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PRIVATE EQUITY

THE ROLE OF PRIVATE EQUITY IN INDIAN MARKET

GROUP MEMBERS:

MANALI CHHEDA
MAYUR NAROLA
NAFISA
KURAWEDWALA
PRERNA SUKHANI
PRIVATE EQUITY

 Private equity is an umbrella term for large amounts of money raised directly from
accredited individuals and institutions and pooled in a fund that invests in a range of
business ventures.

 In finance, private equity is an asset class consisting of equity securities in operating


companies that are not publicly traded on a stock exchange.

 Investments in private equity most often involve either an investment of capital into an
operating company or the acquisition of an operating company.

 Capital for private equity is raised primarily from institutional investors.

 There is a wide array of types and styles of private equity and the term private equity has
different connotations in different countries
TYPES OF PRIVATE EQUITY
Leveraged buyout
The acquisition of a company using debt and equity finance. As the word leverage implies, more debt
than equity is used to finance the purchase, eg 90 percent debt to ten per cent equity. Normally, the
assets of the company being acquired are put up as collateral to secure the debt.

Venture capital
The term given to early-stage investments. There is often confusion surrounding this term. Many
people use the term venture capital very loosely and what they actually mean is private equity

Growth capital
Growth capital refers to equity investments, most often minority investments, in relatively mature
companies that are looking for capital to expand or restructure operations, enter new markets or
finance a major acquisition without a change of control of the business

Distressed and Special Situations


Distressed or Special Situations is a broad category referring to investments in equity or debt securities
of financially stressed companies
Mezzanine capital
This is the term associated with the middle layer of financing in leveraged buy-outs. In
its simplest form, this is a type of loan finance that sits between equity and secured
debt. Because the risk with mezzanine financing is higher than with senior debt, the
interest charged by the provider will be higher than that charged by traditional lenders,
such as banks.

Secondaries
• The term for the market for interests in venture capital and private equity limited
partnerships from the original investors, who are seeking liquidity of their investment
before the limited partnership terminates.

• An original investor might want to sell its stake in a private equity firm for a variety of
reasons: it needs liquidity, it has changed investment strategy or focus or it needs to re-
balance its portfolio.

• The main advantage for investors looking at secondaries is that they can invest in private
equity funds over a shorter period than they could with primaries
ADVANTAGES OF PRIVATE EQUITY
1) Funds gotten through private equity are crucial for the growth of industry
and the development of innovative products.

2) Private equity funds are used for expanding working capital.

3) Private equity funds are helpful when it comes to facilitating mergers and
acquisitions.

4) Private equity funds make a company’s balance sheet stronger, and help it
develop.

5) Private equity funds are a great way to obtain funds for small businesses and
start-ups that have not been able to get loans or grants.

6) The general partner runs the company, so the investing partner, or the
DISADVANTAGES OF PRIVATE EQUITY

1)Since private equity funds are not open to investment on the stock
market, anybody who wants to sell stocks of a private equity fund
finds it difficult to locate a buyer.

2)There are certain transfer limits on private equity.

3)Most individuals cannot afford the high investments required in a


private equity.
SEBI GUIDELINES
 1.The Securities and Exchange Board of India (SEBI) issued its Regulations for
Venture Capital in 1996, thus establishing the agency’s authority over the funds,
the limits on their activities, and incentives for them to finance and rescue
troubled companies. There are no legal or regulatory differences between venture
capital and private equity firms. The Government first permitted financial
institutions (Industrial Development Bank of India, ICICI, and IFCI),
commercial banks (including foreign banks), and subsidiaries of commercial
banks to establish venture capital companies under guidelines issued in 1988. In
addition, under current central bank regulations, banks’ investments in mutual
funds catering to venture capital funding are considered to be outside the ceilings
applicable to banks’ investments in corporate equity and debt.

 2. Foreign venture capital funds have been permitted to operate in India since
1995. They may either hold the shares of unlisted Indian companies directly (up
to a maximum of 25% of equity) or route their investments through domestic
venture capital funds and companies. Before guidelines were issued in
September 2000, direct exposure by offshore private equity funds in shares of
unlisted companies was treated as a foreign direct investment and had to be
approved in line with the Government’s general policy on foreign investments.
Indocean Venture Fund (now Indocean Chase), originally set up by George Soros
 3. The regulatory environment for the private equity industry was
simplified in 1995–2000. Foreign institutional investors participated
in the growth of the private equity industry through the foreign direct
investment regulations of the Government and the simplified tax
administration procedures under the Indo-Mauritius Double Taxation
Avoidance Treaty. While the foreign direct investment route offered
minimum investment restrictions for private equity funds, exit
pricing and repatriation of capital were regulated by the Reserve
Bank of India (RBI). To bring these capital flows under the
regulation of the venture capital industry, new SEBI regulations were
issued with simplified exit pricing and repatriation procedures for
foreign investors.

