Evolution of Private Equity Ecosystem

September 20, 2009

Why Private Equity?
 Valuable source of capital for companies whose value may not be
recognized by other investors, especially

 Companies in high growth phase, sunrise industry, e.g. Suzlon – CVC, IDFC &
ChrysCapital (2004)

 Turnaround situations, e.g. in India Cements – ADM (2005)

 Established source of patient equity capital to meet future growth.

Provides companies greater flexibility to achieve long term business
metrics efficiently without feeling pressure of quarterly performance

 Provides a valuation benchmark and improves perception in the equity

markets

2
Why Private Equity? (Cont’d.)
 Difficulty in obtaining debt (low rating) at the right cost or public equity
(insufficient market standing, unfavorable market conditions) also
often drives issuers towards private equity

 Microfinance companies

 Non-monetary benefits:

 PE funds may bring in experts to advise the firm on strategy and financial/capital
structuring

 Enables business expansion through network of business contacts and portfolio

companies, especially overseas market

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Stages and Nature of Investments
NDTV Special Situation
Apollo Hospitals
Punjab Tractors
Aster Infrastructure Allcargo Global These may include
Sanghvi Movers Buyout
INX Media M&M Finance project financing,
JustDial Nagarjuna Const. Replacement Acquiring a one-time
Lemon Tree Reid & Taylor India Capital majority share in a opportunities etc.
Meru Cabs Buying out other concern, which is
usually associated Spice Jet
Suzlon Energy Expansion Stage investors to
with a change in DLF Assets
smoothen the
Funds directed at management. This
Early Stage capital and
growth and process is usually
organizational
The product or expansion of the leveraged
structure
service is ready. enterprise
Finance at this Flextronics
stage aims at Gokaldas
launching it into Sigma Electric
the market Intelenet Global
Maturity of the Company

 Role of private equity fund in its investee companies can be that of active or passive investor
depending upon its overall investment policy and investment thesis
 Passive role is generally limited to board level representation and guiding/influencing overall long
term policies and direction of the company
 Active role is more intense and apart from above involves participation in day to day operations of
the company by the PE Fund, which is typical in case of buyout transactions
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Current Landscape – Who’s Who in India

Global PE
Players

Indian Private
Equity

5
 2003 & Ahead – Growth of PE in India
The Trendsetter 16
16
500
500
450
Warburg Pincus made US$ 1.1 Billion by selling 14
14 450
off two-thirds of its 18 per cent share in Bharti 400
400
12
Tele-Ventures, reflecting a huge payoff on a US$ 12 350
350
292 Million investment made in stages between 10
10 300
300

(US$ bn)
1999 and 2001

(US$ bn)

(Nos.)
(Nos.)
8 250
8 250
Private Equity In India 6 200
200
6
Calendar Investment 150
4 150
Year ( mn US$ ) 4 100
100
2 50
2003 507 2 50
2004 1,629 - -
- -
CY03 CY04 CY05 CY06 CY07 CY08 CY09
CY03 CY04 CY05 CY06 CY07 CY08 CY09
2005 2,200 YTD
YTD
2006 7,460 Deal Value (LHS) Deals (RHS)
Deal Value (LHS) Deals (RHS)
2007 14,234
2008 10,793 Recent meltdown has severely impacted PE deals

2009 YTD (June) 1,417

Source: Venture Intelligence, Economist Intelligence Unit 2007

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 Size and Type-wise Deal Activity – CY08
Total Deal Volume – Size-wise Deal Value by Type
US$ 100-200 >US$ 200 mn 7,000
mn 9 (2%)
14 (4%)
5,555
US$ 50-100 mn 6,000 52%
30 (8%)
5,000

Deal Value (US$ mn)

< US$ 5 mn
76 (18%)
4,000
US$ 25-50 mn
50 13% 3,000
1,644
2,000 15% 1,085
1,010
US$ 5-10 mn 740
9% 10%
94 (23%) 7% 383 376
US$ 15-25 mn
1,000
4% 3%
75 (19%)
US$ 10-15 mn -
51 (13%) Late PIPE Growth Venture Buyout Pre IPO Others
Stage PE Capital
Note: Figures are the total number of deals in the category

