Private Equity & Venture Capital – Alternative Financing Option Indian Association of Investment Professionals Shwetank Patni

July 6, 2013

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

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 Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

2

Types of Equity Investors Angel Investor/ Seed Funding

• Provide funds for incubation of companies • Small deal size with active involvement

Venture Capital (VC)

• Provide capital for initial expansion of business • Prefer ideas which has tested markets though sometimes provide seed capital also

Private Equity Fund

• Provide Growth Capital • Invest in companies with operating history and established track record • Minority Stakes

Buy Out Fund

• Invest in mature businesses • Provide exit to promoters and/ or acquire distress companies • Majority Stake

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

3

Differentiating Venture Capital & Private Equity Funding Venture Capital

Private Equity

Stage of Investment

Early Stage

Growth to late stage

Size of Investment

Comparatively Smaller ( 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

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

4

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

5

Investment Strategies and Key Players Large Deals (>$100 million) and Buyouts

• Stage-independent / multi strategy firms • Temasek, Carlyle, Blackstone, KKR, TPG, Citigroup, Actis, Chrys Capital, Warburg, ICICI Venture

Mid-market Growth ($20-100 million)

• IL&FS, IDFC, Barings, Kotak, New Silk Route, India Equity Partners, Sequoia, Jacob Ballas • Hedge Funds / pre-IPO investors such as Fidelity

Venture / Early Stage / SME

• NEA, Draper Fisher, Sequoia, Helion, Ambit Pragma, BTS Advisors • Some VCs also involved in late stage deals

Sector Focused Funds

• Infrastructure – IDFC, SBI Macquarie • Real Estate - Kotak Realty Fund, Red Fort Capital, Citigroup Property investors

Other Asset Classes: Hedge, Restructuring

• DE Shaw, Avenue, Spinnaker etc

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

6

Select Deals Company

Investor

Deal Size ($mn)

Genpact

Bain Capital – 30% Stake

1,000

Hero MotoCorp

Bain Capital. GIC – (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 Source: NSE Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

13

Private Equity – Value Addition Initiatives  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 Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

14

Private Equity – Value Addition Initiatives  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

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

15

Private Equity – Value Addition Initiatives

Source: India Private Equity Report 2013 by Bain & Company Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

16

Blackstone – Intelenet*  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

17

Blackstone – Intelenet*  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

18

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

19

Investment Lifecycle

Preparing the Company for Investment

Investment Process Monitoring Exit Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

20

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 Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

21

What VC/ PE Funds Look For 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 Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

22

Private Equity Investment - Process Preparation of Information Memorandum

 Investment Banker (IB) prepares IM and Financial Model in discussion with the Company

Sharing Information with PE Funds

 IB shares teaser with PE funds to gauge interest

 Execute NDA with interested funds

 Share IM and

Commercial Negotiations & Nonbinding offer

 PE investors solicit clarifications

 Management meetings and site visits

 Non binding term sheet

model with interested funds

T + 4 Weeks

T +6Weeks

Due Diligence (DD)

 Exclusivity agreement with select fund

 Financial/ legal/ business / promoter DD

 Addressing DD findings

T +10Weeks

T + 18 Weeks

Documen tation & Closing

 Final Negotiations

 Completing conditions precedent

 Executing definitive agreements

 Funds transfer and issue of shares T + 20 Weeks

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

23

Monitoring 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 Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

24

Exit Initial Public Offer Preferred Option

Investor May Sell at IPO or Hold On

Sale to Other PE Fund More Common for VC Investments

Generally in Next Round of Funding

Sale to Strategic Investor Possible if Promoter is Comfortable

More Common in IT Companies

Swap into Listed Parent Company/ Buy Back Residual Option

Promoter or Company Buy Back

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

25

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

26

PE/ VC Activity In India Shows Cyclical Trends

Source: India Private Equity Report 2013 by Bain & Company Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

27

Top PE Investments in 2012

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

28

Changing Sector Preferences – Flight to Safety

Source: India Private Equity Report 2013 by Bain & Company

29

Exits Remain a Challenge

ICICI, HDFC, Kotak Mahindra

“Any fool can buy a company. You should be congratulated when you sell.” Henry Kravis, Founder, KKR

30

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

31

So What Happened to India & Private Equity? Take a Pause  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

Data Source: Economic times, Bain PE Report

Verbatim from Economic Times Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

32

Views of Foreign Investors (GPs)

Source: India Private Equity Report 2013 by Bain & Company

33

What Went Wrong with PE? 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 Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

34

Timing Issue!!!

PE Investment

Source: www.andertoons.com

35

Corporate Governance!!!

Source: www.glasbergen.com

36

Is the Gloom Greatly Exaggerated?

37

Positives overshadowed by Negatives  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

 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 Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

38

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

39

Mezzanine Funding  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 Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

40

Online Funding Platforms  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

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

41

Annexure

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. Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

42

High Return on Capital Deals* 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 *Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

43

High Return on Capital Deals* 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 200405

− Exited in tranches, making a complete exit by 2009 − Returns > 10x *Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

44

High Return on Capital Deals* 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 *Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

45

Return of Capital!!!*  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% *Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

46

References  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

Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

47

THANK YOU Shwetank Patni Jacob Ballas Capital [email protected] +91 99109 98766

48

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.

49