 4. Following amendments to the 2000 budget, the Government has


allowed private equity funds “pass-through” status, meaning that the
distributed or undistributed income of the funds is not taxed. To
avoid double taxation, the income of a private equity fund is taxed
only in the hands of the investor.
 5. SEBI was also made the sole regulatory authority, and private equity funds must submit
quarterly reports to it. In September 2000 SEBI announced the guidelines that now govern
venture capital investment, based on the January 2000 recommendations of the
Chandrashekhar committee on venture capital. After another set of amendments in April 2004,
the following rules now apply:
 
(i) Foreign venture capital investors can invest in India without the need for approval from the
Foreign Investment Promotion Board if they register with SEBI.
 
(ii) Each investor in a venture fund must invest at least Rs500,000, and each fund must have at
least Rs50 million in capital.
 
(iii) A fund may invest in one company up to 25% of the fund’s capital. It cannot invest in
associated companies of ventures that it finances.

(iv) A fund must invest 66.67% (lowered from 75% in April 2004) of its investible funds in
unlisted equity or equity-linked instruments. The remaining 33.3% can be invested in
subscriptions to initial public offerings (IPOs) of companies or in debt instruments of a
company in which the venture fund has already made an equity investment.
 
(v) The April 2004 amendments removed the previous 1-year lockup period for IPO subscriptions.
They also allowed investments within the 33.3% category in preferential allotments of equity
shares of a listed company, subject to a 1-year lock-in, and in equity shares or equity-linked
(vi) The removal of the profitability criterion as a listing requirement had an important
effect on the private equity industry as it provided an exit mechanism for investors.
To replace the profitability requirement, a firm would be delisted if it did not earn a
profit within 3 years of listing.
 
(vii) The acquisition of shares in a venture fund by the investee company or its
promoters is exempt from the provisions of the takeover code and will therefore not
mandate an open offer.
 
(viii) Mutual funds may invest 5% of the capital of an open-ended scheme and 10% of
the capital of a closed-ended scheme in a venture fund.
 
(ix) In April 2004 the SEBI also removed some previous restrictions and allowed
venture funds to invest in real estate companies, gold financing companies, and
equipment leasing and hire-purchase companies registered with the RBI.
 
 6. These regulations have significantly improved the regulatory environment for
private equity funds operating in India, such as BTS India Private Equity Fund. In
addition, they reflect the strong commitment of the Indian Government to support
the provision of long-term equity finance to domestic entrepreneurial companies
PRIVATE EQUITY: HOW IT
WORKS?
 Private equity funds are set up as limited partnerships.

 These limited partnerships are controlled by private


equity companies that are the general partner in the
limited partnership.

 The private equity company encourages individuals and


institutions to invest in the private equity fund.

 This way, the investors become limited partners, though


the general partner controls the company management.
 When the general partner thinks that a particular investment is
feasible, it asks the limited partner to invest the amount it
guaranteed.

 The general partner chooses the investment portfolio of the


partnership, while the limited partner provides funds for
investing.

 The limited partner, or investor, in turn profits through sales,


mergers, recapitalization or initial public offering.
WHY INDIA??
 Growing economy.

 Changing government
policies.

 Huge potential.

 Young population.

 Promise of a bright future.


PRIVATE EQUITY IN INDIA
 India’s private equity sector is moving to the big league.

 Fund sizes have increased dramatically from US $10 to US $25


million just a few years ago, to between US $400 million and
US $ 1 billion today.

 Examples include the retail sector, where 50 percent FDI is now


allowed in single brand products; the telecoms services sector,
where the FDI limit has been raised from 49 percent to 74
percent.

 The private equity market in India, which attracted $2.2 in


investment capital in 2005, will reach nearly $7 billion in 2010.
MAKING PRIVATE EQUITY WORK
IN INDIA
 India is becoming a powerful magnet for private equity
investment.

 To realize its potential, however, private equity investors and


Indian companies must recognize what each brings to the table.
By some measures, India is poised to become the next big market
in private equity. 

 And there is certainly big interest: Well over 100 private equity
funds are scouting for deals, making India the fastest-growing
private equity market in Asia, with a 67 per cent compounded
annual rate since 2002.
 The survey gathered the opinions of nearly 150 global PE
investors active in India, their local counterparts, and Indian
entrepreneurs and executives.

 Among the highlights: Sixty per cent of survey respondents


said the investment climate in India is more attractive than in
Japan or South Korea, while 40 per cent agreed that India is
more attractive than China. 
 Over the coming three years, moreover, a majority anticipate
that China and India will be on par as Asia's most attractive
destinations for private equity investment.

