
Short list and evince interest
Restructuring the Business Preparation of Business Plan and Marketing collateral from the
Investors
Business discussions & Valuation NegotiationObtain Term SheetDue Diligence
Definitive Agreement Closing Formalities Funding
DEFINITIVE AGREEMENT AND CLOSING FORMALITIES
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DEFINITIVE AGREEMENT AND FUNDING
Share Subscription and Holders AgreementShare Subscription and Holders Agreement
Definition and Interpretationp
Terms of the Agreement & Structure, Issue & Subscription
Business Plan & Utilization of FundBusiness Plan & Utilization of Fund
Undertaking from Promoters, Transfer of Obligation and Restrictions
Monitoring and Corporate GovernanceMonitoring and Corporate Governance
Representation & Warranties
Liquidation Preference and IndemnificationLiquidation Preference and Indemnification
Confidentiality
G i L d Di R l iGoverning Law and Dispute Resolution
Miscellaneous Provisions
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EXIT OPTIONS
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EXIT OPTIONS
IPO
Sale to another Investor
Strategic / Trade Sale
Partial Exit
Repurchase by Company
Liquidation
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PE Fund raising is not the end of the JourneyPE Fund raising is not the end of the JourneyIts just the beginning…
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Q & A
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CONTACT
Phone : +91‐98203 48614Email : [email protected]
Deepak Ladha
102 A 1 t Fl T l +91 22 4033 6363102‐A, 1st Floor,Hallmark Business Plaza,Gurunanak Hospital Road,Bandra (East),Mumbai – 400051
Tel.: +91‐22‐4033 6363Fax: +91‐22‐4033 6364E‐Mail: [email protected]
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Maharashtra, India
THANK YOU
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