Private Equity & Venture Capital – Alternative Financing Option Indian Association of Investment Professionals Shwetank Patni July 6, 2013
Private Equity & Venture Capital – Alternative Financing
Option
Indian Association of Investment Professionals
Shwetank Patni
July 6, 2013
1
Agenda
I. Understanding Private Equity
I. Types of Equity Funding
II. Why PE Funding
III. PE Funding Process
II. PE Industry – Current Status
I. Industry Trends
II. Current Challenges
III. Recent Developments
III. Annexures
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Agenda
I. Understanding Private Equity
I. Types of Equity Funding
II. Why PE Funding
III. PE Funding Process
II. PE Industry – Current Status
I. Industry Trends
II. Current Challenges
III. Recent Developments
III. Annexures
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Types of Equity Investors
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• Provide funds for incubation of companies • Small deal size with active involvement
Angel Investor/ Seed Funding
• Provide capital for initial expansion of business
• Prefer ideas which has tested markets though sometimes provide seed capital also
Venture Capital (VC)
• Provide Growth Capital • Invest in companies with operating history
and established track record • Minority Stakes
Private Equity Fund
• Invest in mature businesses • Provide exit to promoters and/ or acquire
distress companies • Majority Stake
Buy Out Fund
Differentiating Venture Capital & Private Equity Funding
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Venture Capital Private Equity
Stage of Investment Early Stage Growth to late stage
Size of Investment Comparatively Smaller ( <$10 mn)
Relatively large ($10 mn upwards)
Sectors IT/ ITES, Life sciences, Education
Sector Agnostic; Sector Focus Funds
Holding Period Vary between 3-7 years Preferably 3-5 Years
Return Expectations IRR> 30% IRR of 25-30%
Exit Options Strategic Sale, Sale to other investor
IPO/ Secondary Sale/ Strategic sale
Deal Examples Just Dial, Snap Deal, SKS Microfinance, Flip Kart
Asian Genco, Bharti Airtel, Max Healthcare
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Investment Strategies and Key Players
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• Stage-independent / multi strategy firms • Temasek, Carlyle, Blackstone, KKR, TPG, Citigroup,
Actis, Chrys Capital, Warburg, ICICI Venture
Large Deals (>$100 million) and Buyouts
• IL&FS, IDFC, Barings, Kotak, New Silk Route, India Equity Partners, Sequoia, Jacob Ballas
• Hedge Funds / pre-IPO investors such as Fidelity
Mid-market Growth
($20-100 million)
• NEA, Draper Fisher, Sequoia, Helion, Ambit Pragma, BTS Advisors
• Some VCs also involved in late stage deals
Venture / Early Stage / SME
• Infrastructure – IDFC, SBI Macquarie • Real Estate - Kotak Realty Fund, Red Fort Capital,
Citigroup Property investors Sector Focused Funds
• DE Shaw, Avenue, Spinnaker etc Other Asset Classes: Hedge, Restructuring
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Select Deals
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Company Investor
Deal Size ($mn)
Genpact Bain Capital – 30% Stake 1,000
Hero MotoCorp Bain Capital. GIC – (<15% Stake) 851
Alliance Tyre KKR – Majority Stake 460
CSS Partners Group – Majority Stake 270
Nirula’s Navis Capital Partners – Buy Out NA
Flextronics Software Systems KKR – Buy Out 900
Dr Lal Pathlabs TA Associates , WestBridge 44
Transpole Logistics Everstone Capital 41
SnapDeal eBay, RuNet, Intel Capital 50
Fractal Analytics TA Associates 25
HealthKart Sequoia Capital India, Intel Capital 14
Zovi.Com SAIF, Tiger Global 10
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Agenda
I. Understanding Private Equity
I. Types of Equity Funding
II. Why PE Funding
III. PE Funding Process
II. PE Industry – Current Status
I. Industry Trends
II. Current Challenges
III. Recent Developments
III. Annexures
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Why Venture Capital/ Private Equity
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VC/ PE is More Than Just Money
Value Addition Sets a Pricing Benchmark Establishes Credibility
Only Possible Option in Specific Situations
Early stage companies Leveraged and Promoter Funding Not
Available
Better Option than IPO
Low regulatory compliances Possible even in Tough
Market Conditions Faster process at lower cost
Better Option than Debt
No Security required No regular commitments Lesser Covenants
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Why Venture Capital/ Private Equity
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Source: E&Y report
Primary Market Returns Abysmal
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Source: NSE
33 IPOs launched on NSE over last 2 years
6 Withdrawn due to lack of Investor Interest
Out of 27 IPOs subscribed, only 10 trading above IPO price
4 IPOs trading>50% of their IPO price, 4 between 20-50%
17 IPOs trading below their IPO Price within 2 years
9 IPOs below 50% of their IPO Price
6 Companies trading at 25-50% of the IPO price
Private Equity – Value Addition Initiatives
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Business Development
― Business introductions
― Cross selling among various portfolio companies
Mergers & Acquisitions
― Facilitating identification, evaluation and financing for M&A
Corporate Governance
― Introducing best corporate practices
― Facilitating setting up necessary systems and procedures
Strengthening/Developing Management Team/Board
― Assisting companies in making senior level hires
― Inducting independent directors
Strategy Formulation/ Refining
― Identification and evaluation of alternative growth options
― Leveraging PE fund’s experience across multiple investments and industries
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Private Equity – Value Addition Initiatives
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Operations & Systems Improvement
― Improvement in MIS
― Cost optimization
Fund Raising
― Identification and evaluation of alternative fund raising options