 In general, India is perceived to be a friendlier investment


environment than China, with survey respondents indicating
that Indian businesses are less hamstrung by government
regulations and have an easier time recruiting experienced
managers. 
 They also say it is easier to negotiate and close a deal in India
compared with China. For example, via a research it was found
that 71 per cent Chinese corporate accounts suffer from a lack
of transparency, compared to just half as many who said Indian
companies' finances are difficult to track. 

 In one important area, however, China is given an edge over


India: Valuations are more expensive in India. Nevertheless,
private equity firms are rolling out plans that reflect their
confidence that India presents attractive opportunities. 

 Among firms, three-quarters anticipate at least doubling the


amount they invest over the next three years. There was broad
agreement among PE investors and Indian executives who
responded to the survey about which sectors are most
appealing. But there was also consensus about bottlenecks that
may diminish India's attractiveness. 
 Not surprisingly, poor infrastructure was the No 1 concern; 68 per
cent of respondents described it as a "challenge" or "major
challenge." More than 40 per cent thought that high asset values
will continue to crimp opportunities for private equity.

 Also ranking high were worries about whether the supply of skilled
workers can keep pace with the demand, as well as concerns that
onerous government regulations could curb India's appeal.

 Whether India's young private equity market ultimately delivers on


its promise will depend on how Indian companies and PE investors
learn to capitalise on each other's strengths.

 Indian executives will have to discover what these deep-pocketed


newcomers can do help their companies flourish.

 For their part, private equity firms should be willing to invest


patience as well as cash in cultivating relationships. 
BENEFITS OF PRIVATE EQUITY
1. Private Equity boosts the Indian economy
2. Private Equity funding provides long term perspective -
Profitability
3. Private Equity-backed companies generate foreign
exchange earnings
4. Private Equity-backed companies create well-paying
jobs
5. Private Equity catalyzes innovation in the economy
PRIVATE EQUITY CAPITAL IS MORE THAN JUST
MONEY

 Apart from providing capital, Private Equity investors provide strategic


and operational guidance to the companies they invest in.

 Their strategic input is more than just financial monitoring. Eighty percent
of the top management at PE-backed companies interact with their
investors on a weekly or monthly basis.

 PE Investor contributes to various business operations of a company, like


Strategic Decision making, Financial Advise, Recruitment and Marketing.

 Private Equity for Indian companies can create enormous growth


opportunities to compete in the global market and boost the growth of
Indian Economy.
CASE: PRIVATE EQUITY CAPITAL IS
MORE THAN JUST MONEY
 Blackstone bought 50.1 per cent of the 70.1 per cent
stake held in Gokaldas by the Bangalore-based Hinduja
family.

 The Hindujas still continue to have management control.

 The Executive Director of GEL says that, “Acquisitions


are the easiest way to grow as we don’t need to reinvent
the wheel, a bigger company will boost its bargaining
power while negotiating contracts with buyers”.
CONTD.
 Hindujas are also clear that it would not have been
possible for their family to go to the next orbit of growth
on their own.

 Blackstone, being a large US private equity giant, has the


experience to infuse the necessary capital, process know-
how, industry networking and management specialists.
THE OPPORTUNITY
 All the leading international PE Funds have been active in India
in recent months; they include the Blackstone group, Goldman
sachs, Warburg Pincus, the Carlyle group, Kohlberg Kravis
Roberts & co (KKR), Citigroup and Actis capital, besides two
leading funds from Singapore, GIC and Temasek holdings.

 In 2007-08, nearly 400 PE deals were struck by these


international funds, aggressively buying into companies showing
promise in sectors like information technology, biotechnology,
healthcare, telecommunications, media and entertainment and
real estate and retailing.
 Goldman Sachs, the US finance major, is now beefing up its
presence in India and looking at various options, including
setting up an asset management company, a brokerage unit,
wealth management division and a commodities outfit. It is
also keen on setting up a non-banking finance company.

 Besides American and Europe PE majors, other smaller private


investors are also striking smaller deals, especially in the real
estate and hospitality sectors. (Pragnya, a Mauritius-based PE
fund, invested $40 million in real estate projects in India.)
 But many private Indian business groups have also set up private equity funds and
venture capital funds. They include the Anil Dhirubhai Ambani group, the Aditya
Birla group and the Future group.

 INDIA’S largest commercial bank, State Bank of India, has also entered the PE
segment

 The Insurance Regulatory and Development Authority of India allows even


insurance companies to invest up to five per cent of their investible corpus in VC
funds that invest in infrastructure projects.

 The private equity industry in India is at a key inflection point.