 Total number of deals = 399 (53 deals above US$  Late stage investment (52%) and PIPE (15%)
50 mn) were most preferred by the investors
 Bulk of the deals (346 deals, ~87%) happened in  Both Venture (7%) and Buyout (4%) deals are still
<US$50mn category nascent and yet to take-off in a big way
 About 23 (6%) deals in US$100mn+ segment
 Average overall deal size = US$27mn
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 Sector-wise Deal Activity – CY08
Total Deal Value – Sector-wise Total Deal Volume – Sector-wise
Textiles & Education Others
Hotels & Resorts Garments 7 (1.8%) 35 (8.8%)
12 (3.0%) 8 (2.0%) Energy
28 (7.0%)
Food &
Beverages
6 (1.5%)
Shipping &
Logistics
13 (3.3%)
IT & ITES
Healthcare
107 (26.8%)
33 (8.3%)

Engg. &
Construction
24 (6.0%)
Telecom
Media & 10 (2.5%)
Entertainment
22 (5.5%) BFSI
Manufacturing
45 (11.3%)
49 (12.3%)

Note: Figures are the total deal value in the sector (in US$ mn) Note: Figures are the total number of deals in the sector

 Energy emerged as favorite sector attracting US$1.7 bn  IT&ITES witnessed maximum number of deals (107,
(15.7%) 16%)
 Top 5 sectors – Energy, IT&ITES, Telecom, BFSI and  Telecom, food & beverage, energy, textiles & garments
Manufacturing accounted for ~63% and shipping & logistics were high value deal sectors
(i.e. large deals)
 IT/ITeS, healthcare, education were low value deal
sectors 8
 Notable PE Transactions Announced in CY08
S. No Target Investor (s) Transaction Size, US$ mn
1 Aditya Birla Telecom Providence 640
2 Indiabulls Power Farallon Capital, LN Mittal 395
3 Cairn India Orient Global 278
4 Bharti Infratel KKR 250
5 Cafe Coffee Day JP Morgan 250
6 Ballarpur Paper Holdings JP Morgan, GIC 175
7 Mahindra & Mahindra Goldman Sachs 175
8 WinWind Masdar 174
9 International Amusement DE Shaw 158
10 Konaseema Gas Power IDFC PE, Lehman 125
11 Shriram Retail Holdings TPG Capital 120
12 National Stock Exchange Premji Invest 100
13 Narayana Hrudayalaya JP Morgan, AIG 100
14 Moser Baer Photo Voltaic IDFC PE, Morgan Stanley and others 100
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 Notable Exits by PE in CY08
S.
No Company Exiting Investor (s) Exit Type

1 IL&FS Investsmart SAIF Strategic Sale

2 Thomas Cook India Dubai Investment Group Strategic Sale

3 Dabur Pharma IFC Strategic Sale

4 Subhiksha Trading Services ICICI Venture New PE Fund

5 Orchid Chemicals & Schroders Public Market

Pharmaceuticals

6 NDTV General Atlantic Promoters

7 Shriram Transport Finance ChrysCapital Public Market

8 Excelsoft UTI Ventures New Investor

9 Aztecsoft Canaan Partners,e4e Strategic Sale

10 Updater Services New Vernon New PE Fund

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 Size and Type-wise Deal Activity – H1 CY09
Deal Volume – Size-wise Deal Value by Type
US$ 100-200 1,000
US$ 50-100 mn
mn
4 (5%)
1 (1%)
US$ 25-50 mn 718
800
13 (16%) 51%

Deal Value (US$ mn)

< US$ 5 mn 600
24 (30%)

400 284
US$ 15-25 mn
20% 216
11 (14%)
15%
200 102 79
7% 6% 16
1%
US$ 10-15 mn US$ 5-10 mn
17 (21%) -
10 (13%)
Late PIPE Growth Venture Buyout Others
Stage PE Capital
Note: Figures are the total number of deals in the category

