A Project Report On

Submitted By: Nitesh Sadani
In Summer Internship for M.B.A & PGDM-FT Of

Submitted To: Mr. Shashank Choudhary
Investment Banking Group
Khandwala Securities Limited


Acknowledgement ………………………………………………………………………….3 Abstract …………….……………………………………………………………………….. 4 Objective ……………………………………………………………………………………. 6 Definition …………………………………………………………………………………… 7 Private Equity: Current Scenario ………………………………………………………… 8 Types of Private Equity.………………………………………………………………….. .12 The stages of Private Equity ...…………………...………………………………………. 15 Process of Private Equity Investment …………………………………..………………. 16 Advantages of Private Equity …………………………………………………………… 18 Disadvantages of Private Equity …………………………………………………………20 Ways of investment (Entry Route) ……………………………………………………….. 22 Ways of Exit ……………………………………………………………………………….... 24 Major Private Equity Deals in India Warburg-Pincus & Bharti Tele Ventures……………………………………….. 28 Dalmia Cement & KKR …………………………………………………………...40 Air-Deccan & ICICI Ventures and CI ……………………………………………42 Paras Pharmaceuticals & Actis ………………………………………………….. 44 Shriram Transport Finance & TPG …………………………………………….... 46 Gokaldas Exports Ltd. & Blackstone ………………………………………….... 48 Success of Private Equity in India ………………………………………………………. 50 Future of Private Equity in India ……………………………………………………….. 52 SEBI Guidelines …………………………………………………………………………… 54 World’s Top 10 Private Equity Firms …………………………………………………… 57 Comparing the Indian PE environment to other countries …………………………… 58 Introduction of Khandwala Securities Limited …………………………………………59 References ………………………………………………………………………………...... 61
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I take this opportunity to express my profound and sincere gratitude to Mr. Rajesh Katare (Manager Execution - IBG) for his inputs and feedback in developing this project. His guidance, continued support, constructive criticism and suggestions helped invaluably in shaping the form and content of this report. I acknowledge and thank with deep sense of gratitude to Mr. Giriraj Daga (Research Analyst) for his constant support and invaluable suggestions right from the conception to the design and completion of the project. I also acknowledge and thankful to Mr. Ankit Kothari (Junior Analyst - IBG) for his consistent eye watching on report and for providing better ideas and suggestions to improve the project. This project will help me in understanding the global investment pattern and factors influencing it. It will also helpful in understand the future scenario of Private Equity in India. I am sure that project is very useful to know that why PE firms are successful in India.

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India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years. Institutional investors in developed countries, for their portfolio diversification, are continuously seeking new destinations and innovative and alternative asset class. The Private Equity is the best alternative for raise money from an investment. The Private Equity sector is broadly defined as investing in a company through a negotiated process. Investments typically involve a transformational, value-added, active management strategy. Typical forms of private equity include venture capital, growth and mezzanine capital, angel investing and private equity funds. The major PE investments influencing the deal values are Real Estate, IT/IT Services and Energy sectors. The other sectors, which have significantly contributed to private equity deal value, are Logistics and Telecom. The most active sectors in terms of deal volume were IT/IT Services and Manufacturing. Other sectors contributing significantly to deal volume were Banking, Finance and Insurance and Real estate. The PE investment pattern follows various stages, which are: seed, start-up, expansion and replacement stages. It also follows a definite process, which is Deal Origination (Deal Sourcing), Due Diligence, Deal Negotiation, Deal Closing (Acquisition), Post Acquisition Monitoring and Exit (IPO, Trade Sale or Buy back). The Indian Private Equity sector consists of many historical deals so far. Among them “Warburg Pincus – Bharti Tele Venture” deal was beginning of the PE era in India. By this deal WP earned 450 % return on its investment which is the biggest earning by any PE fund worldwide. On the other hand Bharti Tele Ventures Ltd. has result as huge growth in its subscribers and became 2nd largest telecom company in India. After the deal with Warburg Pincus, Bharti spread its business worldwide. Currently Bharti have its operations not only in India, but also in Bangladesh, Sri Lanka and 15 countries in South Africa. Subsequently Bharti became 5th largest telecom service provider all over the world.
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The project would deal with understanding the role of private equity in India, analyzing their investment strategies, their success in the Indian financial market, future of Private Equity in India, regulatory norms in India and how it is beneficial of Indian companies. An attempt will also be made to understand their investment patterns. The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like seed funding, expansion capital, and buyout financing, financing restructuring of companies and providing mezzanine capital. These all types are discussed in “Major Private Equity Deals in India.” The project is consists of top PE firms in the world. According to Private Equity International (PEI), the largest private equity firm in the world today is TPG, based on the amount of private equity direct-investment capital. Some other players in this ranking are; Goldman Sachs Capital Partners, The Carlyle Group, Kohlberg Kravis Roberts, The Blackstone Group and Warburg Pincus The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors. With India becoming a preferred investment destination, this heightened level of private equity activity is likely to continue for some time to come.

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The objective of this project is to study the role of private equity in India, analyzing their investment strategies, their particular strategies, by studying their entry strategies into India financial markets, regulatory norms in India and how it is beneficial of Indian companies. An attempt will also be made to understand their investment patterns. The project would also deal with some of the major deals in India, this would help to understand the investment pattern and than the exit strategies of the PE firms. The project would also help to understand us what could be the scenario of the private equity investments in the near future, and comparison of the Indian scenario with rest of the world.