 Investors the world over are increasing their allocations on India.

 The robust economy, supportive government, and recent industrial reforms could
see several hundred billion dollars channeled to the newly opened infrastructure
sector alone.
IMPORTANCE OF PRIVATE EQUITY
 “Five years ago, entrepreneurs ran family owned businesses
& looked to the next generation to take over the business. It
was very difficult for private equity players to invest as
entrepreneurs were reluctant to relinquish control of their
business. Now increasingly second generation family
members accept that ceding control of part of the business is
not a bad thing; PE investment provides additional capital &
brings additional business expertise & improved
governance.”
Richard Laing, Chief Executive,
CDC 2008 outlook
without PE funding, company…. Investments by stage

would have PIPE


developed buyout
the same way 22%
33% 36% other
would have
existed 4% early stage
63% would not growth stage
3%
have existed 20% late stage
15%
4%
ROLE OF A PE INVESTOR

Main contribution of PE investor to business operations

strategic direction

financial advice
Main contribution of PE
investor to business
operations
Recruitment

Marketing

0% 10% 20% 30% 40% 50% 60% 70%


PRIVATE EQUITY INVESTMENTS IN
INDIA
 Total FDI : USD 30 Private equity investments in India
Billion (USD Million)
2500
 Private equity : USD
2000
6 Billion till
1500
June/July 2008
1000
 Real estate sector :
500
USD 10 Billion 0
1996 1999 2002 2005
Private equity investments in India (USD
Million)
VALUE ADDITION TO THE INVESTEE
COMPANY
Higher returns

Higher exports

Innovation
REASON FOR UNDERPERFORMANCE OF
PE
 Low Standards of Corporate Governance

 Limited Legal Recourse

 Dysfunctional Capital Markets


SOLUTIONS
 RETHINKING THE APPROACH
- Go local
- Add value
- More discerning deal selection
- Creative exit strategies
- Improving access to public equity markets
 LOCAL GOVERNMENTS MUST PROMOTE
EMERGING MARKET DEVELOPMENT
- Protecting shareholder rights
- Promoting sound corporate governance
standards.
- Liberalizing investment restrictions for local
institutional investors.
 DEVELOPMENT FINANCE INSTITUTIONS MUST
PROVIDE LEADERSHIP
- Training for fund managers
- Financing that attracts additional investors
- Assist with policy and regulatory reform
- Support creative new initiatives
CASE STUDY
WARBURG –PINCUS-BHARTI
• One of the most reputed PE firms of US
• Investments worth more than $ 26 billion
• In more than 100 Companies
• Presence in US, Europe & Asia
• One of the first PE investors in India
Positive Macro Factors – Sector
• National Telecom Policy encouraging
 Domestic Private Investment
 Foreign Direct Investment

• Competition to Fixed Line Service Providers


 High Installation Fees
 Order Backlog

• Mobile Telephony considered as a status symbol


• Markets were Price Elastic
• No Player having Pan-India presence
• Telecommunication is a pre-requisite for Growth
Negative Macro Factors – Sector

• Lack of Regulatory Clarity

• Economic viability of Telecommunication Project

• Restriction on Licenses

• Monthly Fixed License fee to government

• No investor interest – No clarity on Exit route

• Bharti having presence only in North India


Landmark Transaction
• The Deal equaled one – third of total PE
investments in India till date
• PE investments in India were only 0.2% of total
GDP
• FDI was only about 1% of GDP
• First Investment done banking upon the “India
Growth Story”
• Foreign Exchange fluctuation was a matter of
concern
• Investment in Unorganized Sector
• Investment in a privately owned company
WP – Information Gaps

• Bet on forecasts
• Loss making business
• Entering as a minority stakeholder
• Ambiguity in Government Policies
• Fragmented Sector – Cost efficiency
• Mobile telephony was still a Luxury among Indians
• Business model based on Cost-Volume-Pricing
Shareholder Value & Corp
Governance
• Think Big !!!
BT- Initial Suboptimal Strategy – Bell North
WP -Change in Plans – Pan India Presence
• Growth Plans !!!
BT - Management Approach to build business from scratch
WP - Time sensitive: Growth by Acquisition
• Restructuring the corporate structure
BT- Adhoc structure
WP – Buy back stakes to reduce to conflicts of interest
• Inclusion of Strategic Partners - SINGTEL
Exit
CONCLUSION
 Privateequity funds are an excellent investment
options for venture capitals and other
organizations looking for long-term investment
in projects that will bring in good returns.

 However, they are not open for public trading


and not affordable to minor investors and
individuals.

 Forming a private equity fund is a good option


for small business owners who have not been
able to source funds for their start-ups or long
THANK
YOU

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