― Working with the company to provide necessary inputs to a potential investor
IPO/ Listing Preparation
― Selection of bankers, lawyers and other intermediaries
― Support in preparation and review of offer documents
― Support in pre-IPO transaction, if any
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Private Equity – Value Addition Initiatives
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Source: India Private Equity Report 2013 by Bain & Company
Blackstone – Intelenet*
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Blackstone, along with Mr Susir Kumar, acquired Intelenet from Barclays in 2007
― $180 mn invested for 90% stake; Approximately 3 times revenues
― Investment was followed by Financial Crisis – Timing?
Partnership for growth:
― Blackstone was backing a team which was mature, risk-taking and yet humane
― Intelenet needed capital to expand as well as necessary business relationships
At the time of investment
― Intelenet was operating in 1 country
― 8 sales people to get global business with 1 delivery centre in India
― EBITDA margin was 14%
― Lack of focus on business growth
― Changed hands from TCS to Barclays to Blackstone
Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide Source: Forbes
Blackstone – Intelenet*
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Initiatives Takes
― Strengthening top management team
― ESOPs to employees to align interest
― Introduction to global investee companies of Blackstone
― Expand sales team; Significant investment in improving sales network
― Cost rationalisation
At the time of Exit
― Intelenet was operating in 7 countries
― 25 percent of Intelenet’s revenues come from Blackstone’s portfolio companies
― Sales team expanded to 41 people
― EBITDA margin was 20%
Blackstone exited Intelenet in 2011 – Sale to Serco @ 3.0x Invested Capital
Wealth creation for employees through ESOPs
Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide Source: Forbes
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Agenda
I. Understanding Private Equity
I. Types of Equity Funding
II. Why PE Funding
III.PE Funding Process
II. PE Industry – Current Status
I. Industry Trends
II. Current Challenges
III. Recent Developments
III. Annexures
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Investment Lifecycle
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Preparing the Company for Investment
Investment Process
Monitoring
Exit
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Readiness Assessment
Determining the Capital Need and Funding Timeline
Developing a Business Plan
Management Team Maturity and Completeness
Thoughts on Funding Level (Company/ SPV) and Dilution
Establishing a Fund Raising Team
Interacting with Intermediaries
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What VC/ PE Funds Look For
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Promoter and Management
Industry Prospects
Market Leadership and Competitive Positioning
Financials – Growth, Valuation, Return Scenarios
Deal Structure
Terms, Rights and Due Diligence Findings
Exit Prospects
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Private Equity Investment - Process
Preparation of Information
Memorandum
Sharing Information
with PE Funds
Due Diligence (DD)
Documentation & Closing
Commercial Negotiations
& Non-binding offer
Investment Banker (IB) prepares IM and Financial Model in discussion with the Company
IB shares teaser with PE funds to gauge interest
Execute NDA with interested funds
Share IM and model with interested funds
PE investors solicit clarifications
Management meetings and site visits
Non binding term sheet
Exclusivity agreement with select fund
Financial/ legal/ business / promoter DD
Addressing DD findings
Final Negotiations
Completing conditions precedent
Executing definitive agreements
Funds transfer and issue of shares
T + 4 Weeks
T +6Weeks
T + 18 Weeks
T + 20 Weeks
T +10Weeks
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Monitoring
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Operational Level mostly in case of VC Funding
MIS Reports at Regular Interval
Site Visits
Participation in Board Meetings
Strategic Discussions
Budgeting & Planning
Value Addition Initiatives
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Exit
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Swap into Listed Parent Company/ Buy Back
Residual Option Promoter or Company Buy Back
Sale to Strategic Investor
Possible if Promoter is Comfortable More Common in IT Companies
Sale to Other PE Fund
More Common for VC Investments Generally in Next Round of Funding
Initial Public Offer
Preferred Option Investor May Sell at IPO or Hold On
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Agenda
I. Understanding Private Equity
I. Types of Equity Funding
II. Why PE Funding
III. PE Funding Process
II. PE Industry – Current Status
I. Industry Trends
II. Current Challenges
III. Recent Developments
III. Annexures
Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide
27
PE/ VC Activity In India Shows Cyclical Trends
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Source: India Private Equity Report 2013 by Bain & Company
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Top PE Investments in 2012
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Changing Sector Preferences – Flight to Safety
Source: India Private Equity Report 2013 by Bain & Company
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Exits Remain a Challenge
“Any fool can buy a company. You should be congratulated when you sell.” Henry Kravis, Founder, KKR
ICICI, HDFC, Kotak
Mahindra
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Agenda
I. Understanding Private Equity
I. Types of Equity Funding
II. Why PE Funding
III. PE Funding Process
II. PE Industry – Current Status
I. Industry Trends
II. Current Challenges
III. Recent Developments
III. Annexures
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So What Happened to India & Private Equity?