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The Private Equity sector is broadly defined as investing in a company through a negotiated process. Investments typically involve a transformational, value-added, active management strategy. Typical forms of private equity include venture capital, growth and mezzanine capital, angel investing and private equity funds. Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firms’ strategic decisions. Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies. Capital for private equity is raised from institutional investors and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. The term "private equity" encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assets such as corporate stock or bonds. Private Equity Funds: Private equity funds are investment companies that, as a rule, do not trade in publicly-traded securities. Instead, they normally seek equity stakes (that is, partial ownership) in private companies. They may also invest in so-called private placements of securities from public companies. Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters.

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Private Equity: Current Scenario
India has a very vibrant Venture Capital (VC) / Private Equity (PE) industry with USD 32.5 billion invested across more than 1500 VC/PE deals from January 2006 till date. Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent. This translates to USD 60-100 billion of VC/PE investments requirement over three years, against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31, 2010. After a turbulent 2009, private equity investments in India displayed steady signs of recovery in the first quarter of 2010. The latest quarter registered the highest value of deals since 2009. For the quarter ended March 2010, total announced deal value was $1,943 mn, a jump of more than 185% from $675 mn in Q1 2009. Total deal count in Q1 2010 also increased by 35% to 88 deals, up from 65 in Q1 2009. Interestingly, despite the enormous growth in deal value on a quarter-on-quarter basis, the deal count decreased by 11% to 88, down from 99 in Q4 2009.
Year Value (in $mn) Volume 2005 Q2 Q3 379 716 44 45 2006 Q4 691 65 Q1 1,246 114 Q2 2,605 93 Q3 1,526 81 Q4 1,697 100 Q1 2,555 166 2007 Q2 2,734 88 Q3 5,508 105 Q4 5,184 149

Q1 442 66

Year Value (in $mn) Volume

Q1 5229 190

2008 Q2 Q3 2065 3345 113 133

Q4 1604 84

Q1 675 65

2009 Q2 Q3 1138 1178 62 73

Q4 1413 99

2010 Q1 1943 88 (Source: VCCEdge)

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(Source: VCCEdge)

(Source: VCCEdge)

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Top Sectors by Deal Value for the year 2009 ($mn)
(Source: VCCEdge)

Real estate, IT/IT Services and Energy were the most targeted sectors for investment with deals worth $0.65 billion, $0.62 billion and $0.54 billion respectively. Together, they accounted for more than 40% of total private equity deal value during the year 2009.

Top Sectors deals in 2009
Real Estate IT/IT Services Energy Logistics Telecom Banking, Finance & Insurance Manufacturing

20 47 16 15 5 32 34

Deal Value ($mn) Average Deal Size
657 621 538 354 336 244 242 43.8 15.9 41.4 23.6 84 8.4 9.3
(Source: VCCEdge)

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The major PE investments influencing the deal values of these sectors were investments in Aricent Inc., Indiabulls Real Estate Ltd., Mohtisham Estates and Ind Barath Power Infra Pvt. Ltd. The other sectors, which have significantly contributed to private equity deal value in the year 2009, are Logistics and Telecom accounting for 15% of total deal value.

Top Sectors by Deal Volume for the year 2009
(Source: VCCEdge)

The most active sectors in terms of deal volume were IT/IT Services and Manufacturing which lead with 17% and 11% of deal volume respectively in 2009. Other sectors contributing significantly to deal volume were Banking, Finance and Insurance and Real estate accounting for 11% and 7% of deal volumes respectively. As seen in the year 2008, 2009 too saw large number of deals in IT/IT Services, Manufacturing, Banking, Finance and Insurance and Real estate.

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Types of Private Equity
Private Equity investments can be divided into the following categories:

1. Leveraged Buyout
Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itself committing all the capital required for the acquisition. To do this, the financial sponsor will raise acquisition debt which ultimately looks to the cash flows of the acquisition target to make interest and principal payments. Acquisition debt in an LBO is often non-recourse to the financial sponsor and has no claim on other investment managed by the financial sponsor. Therefore, an LBO transaction's financial structure is particularly attractive to a fund's limited partners, allowing them the benefits of leverage but greatly limiting the degree of recourse of that leverage.

2. Venture capital
Venture capital is a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business. Venture investment is most often found in the application of new technology, new marketing concepts and new products that have yet to be proven. Venture capital is often sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth capital that is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth. Entrepreneurs often develop products and ideas that require substantial capital during the formative stages of their companies' life cycles. Many entrepreneurs do not have sufficient funds to finance projects themselves, and they prefer outside financing. To compensate the risk of failure, venture capitalist's seeks higher return from these investments. Venture Capital is often most closely associated with fastgrowing technology and biotechnology fields.

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3 .Growth capital
Growth capital refers to equity investments, most often significant 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. Companies that seek growth capital will often do so in order to finance a transformational event in their life cycle. These companies are likely to be more mature than venture capital funded companies, able to generate revenue and operating profits but unable to generate sufficient cash to fund major expansions, acquisitions or other investments. The primary owner of the company may not be willing to take the financial risk alone. By selling part of the company to private equity, the owner can take out some value and share the risk of growth with partners.

4 .Distressed and Special Situations
Distressed or Special Situations are a broad category referring to investments in equity or debt securities of financially stressed companies. The "distressed" category encompasses two broad sub-strategies including: "Distressed-to-Control" or "Loan-to-Own" strategies where the investor acquires debt securities in the hopes of emerging from a corporate restructuring in control of the company's equity; "Special Situations" or "Turnaround" strategies where an investor will provide debt and equity investments, often "rescue financing" to companies undergoing operational or financial challenges.