 Total number of deals = 80 (5 deals above US$  Late stage (51%) and PIPE (20%) still remains
50mn) popular with investors
 Bulk of the volume (~94%) contributed by <US$50  No Pre-IPO investment during the period due to
mn deals lack of interesting companies going public
 Only 1 deals in US$100mn+ segment
 Average overall deal size = US$18mn
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 Sector-wise Deal Activity – H1 CY09
Total Deal Value – Sector-wise Total Deal Volume – Sector-wise

Note: Figures are the total deal value in the sector (in US$ mn) Note: Figures are the total number of deals in the sector

 Telecom was the sector with highest deal value (18%)  Highest number of deals were seen in IT/ITES (25)
with Quippo Telecom raising US$125mn followed by BFSI (9) and Healthcare (8)
 Top 5 sectors accounted for ~62%. Telecom, BFSI,
IT&ITES retained while Energy and Manufacturing lost
their place to Healthcare and Engg. & Construction in
top 5 slot 12
 Notable PE Transactions Announced in H1
CY09
S. Transaction size, US$
No Target Investor (s) mn

1 Quippo Telecom Oman International and IDFC 125

Infrastructure

2 Essar Power India Infrastructure Fund 70

3 Keystone Sun Apollo Ventures 60

4 NSE Norwest Partners 52

5 Share Microfin Ltd IFC 50

6 Nova Medical Centers India GTI Group 49

7 Ashoka Buildcon (SPV) India Infrastructure Fund 48

8 Ramky Enviro Engineers Stan Chart IL&FS fund 42

9 Inlogistics India Value Fund 40

10 Infrastructure Ventures India IL & FS Realty Fund 40

(SPV of Akruti City)

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 Notable Exits by PE in H1 CY09
S.
No Company Exiting Investor (s) Exit Type

1 XCEL Telecom Q Investments Strategic Sale

2 Telsima NewPath Ventures, JAFCO Asia,NEA & Others Strategic Sale

3 Mundra Port & SEZ 3i Public Market Sale

4 Gateway Distriparks Temasek Public Market Sale

5 Welspun India ICICI Venture Public Market Sale

6 Shriram Transport Finance ChrysCapital Public Market Sale

7 Lupin Citi Public Market Sale

8 HT Media Citi Public Market Sale

9 KS Oils Citi Public Market Sale

10 Max India Limited Warburg Pincus Public Market Sale

Public market sale has emerged as preferred exit route for PE Funds with recent market upsurge

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What PE Investors Look For?
 Overall sector attractiveness – potential for immense future growth
 Sunrise sectors like Alternative Energy, Education, Microfinance, Insurance are
drawing significant interest

 Some of the investors are averse to cyclical industries like commodities,

industries with various political risks

 Reputed promoters, strong franchise and a top class management

team

 Clear enunciation of a business strategy/future plans

 High visibility in terms of order book / future demand is desirable

 Company’s ability to deliver consistent earnings growth of 20-25%+

p.a. over the investment horizon of 3 – 5 years

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What PE Investors Look For? (Cont’d.)
 High return ratios – high return on capital employed and return on
equity are the most significant parameters for investors

 Reasonable valuation
 Though PE investors have the capability to pay a premium given their long term
focus, they do a lot of valuation diligence and expect valuations to be reasonably
benchmarked against trading / listed peers

 Enunciation of clear exit opportunity

 Agreement with management and sponsors on possible exit mechanisms

 Term sheets ask private companies to undertake IPO within stipulated period
else there is a put option / drag along mechanism

 Alignment of interest with management on tapping inorganic growth opportunities

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 Negotiable Restrictive Covenants
 Board seat
Management
representation
 Representation on committees

 Entering a new line of business (unrelated diversification)

 Fresh issue or buyback of shares

 Merging/acquiring another company or forming a joint venture

Supermajority
rights –  Selling the company or disposing off substantial assets of the company
Investors’ veto
 Winding up the business

 Changing the statutory auditor

 Amending the Memorandum or Articles of the company

 Maintaining minimum promoter holding

Share transfer
 Tag along
restriction
 Right of first offer

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Negotiable Restrictive Covenants (Cont’d.)
 Non-compete clause
Corporate
 Independent directors
governance
 ‘Arms length’ dealing with other group companies of the promoters

 Mandates the private company to undertake qualified IPO within a stipulated period

Exit Rights  Put option on promoters if IPO doesn’t happen in specified period

 Drag along rights

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Basic Types of Instruments
Instrument Orientation Comments

Equity
 Full equity exposure
Straight Equity
 Returns, both negative & positive are not capped

 Full equity exposure though deferred to a future date, i.e.

on conversion of warrants
Equity Warrants
 Helps limiting downside risk without capping positive
returns

 Full equity exposure though deferred to a future date, i.e.