India: from Breakout Nation to Blackout Nation
India has moved from Boundless Optimism to Bottomless Pessimism*
Concerns on governance and economic policies
Economic Data not comforting
Private Equity returns have plunged since 2006
Fund-raising has hit a wall
India received only $3.5 billion of the $320 billion funding raised globally in 2012; $6.9 billion committed in 2011
Players such as 3i, Starwood Capital etc are exit India; Actis cuts its fund size by 2/3rd
Negative sentiment swirling around
Take a Pause
Data Source: Economic times, Bain PE Report
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Verbatim from Economic Times
What Went Wrong with PE?
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2006-08 – Max deals @ peak valuation
Too much money chasing too few deals - Auction
Projected Business Plans impacted by Economic Turmoil
Rush to Invest money – Was due diligence compromised?
Exits – Far and Few
Currency Depreciation has further propelled the pain
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Positives overshadowed by Negatives
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India still one of the fastest growing economies
Young Population with median age of 25 years
Increasing VC deals indicate comfort in Indian Entrepreneurs
VC deals in future culminate into PE deals
Valuations are down and investment opportunities exist
Just Dial, Dr Lal Pathlabs, Kotak Bank, Shriram Transport Finance, Paras healthcare etc – Multi-baggers still exist
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Every Industry goes through a cycle; so is PE
Industry expected to witness consolidation
LPs to prefer Funds with track record and operating history; GPs need to differentiate
Funds with wider mandate in terms of deal size, stage of investment etc expected to have better prospects
Focus to shift from investment rush to profitable exits
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Agenda
I. Understanding Private Equity
I. Types of Equity Funding
II. Why PE Funding
III. PE Funding Process
II. PE Industry – Current Status
I. Industry Trends
II. Current Challenges
III.Recent Developments
III. Annexures
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Mezzanine Funding
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Debt Instrument with Potential Equity Upside
― Instruments like Convertible Debentures, Preference Shares, Warrants, Options etc
― Provides regular returns to investor with equity conversion providing upside
― Can be secured by pledge of shares, promoter guarantee , corporate guarantee, escrow of cash flows etc
Addresses 2 key concerns impacting PE Industry today
― Valuation – Debt instrument so no equity valuation required
― Exit – Redeemable, so no exit risks
― Can be structured to match the timing of cash flows
Benefits promoters as
― No equity dilution
― Funding availability in specific situations like foreign acquisitions, promoter funding , restructuring/refinance , buyback, PE exit etc. wherein debt funding from traditional sources may not be easily available
― However, high cost debt and so strong cash flows are required to service it
― Key Players – Indo Star (Everstone, Goldman Sach, Ashmore), KKR, ICICI Ventures, Blackstone, Prop desks of MNC banks such as Stan C, BOAML, CS
Online Funding Platforms
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Venturesutra and India Venture Board are Pioneers
Purpose – To Connect Entrepreneurs to Investors
Primarily Focused on VC Funds
Entrepreneurs Located in Tier II and Tier III Cities Benefits
― Limited Access to VC Funds
Entrepreneurs Post Business Plan Accessible to Funds
Access to Intermediaries, Legal Counsels etc
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Annexure
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Data in annexure are as on a particular data. Some numbers would have changed, especially pertaining to
market price of listed shares. Annexure is just to highlight specific instances for information purposes only.