5 .Mezzanine capital
Mezzanine capital refers to subordinated debt or preferred equity securities that often represent the most junior portion of a company's capital structure that is senior to the company's common equity. This form of financing is often used by private equity investors to reduce the amount of equity capital required to finance a leveraged buyout or major expansion. Mezzanine capital, which is often used by smaller companies that are unable to access the high yield market, allows such companies to borrow additional capital beyond the levels that traditional lenders are willing to provide through bank

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loans. In compensation for the increased risk, mezzanine debt holders require a higher return for their investment than secured or other more senior lenders.

6. Secondaries
Secondary investments refer to investments made in existing private equity assets. These transactions can involve the sale of private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. Secondary investments provide institutional investors with the ability to improve vintage diversification, particularly for investors that are new to the asset class. Secondaries also typically experience a different cash flow profile, diminishing the effect of investing in new private equity funds. Often investments in secondaries are made through third party fund vehicle, structured similar to a fund of funds although many large institutional investors have purchased private equity fund interests through secondary transactions. Sellers of private equity fund investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds.

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The Stages of Private Equity
Private Equity investments can be classified into: • Seed stage Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase Start-up stage financing for product development and initial marketing. Expansion stage financing for growth and expansion of a company which is breaking even or trading profitably. Replacement capital Purchase of shares from another investor or to reduce gearing via the refinancing of debt.

• •

The above stages can be explained by the diagram which is shown below -:

The Stages of Private Equity Expansion capital Follow-on venture financing Liquidity event

Bridge/ mezzanine


Seed/start up [Reengineering restructuring] [Later stage] [Development stage] [Concept stage]
(Source: private-equityonline.com)

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Process of Private Equity Investment
The Private Equity Process in 6 Steps: 1. 2. 3. 4. 5. 6. Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring Exit (IPO, Trade Sale or Buy back)

Deal Origination or as some call it ‘Deal Sourcing’ is how Deal Makers get their deals, a potential deal can either come through a company owner approaching them or from an intermediary who will try to bring both parties (Company and Deal Maker) to make the deal. In some cases, they may just approach companies who are expanding fast and wish to grow further. In a year, Deal Makers come across hundreds of potential deals but only a few are selected. Due Diligence is what you could call ‘doing your homework’. Before starting detailed negotiations, investor try to make sure everything is fair and secure. Although Auditors and Consultants are appointed to conduct the Financial, Tax, Legal and Technical Due Diligence - they also work side by side to understand the target company and its industry better. All the information collected at this time, is then used during negotiation. At the Deal Negotiation phase, investor set out the terms and conditions (covenants, representations and warranties) and other deal terms that defines (or makes the deal). Contracts such as Investment Agreement, Share Purchase Agreement, Management Agreement, Advisory Agreement etc are drafted to include all items that put the deal together. Deal Closing is probably the easiest part but also contains an element of risk. It’s the conclusion of the deal, the signing of all Agreements and transferring funds from the buyer to seller, conducting other administrative functions (usually done by a separate entity) like updating any articles of association etc. Post Acquisition Monitoring requires the Deal Team (those who have worked on putting the deal together) to closely monitor the company, both from an operational and financial point of view against the expansion plan and budgets that were setup

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earlier by the company. Improvements to business, from Corporate Governance, Financial Reporting, and Information Flow to Strategy are made at each level through either the company’s management or its board. As the company matures (usually after 2 - 4 years) with the presence of the Deal Team, investor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger party, multi-national or conglomerate) or in rare cases a Buy Back by the owners. By this time, the company will have grown quite a bit with still plenty of room to grow further. (There’s a saying, in a deal - always leave something extra for the person buying - it makes everyone happy.) And once investor have exited the company, they return their money with the profit they gained for company after taking their fees for all the effort put in the above process. Although this may seem like a linear process - it isn’t exactly so, primarily because investors deal with a number of companies and each one is at a different stage in the private equity process.

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Advantages of Private Equity
Investing in a private equity fund has a lot of advantages compared to other investment areas; here are some advantages of private equity for not only investors but also the companies that private equity firms acquire:

Advantages for Investors:
By definition, private equity firms work outside the public eye and do not have to follow the same transparency standards that public firms and funds must adhere to. This allows private equity firms to reform the companies without the constraint of having to report quarterly to the SEBI, ROC or similar distractions. Private equity firms generally perform very rigorous due diligence on potential investments. By utilizing a team of researchers the private equity firm is able to identify most risks that would not otherwise be found. The management receives carried interest, a portion of the profits, so managers and their staff are motivated to produce good results to investors. Although carried interest is often criticized for taking money from the investors, it is a very big incentive for managers. Economic Scenario- India is one of the fastest growing economies in the world, with enormous growth potential in many industries. This means that capital requirements are high, translating into an ideal hunting ground for PE funds . Abundance of skilled labor - India offers a huge advantage in the form of its highly talented and skilled labor pool, which can lead to the success of the firms in which investment is made through the private equity route. The funds are not just bullish about the businesses in India but have also grabbed a fair share of highly rated managers like Vivek Paul, Rajeev Gupta, Avnish Bajaj, Akhil Gupta, and Nikhil Khattau. PE funds are invariably on the lookout for high profile managers, not only to manage their own funds but also as their representative on the board of companies in which they have invested. Success of several sectors - India has firmly established itself as the world’s IT superpower with almost all major software development companies having an Indian development centre. It is also becoming the the hub of back office operations, and a leading provider of BPO and KPO services. This has led to greater confidence in the future growth potential of Indian companies.