Compulsorily Convertible on conversion of securities
Securities
 Coupon payments helps in lowering cost of acquisition

Optionally Convertible  Provides protection from downside risk however positive

Securities returns are not capped

Debt
 Other hybrid structures are also used to meet specific needs of the transactions
 Investment with minimum return guarantee from company / promoter. e.g. several deals in real estate
sector specially SPV level investments
 Investment with valuation linked to future committed performance, achieved thorough stake adjustment
or profit share. Mostly used incase of private companies can also be used incase of public companies
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 Current Valuations Not Cheap
Valuation are currently driven more by liquidity and sentiments
Sensex P/E and P/B – Over Last Decade
30.0 7.0

25.0 Average TTM P/E: 16.7 6.0

5.0
20.0
4.0

(x)
15.0
(x)

3.0
10.0
2.0
Average TTM P/B: 3.3x
5.0 1.0
- -

Nov-06

Nov-07

Nov-08
Jan-00

Jul-00

Jun-02

Jan-08

Jan-09
Jun-01

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Jun-04

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Jul-08

Jul-09
Mar-00

Aug-00

Feb-01
Apr-01

Oct-01
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Aug-02

Dec-02

Apr-03

Feb-04

Dec-04
Feb-05
Apr-05

Aug-05
Oct-05

Apr-06
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Sep-06

Mar-08

Sep-08

Mar-09
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Sep-09
May-00

Oct-00
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Feb-03

Aug-03
Oct-03
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Apr-04

Aug-04
Oct-04

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Mar-07
May-07

Sep-07

May-08
TTM P/B (RHS) TTM P/E (LHS)

Sensex vs. Global Valuations – Trailing P/E & P/B Sensex vs. Global Indices Returns – Last 5 Yrs
Indonesia 202
India 200
South Korea 100
Hong Kong 65
Malaysia 42
4.0 3.5
2.8 Singapore 39
3.0 2.7
P/B (x)

2.1 2.1 2.2

Thailand 6
2.0 1.5 1.6
1.3
Dow (5)
1.0
S&P 500 (5)
-
South Thailand Singapore Hong Malaysia S&P 500 Dow Indonesia India Japan (6)
Korea Kong
(50) - 50 100 150 200 250
(%)
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 Key Challenges and Emerging Trends
Companies
 SEBI floor price requirement for preferential allotment is a challenge

 Private equity deals are taking longer to close and terms are getting tougher, making it less
attractive compared to Equity Capital Markets

 Option like QIP is quicker and no special rights need to be created unlike in PE situation

 Easy listing norms and low thresholds, compared to other countries, make IPO an attractive
option to raise equity for unlisted firms

 After recent recovery of Capital Market, companies are finding that public markets offer better
valuations to raise equity finance as

 Equity returns expected by public market investors are lower than that expected by PE
investors and investment horizon is also shorter

 Indian Valuations in recent years have been more driven by liquidity and sentiments
leading to several sectors being richly valued from a fundamental perspective

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 Key Challenges and Emerging Trends
(Cont’d.)
Private Equity Funds
 PE Funds are cautious with regard to fresh investments in listed companies due to MTM losses on
existing investments

 Funds concentrating on improving operational / financial performance of their portfolio

companies

 Using recent market upsurge to exit their investments

 Demand for downside protection is increasing from investors leading to use of hybrid structures
and instruments

 Use of convertible instruments are rising both to bridge valuation gap and provide down side
protections to investors

 Investments at SPV, subsidiary and project level are expected to increase

 Buyout Challenges: Indian promoters are emotionally wedded to their business and are
typically averse to ceding control. Exceptions being cases where stake owned by promoters
is too small, there being generation change or business is promoted by professional
entrepreneurs
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THANK YOU