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IPO Exits
Bharti Airtel
− Raised $260 million between Sep 1999 and July 2001 from Warburg Pincus, New York Life Int’l India
Fund, IFC and AIF Capital; Bharti had 1.5 lakh subscribers in 1999
− The Company now has about 150 million subscribers and a market cap of >$32 billion
− Funds made returns raging from 3x – 5x depending on time of exit
VA Tech Wabag
− ICICI Ventures invested INR 500 – 600 mn in VA Tech Wabag in 2006
− Company focused on water and waste water management solutions
− Buy Out deal with ICICI Ventures buying the stake from Australian Parent
− Exited in 2010-11, making returns of 6x – 8x
Punj Lloyd
− Punj Lloyd raised $50 million from New York Life Investment Management India Fund II, Standard
Chartered PE and Temasek Holdings in 2004; Punj Lloyd had revenue of INR 16.2 billion in 2003-04
− The Company launched its IPO in 2005. Presently has a revenue of INR 81.6 billion
− NYLIM Jacob Ballas exited, making a return of >4.5x
High Return on Capital Deals*
*Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide
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IPO Exits
Pipavav Defence
− Pipavav Shipyard raised about $60 million from New York Life Investment Management India
Fund II, Indus Capital and Trinity Capital in early 2007, followed by approximately $150.0 million from
other investors to set up the largest shipbuilding yard in India
− The Company launched its IPO in Sep 2009 and now has a market cap of >$ 1.3 billion
− At Market Price of around INR 75, at 3.0x NYLIM Investment price
Jubilant Foodworks
− JP Morgan and India Private Equity Fund invested in Jubilant Foodworks over a period of 1999-2003
− Total investment approximately INR 500 million
− Exited at IPO in 2010, returns >4x
Shriram Transport
− Chrys Capital invested approximately INR 1,000 – 1,200 million in Shriram Transport in 2004-
05
− Exited in tranches, making a complete exit by 2009
− Returns > 10x
*Source: Various newspaper articles
High Return on Capital Deals*
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Strategic Sale/ Sale to Another PE Fund
Excelsoft
− UTI Ventures invested INR 25 million in 2001 in the e-learning firm for a 35% stake
− In early 2008, D.E. Shaw bought UTI Ventures’ stake for INR 1,250 million, representing a 50x return
Paras Pharma
− Actis and Sequoia invested in Paras Pharma between 2006-2008
− Exited in 2010 through sales to Reckitt Benckiser– Returns of >3x
MphasiS BFL
− In 1998, Baring Private Equity invested $11.4 million in the loss making BFL software. It later merged the
company with another portfolio company, Mphasis
− Revenue growth from INR 1.8 billion in FY 2001 to INR 50.3 billion in FY2010. The Company has a
market cap of >$1.6 billion
− In June 2006, Baring sold its entire stake in MphasiS BFL to EDS, making a return of over 16x
Dr Lal Pathlabs
− Sequoia capital invested in Dr Lal Pathlabs in 2006
− Exited in 2011 through sale to TA Associates. Returns expected to be >6x
High Return on Capital Deals*
*Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide
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Vaibhav Gems
− Warburg Pincus invested INR 2,470 million in Vaibhav Gems in 2004-05
− Sold the stake to HNIs at INR 184 million in 2011
− Value lost – 92.5%
Amtek India
− Warburg Pincus invested INR 1,500 – 2,000 million in 2006
− Sold part stake in November 2010
− Value lost – 63%
KS Oil
− New Silk Route (INR 135 cr) and CVCI & Barings (INR 49 cr each) in KS Oil @ approx INR 48 – INR 57
per share in 2009
− Current share price of INR 2.0 per share
− Value lost – >90% (These are notional losses as these fund may still be holding the shares)
Fame India
− Taemasek invested $ 7.5 million in Fame India in 2005
− Sold stake in 2009. Value Lost > 50%
Return of Capital!!!*
*Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide
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Venture Intelligence
VC Circle
“The Fourth Wheel” – Report on PE from Grant Thornton
Economic Times and other News Articles
Deal Curry
Bain & Company report on PE Industry in India, 2012
EY report on PE industry
References
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Disclaimer
The presentation represents the personal views of the author and not his organization. No claim is made for its accuracy or otherwise and users should do their own research in arriving at investment decisions. The data has been sourced from various public sources and may not be completely accurate. The data is used more for representation purposes and should not be reproduced anywhere with reference to this presentation. The data mentioned should not be used to judge/ comment on the performance of any fund. Data has been picked up randomly for specific cases and does not reflect an opinion on any fund. The presentation should not be used or reproduced without the consent of the author.