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Mature Financial markets - Capital markets have stabilized in the recent past with regulators like SEBI keeping a firm watch on the market development. This means both increased opportunities as well as an easier and painless exit route for PE funds. The emergence of entrepreneurs in India who consider PE their full time occupation is also a positive sign. Besides, there are well established corporate houses diversifying their surplus investment, as a strategy for their assets allocation, through PE funds without involving themselves directly in the operations of target companies. Successful M&As- A recent spate of mergers and acquisitions has given rise to yet another way of exiting from Indian companies for private equity investors. Successful track record - The first generation of private equity players have realized significant success in the last several years. For instance, Warburg Pincus earned huge returns out from its investments in Indian companies like Bharti Telecom.

Advantages for Company:
Private equity managers are paid very well and so it is easy to attract high caliber, experienced managers that tend to perform very well. The same goes for lower level employees at private equity firms, they tend to be the top young business school graduates. This helps the company to utilize best talent in the industry without shelling out even a single penny from its pocket. PE helps a company to prepare for stock market listing (IPO) as the exit route of investment. It opens up enormous opportunities for companies to raise funds. The continuous scrutiny by stock market participants, SEBI & ROC facilitates efficiency improvement and proper strategic decisions. PE helps those companies which cannot raise money from the market. By private equity company get money from the investors, which help in the growth of the company.

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Disadvantages of Private Equity Disadvantages for Investors:
Difficult to access for small & medium investors- private equity Limited Partnership funds may only be marketed to institutions and very wealthy individuals; in addition the minimum investment accepted is usually more than £1mn. Relative illiquidity –Private Equity funds normally invest in a unlisted space and they find it difficult to exit the investment at their wish, since it require concentrated efforts to find a suitable investor for unlisted company. Even in the listed space, the impact cost remains very high due to sheer magnitude of scale. A long term investment perspective is necessary to achieve gains for a private equity investment programme because the investment programme depends on the company growth. It depends on the gap between entry and exit of the investor. Political condition - India, being divided into a number of states, causes an investment decision to be affected by politics. Changes in regulation and infrastructure development are often sidelined due to friction and conflict between the state and the federal government. Competition from China - China is a direct competitor of India and most of the private equity investors, eyeing the Asian region, draw a comparison across both the countries to decide where their money should be parked. The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of the terminals in India’s main cities. High costs - private equity managers charge relatively high fees for managing capital committed by external investors (generally around 2%) and, if the fund performs well, take a sizeable proportion (generally 20%) of realised returns in excess of investment hurdle rates.

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Disadvantages for Company:
It is a lengthy process since private equity managers conduct detailed market, financial, legal, environmental and management due diligence, which could take several months before they make final decisions on investing. Entrepreneurs have to give up some of their company’s shares to a private equity investor, i.e. control. Because investor have some control over the company, so it is not easy for the entrepreneur to take decision independently. He have to take advice of the investor to take decision and it causes delay in the process. The private equity managers have control over the timing of a sale of (a part of) the business. Lack of promotion in investment across sectors - PE funds are being channelized into only a few sectors like IT, infrastructure & real estate and telecommunications, to the exclusion of the remaining industries, desperately in need of funds for growth.

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Ways of Investment
There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds). Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out below.

Direct investors
The investment company has a private equity team who invest directly in companies, subject to the stated objective of the company. The managers’ aim is to help these companies develop and progress, and sometimes restructure, in order to increase the long-term value of the companies so these companies can be sold at a profit.

Fund of funds investors
In a fund of funds, the investment company invests in a portfolio of private equity funds which invest in companies. Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers.

Investing in PE Funds

Direct Investment

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Top 10 Private Equity Deals
• The top 10 private equity deals accounted for more than 36% of total private equity deals in 2009. In 2008, top 10 deals accounted for about 40% of total deal value for the year The largest deal by value was KKR’s $255 mn buyout of Aricent, followed by Siva Ventures investment in S Tel Ltd. and TPG’s $200 mn investment in Indiabulls Real Estate. Top deals occurred across various sectors, with 3 of the top 10 deals in Real Estate.

Top Private Equity deals in 2009
S. NO.
1 2 3 4 5 6

IT/IT Services Telecom Real Estate Logistics Real Estate Agriculture

Aricent Inc. S Tel Ltd. Indiabulls Real Estate Ltd. Krishnapatnam Port Co. Ltd. Mohtisham Estates Karuturi Global Ltd.

Kohlberg Kravis Roberts & Co. Siva Ventures Ltd. TPG Capital Inc. 3i India Infrastructure Fund Oman Investment Fund Emerging India Focus Funds, India Focus Cardinal Fund, Elara India Opportunities Fund, Monsoon India Inflection Fund Ltd. New Silk Route Partners

Price ($mn)
255 230 200 161 125 124


Hospitality & Travel Healthcare & Services Real Estate

8 9

Capricon Hospitality Services Pvt. Ltd. Max India Goldman Sachs Century Real Estate, Seven Star Hotel Project Ind-Barath Power Infra Pvt. Ltd.


115 104

Goldman Sachs Whitehall Real Estate Fund Bessemer Venture Partners India, Citi Venture Capital International, Sequoia Capital India




(Source: VCCEdge)

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Ways of Exit
There are different ways in which a private equity investor can exit from an investment:

A. Trade sale
A trade sale, also referred to as M&A (Mergers & Acquisitions), of privately held company equity is the most popular type of exit strategy and refers to the sale of company shares to industrial investors. The trade sale is agreed in private and makes both the buyer and the seller less vulnerable to the external pressures of a stock market flotation. It is often advisable to keep the transaction a closely guarded secret because clients, suppliers and employees may interpret a trade sale negatively. These negative signals become even stronger if the negotiations fail.

B. Entrepreneur or Management Buy-Out
The Buy-Out of the funds stake by its management team is becoming more and more successful as an exit strategy. It is a very attractive exit for both the investment manager and the company’s management team if the company can guarantee regular cash flows and can mobilize sufficient loans. The accounting and financial aspects of this exit need to be studied very carefully.

C. Sale of the investment to another financial purchaser (called a secondary market investor)
One financial investor may sell his equity stake to another one when the company has reached the stage of development or when the current development of the company no longer corresponds to the investment criteria of the original fund. This can also occur if the financial support required maintaining the company’s development has exceeded the capacity of the fund. This strategy has the advantage of enabling an exit when the team does not want a trade sale or a stock market flotation.

D. IPO (Initial Public Offering): flotation on a public stock market
A stock market flotation may be the most spectacular exit, but it is far from being the most widely used, even in stock market booms.

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A stock market flotation should correspond with a genuine wish to make the company more dynamic over the long term and to profit from the growth possibilities offered by a stock market. Therefore, the equity share placed on the market (the float) must be sufficiently large to ensure liquidity – the reward for appealing to the market. A flotation is not an end in itself but the beginning of a long process of development. A stock market flotation always leaves company open to the risk of an unwanted bid whereas equity held by an investor that company has chosen can be better managed. If company decides to opt for this route, it must be minutely prepared over a long period.

E. Liquidation
This is obviously the least favorable option and occurs when the efforts of the head of the company and the investors to save the company have not succeeded.

Top Private Equity Exits in 2009
S. NO.
1 2 3 4 5

DLF Assets Pvt. Ltd. ICICI Bank Ltd. Shriram Transport Finance Co. Ltd. XCEL Telecom Pvt. Ltd. Cognizant Technology Solution Corp. Edelweiss Capital Ltd. India Infoline Ltd.



Price ($ mn)
470 460 221 150 60

DE Shaw Composite Buyback Investments (Mauritius) Ltd. Temasek Holdings Pte. Ltd., GIC Open Market Special Investment Pte. Ltd. ChrysCapital lll LLC Open Market Q Investments LP Sequoia Capital India M&A Open Market

6 7

8 9 10

Max India Ltd. Financial Software & System Pvt. Ltd. Mindtree Ltd.

Galleon Special Opportunities Master Fund SPC Ltd. Orient Global Tamarind Fund Pte Ltd, Orient Global Cinnamon Capital Ltd. Warburg Pincus India Pvt. Ltd. Carlyle Asia Venture Partners l Capital International Global Emerging Markets Private Equity Fund LP.

Open Market Open Market

54.93 51.9

Open Market Secondary Sales Open Market

50.5 51 47

(Source: VCCEdge)

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Private Equity Exits Breakdown
• 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale in Centurion Bank of Punjab to HDFC Bank. Total exit value rose to $2.2 billion in 2009 compared to $0.93 billion in 2008. Funds utilized the sharp rise in the stock markets to cash out and return some money to LP’s. There were 66 open market exits and only one IPO exit – the part sale of Warburg Pincus’ stake in DB Corp.

(Source: VCCEdge)

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Major Private Equity Deals in India

Warburg Pincus

Bharti-Tele Ventures


Investm ent Size

Venture Capital

Start up

Entry Route

Exit Route
Open Market, Seconda ry Sale Still Invested *

Curren t Value of Invest ment

Profit / Loss
$ 1.324 bn

1999-2001 $ 292 mn

KKR ICICI Venture, Capital International Actis TPG

Dalmia Cement Air Deccan

2010 2004

$ 150 mn $ 70 mn

Growth Capital Venture Capital

Expansion Start up / Expansion

Direct Fund Of Funds Direct Fund Of Funds Direct

Unlisted *

_______ *


Paras Pharmaceuticals Shriram Transport Finance Gokaldas Exports Ltd.

2006 2006

$ 42 mn $ 100 mn

Growth Capital Growth Capital Secondaries

Expansion Expansion

Still Invested Still Invested Still Invested

Unlisted Unlisted

_______ _______


$ 165 mn


INR 3595.49 mn


* Air Deccan has been merged into Kingfisher Airlines by late 2008.

Warburg Pincus & Bharti Airtel Ltd.
About Bharti Airtel Ltd.
Bharti Airtel provides telecommunication services primarily to retail, corporate, and small and medium scale enterprises in India. It offers global system for mobile communication (GSM) services, broadband and telephone services, national and international long distance services, and enterprise services. The company's mobile communication services include information services, short message, and prepaid and post paid services, as well as wireless application protocolenabled Internet access and roaming services. Its telephone services include telephone services, dial-up services, special phone plus services, unified messaging, and audio conference services; and broadband services comprise integrated services digital network, leased line, virtual private networks, and wireless fidelity networks. The company also offers long-distance voice and data communication services, as well as enterprise services, such as voice services, mobile services, satellite services, managed data and Internet services, and managed e-business services. As of Mar. 31, 2009, it provided telecommunications services to approximately 96,649,000 customers, consisting of GSM mobile, broadband and telephone customers. Bharti Airtel had strategic alliances with SingTel and Vodafone; partnerships with Ericsson and Nokia; and an information technology alliance with IBM. The company was founded in 1995. It was formerly known as Bharti Tele-Ventures and changed its name to Bharti Airtel in April, 2006. The company is based in New Delhi, India. Bharti Airtel is a part of Bharti Enterprises. Between September 1999 and July 2001, Warburg Pincus invested $292 mn to finance Bharti's growth through acquisition and expansion of existing properties. Since the initial investment in Bharti in September 1999, it has become the largest private sector telecom company in India and has undergone a number of changes. First, the company has formulated a focused acquisition strategy, acquired three companies and successfully won bids for 15 new licenses. Second, all the key support functions and processes (like human resources, finances, marketing and technology)


have been strengthened, with experienced professionals heading these functions. Lastly, in spite of tough market conditions, the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn.

Top 10 Shareholders
S. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Holders Bharti Telecom Limited Pastel Limited Indian Continent Investment Limited Life Insurance Corporation of India Europacific Growth Fund Fidelity Management and Research and Funds Copthall Mauritius Investment Limited JP Morgan Asset Management and Funds ICICI Prudential Emerging Markets Fund Total % 45.30 15.58 6.27 4.23 1.68 1.26 0.97 0.98 0.82 0.73 77.82

(Source: Bharti Airtel Annual Report 2008-2009)

International Footprints
Its area of operations includes: 3 countries in the Indian Subcontinent: Bangladesh, India and Sri Lanka Bangladesh- In March 2010, Bharti agreed to buy 70 percent of Bangladesh's Warid Telecom from Abu Dhabi Group for an initial investment of US $300 million. India- In India, the company's mobile service is branded as Airtel. It has nationwide presence and is the market leader with a market share of 30.07% (as of May 2010). Sri Lanka- In December 2008, Bharti Airtel rolled out 3.5G services in Sri Lanka in association with Singapore Telecommunications. Airtel's operation in Sri Lanka, known as Airtel Lanka, commenced operations on the 12th of January 2009. 15 countries in Africa: Burkina Faso, Chad, Democratic Republic of the Congo, Republic of the Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia

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About Zain
Zain is a leading telecommunications operator across the Middle East providing mobile voice and data services to over 31.4 million active customers as at 31 March 2010 with a commercial presence in 8 countries. Zain is listed on the Kuwait Stock Exchange. Zain operates in the following countries: Bahrain, Iraq, Jordan, Kuwait, Saudi Arabia and Sudan. In Lebanon, the company manages ‘mtc-touch’ on behalf of the government. In Morocco, Zain has a stake in Wana Telecom through a joint venture.

Zain-Bharti Deal
Zain, with its African and Middle East businesses, had been considered a natural target for Bharti, which has thrived in an Indian market with low incomes and tariffs and a heavily rural population -- characteristics shared by African nations. Mobile phone penetration in half of Africa's countries was below 40 percent as of August and a dozen countries had penetration below 30 percent, according to a research report. Offloading the operations, excluding those in Morocco and Sudan, would mark a strategic reversal for Zain, which has spent more than US $12 billion expanding in Africa since 2005. This transaction has resulted in aggregate net cash proceeds of US $8.968 billion. Zain confirms that it has received US $7.868 billion of cash proceeds from Bharti. Over the next 6 months, Zain expects to receive up to an additional US $400 million upon certain milestones being achieved. The balance of US $700 million is due one year from completion as per the original agreements signed on 30th March 2010.

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About Warburg Pincus
Over the last 30 years, Warburg Pincus has become one of the leading private equity and venture capital firms in the world. The firm’s experience is unparalleled in building successful businesses. Working in partnership with management teams, Warburg Pincus takes an active role in building businesses. The firm operates globally to source new investment opportunities, provide strategic advice and guidance, and fund the growth of attractive opportunities, since its inception, Warburg Pincus’ strategy has been to: • • • Develop broad investment capabilities internally. Create a network of talented and experienced business people around the world. Provide superior rates to return for its limited partners over the long term.

Warburg Pincus is a global leader in the industry it helped create: Private equity. With more than 40 years of experience, its track record of continuous and successful investing is unmatched by any other private equity firm. Striving to create sustainable value in partnership with superior management teams, it work with companies to formulate strategy, conceptualize and implement creative financing structures, recruit talented executives and draw on best practices from the firm’s portfolio companies. It takes a different approach to investing, beginning with a thorough evaluation of macroeconomic and industry fundamentals. Private equity at Warburg Pincus means investing at all stages of a company’s life-cycle: From founding start-ups and fostering growth in developing companies to leading complex recapitalizations or large-scale buy-outs of more mature businesses. This growth-oriented philosophy is incorporated across each of its investment sectors. With an investment horizon of five to seven years, it takes an unusually long-term perspective. Matched with its size and scope of funds under management, this approach enables the firm to provide substantial resources to its portfolio companies. This is a critical advantage in the face of constantly changing economic conditions and financial markets.

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The firm has been industry-focused for more than two decades. With more than 160 investment professionals worldwide, Warburg Pincus provides deep expertise in a range of investment sectors including financial services, healthcare, industrial, technology, media and telecommunications, energy, consumer and retail and real estate. The firm also works with its consultants, entrepreneurs-in-residence and advisory boards, whose expertise can be tapped at any time. In addition to the support provided by its investment professionals, Warburg Pincus enhances its involvement with management by providing portfolio companies with value-added services in capital markets, IT strategy and assessment and marketing. Warburg Pincus has been the lead investor in more than 100 companies that have completed initial public offerings. Over the last few years, the firm’s global portfolio has generated more than $20 billion annually in equity and debt financings on a global basis. The firm’s IT Strategy and Assessment group is available to evaluate and advise businesses on their technology strategy. Warburg Pincus also provides companies with marketing expertise to develop brand-building programs and strategic communications platforms for internal and external audiences. Key-Points: It has invested over US $ 11 billion in over 400 companies in 29 countries, providing equity capital across the life cycle of the enterprise, from start-up through growth financings and including acquisitions and restructurings. Warburg Pincus operates from 8 offices in 7 countries covering the United States, Europe, Asia and Latin America. With the proposed investment, Warburg Pincus will have invested approximately US $ 530 mn in India making the country, the firm’s premier investment destination in Asia. The investment in Bharti Enterprises of approx. US $ 300 mn is the second highest investment ever made by Warburg Pincus in any company, anywhere in the world.

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The Deal
The Investment (1999-2001) Between September 1999 and July 2001, Warburg Pincus invests $292 mn in Bharti TeleVentures in return for an 18.58 per cent stake, the first tranche being invested in September 1999. The Bharti IPO (January 2002) Bharti goes public (Warburg stake diluted) The other exits (2004-2005) • • August 2004: Warburg sells a 3.35 per cent stake for about $208 mn. March 2005: Warburg sells another 6 per cent stake for $560 mn, marking the largest ever equity deals in single scrip on an Indian stock exchange. October 2005: Warburg sells its final 5.65% stake to UK-based Vodafone for $847.5 mn.

This is the timeline of Warburg Pincus' exit from Bharti Tele-Ventures.

Total realization: $1.616 bn. Profit: $1.324 bn - 450 per cent return on investment.

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Opportunities viewed by Warburg Pincus
The deal with Bharti Tele Ventures Ltd. had a lot of opportunities for Warburg Pincus. • 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

Challenges faced by Warburg Pincus
• • • • • • • Lack of Regulatory Clarity Economic viability of Telecommunication Project Restriction on Licenses Monthly Fixed License fee to government High tariff charges-Expensive for users No investor interest – No clarity on Exit route Bharti having presence only in North India

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Strengths and Opportunities of Airtel

Bharti Airtel has more than 200 million customers (June, 2010). It is the largest cellular provider in India and among top 5 in the world and also supplies broadband and telephone services - as well as many other telecommunications services to both domestic and corporate customers.
Today they are among the top 5 largest Wireless & Cellular Company in world, with expanded footprints of over 25 countries in two of the largest continents spread over South Asia and Africa. Bharti Airtel has strategic alliances with Nokia, Sing Tel

and a host of all other international service providers. They have access to Emerging Africa, which means that they can replicate their Indian business strategy and knowledge to other parts of the world.

Opportunities • The Rural Landscape The Indian telecom industry is the 2nd largest wireless markets in the world after china. The focus on rural penetration and customer affordability will be instrumental in driving the next phase of growth in India. An increasing number of rural customers are contributing to the growth in telecom sector.

New technologies and paradigms New technologies also play vital role in growth of telecom sector. Technologies like HSPA, WiMAX and Wi-Fi has already adopted by customers. 3G and BWA auction are in the process currently. Besides this DTH and IPTV technologies are viewed as long term perspective by telecom operators.

Strong strategic partnership
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Airtel have a strategic alliance with SingTel, Ericsson, Nokia and IBM. The partnership with SingTel was to provide quality service to the customers. Partnership with Ericsson and Nokia was for providing better equipments. IBM has been working closely with Airtel to transform its IT system.

PE Impact on Bharti
The deal of Warburg Pincus & Bharti Tele ended not only with the increase in profit for WP, but also high growth in subscribers of Bharti Tele Ventures. In partnership with Warburg Pincus, Bharti’s management team was able to complete additional cellular property acquisitions and extend its leading position in India. Today they are among the top 5 largest Wireless & Cellular Company in world, with expanded footprints of over 25 countries in two of the largest continents spread over South Asia and Africa. WP also worked with management to secure a strategic partnership with Singapore Telecom, which subsequently committed support in the management of the operations. The company was listed on Indian stock exchanges in February 2002. Now known as Bharti Airtel, the company has a market capitalization in excess of $35 billion and is a dominant player in the Emerging Markets telecommunications with a customer base of more than 200 million (including operations in Africa and other South Asian countries). “Partnership with Warburg Pincus helps management focus. They’ve helped us look at things in a different light. And, they know how to move a company from something small to something much larger…” Sunil Mittal, Chairman and Group Managing Director

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(Source: Bharti Airtel Annual Report 2008-2009)

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(Source: Bharti Airtel Annual Report 2008-2009)

(Source: Bharti Airtel Annual Report 2008-2009)

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(Source: Bharti Airtel Annual Report 2008-2009)

(Source: Bharti Airtel Annual Report 2008-2009)

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Dalmia Cement - KKR
About KKR
Founded in 1976 and led by Henry Kravis and George Roberts, KKR is a leading global alternative asset manager with $52.2 billion in assets under management as of December 31, 2009. With over 600 people and 14 offices around the world, KKR manages assets through a variety of investment funds and accounts covering multiple asset classes. KKR seeks to create value by bringing operational expertise to its portfolio companies and through active oversight and monitoring of its investments. KKR complements its investment expertise and strengthens interactions with investors through its client relationships and capital markets platforms. KKR is publicly traded through KKR & Co. (Guernsey) L.P. (Euro next Amsterdam: KKR). KKR has invested more than over $1.1 billion in India since 2006, which includes investments in Aricent, a global innovation, technology and services company; Bharti Infratel, a telecom infrastructure provider and Coffee Day Resorts, operator of the Café Coffee Day chain of cafes in India.

About Dalmia Cement (Bharat) Ltd
DCBL has business interests in two major segments, Cement and Sugar. It has cement plants in southern states of Tamil Nadu (Dalmiapuram & Ariyalur) and Andhra Pradesh (Kadapa), with a capacity of 9MTPA. A leader in cement manufacturing since 1939, DCBL is a multi spectrum cement player with double digit market share and a pioneer in super specialty cements used for Oil wells, Railway sleepers and Air strips. The company also produces around 160 MW of Power through thermal and renewable energy with an aim to increase the power generation from non-conventional methods.

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Over the past 7 decades, the company has earned the trust of the employees, distribution chain as well as all its stakeholders. DCBL’s vision has been acknowledged by the existing Private Equity investor, Actis who has been on the Board and adding valuable insights for the organisational growth. The company is looked upon and respected for being a value-based organization. DCBL has been recognized and awarded Hewitt’s Best employer for the year 2009. It has been ranked among the Top Ten in the Manufacturing industry. DCBL is Head Quartered in New Delhi. It has employee strength of more than 3,500 people.

PE Impact on DCBL
Dalmia Cement (Bharat) Ltd. (DCBL), and Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR”) announced the signing of a definitive agreement under which KKR has agreed to invest up to Rs 7,500 mn in DCBL’s wholly owned unlisted subsidiary (“Company”) which will house post restructuring DCBL’s 9MTPA cement manufacturing capacity, DCBL’s stake in OCL India Limited (5.3MTPA capacity) along with the upcoming green field projects of 10MTPA across the country. The use of proceeds will be for both organic/inorganic growth and de-leveraging. “When we realigned our businesses in March, 2010, one of our goals was to create separate pure play entities that could thrive on their own and have flexibility to raise capital. This transaction with KKR is not just about capital but the foundation of a long term relationship. It will enable us to enhance our capacity and market share through organic as well as inorganic routes, while benefiting from KKR’s global network and proven value creation capabilities,” said Mr. Puneet Dalmia, MD of Dalmia Cement (Bharat) Limited. “We are excited to be working with a dynamic and entrepreneurial family with a successful execution track record in India. While the cement industry by nature is cyclical, this is a long-term investment in a great family business, its management team and in India’s economy. This is a way to invest behind and contribute to the continued development of India’s residential, commercial, and public sector infrastructure,” said Mr. Sanjay Nayar, CEO of KKR India.

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Air Deccan - ICICI Ventures & Capital International
Air Deccan was established in 2003 with the objective of setting up a budget airline, the first of its kind in India. Price sensitivity and the aspirations of the typical Indian consumer were cited to be the main reasons for a budget airline. Initially, the company’s operations revolved around the founder, Captain G. R. Gopinath. Modeled on Southwest Airlines in the U.S. and Ryan Air in Britain, Air Deccan positioned itself as an airline for the masses. Seeking capital for growth, Air Deccan obtained PE investment from ICICI Ventures, which invested USD 30 mn in 2004 for a 19 percent equity share. Air Deccan also received PE investment from Capital International, an American PE firm, which, it hoped, would provide a global presence and learning from the operations of similar airlines in other countries. Both ICICI and Capital International played an active role in formulating strategy. With the PE firms’ assistance, Air Deccan appointed a person from Ryan Air to run the business. The funds were intended to build capacity in a phased manner. Accessing PE funds was critical for being able to raise the much needed debt and to guarantee leases, without which project implementation would have been difficult. The funds were also used to enhance plane capacity quickly by ordering 60 airbuses on purchase and leased bases. By 2007, Air Deccan flew into 68 cities, as compared with the incumbent, Government owned Indian Airlines coverage of 45 cities. The high capacity was both an advantage (as it became an attractive acquisition target for Kingfisher) and a disadvantage (as it adversely impacted the company financially due to the economic slowdown and unforeseen spike in fuel cost).

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The airline industry began to face significant changes in its operating environment from 2005. Large rises in fuel prices and competition from other budget airlines like Spice Jet, Indigo and Go Air adversely affected Air Deccan’s profitability. With ICICI Ventures’ assistance, some of the aircraft that had been purchased were re-contracted on a lease basis, thereby improving cash flows. In 2006, Air Deccan offloaded 25 percent of its equity in an IPO. The IPO took place during a very difficult time for Indian equity markets. Fortunately, with ICICI’s support in the form of stepped up funding as well as marketing to other investors, the issue was completed at the offer price. At its peak, the market capitalization of Air Deccan reached USD 1.1 billion. By late 2007, the ongoing pressure of competition and lower than expected growth forced Air Deccan into significant losses. In 2008, the company was merged into Kingfisher Airlines, a premium domestic airline. Kingfisher was attracted by Air Deccan’s large fleet that enabled Kingfisher to rapidly scale up its operations. Although the initial understanding was that Air Deccan would be the budget brand of Kingfisher, it was later rebranded with the Kingfisher name.

Impact of PE on Air Deccan
The PE investment in Air Deccan brought both operational and fiscal discipline. PE firms helped setup a proper organization structure and created a formal business plan. The financing enabled Air Deccan to pursue its aggressive business model of running a budget airline.

Impact of PE on the industry
Air Deccan had a big impact on the industry. Its no-frills flights focus on second-tier cities, and aggressive pricing led to aggressive growth and spurred the entry of comparable budget airlines. Its practices were imitated by established competitors and became part of industry practice. The result was a fall in the average cost of air travel in India. To a significant extent, these new business approaches were enabled by the initial round of funding and the models that were introduced by PE financiers seeking to imitate the success of budget airlines in other countries. Thus, we may conclude that PE significantly impacted the industry.

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Paras Pharmaceuticals-Actis
Paras Pharmaceuticals is one of India’s leading OTC healthcare and personal care companies, with a track record of introducing successful branded products. Its two leading brands, MOOV (a pain relieving ointment) and D’Cold (a cough syrup) are both in the top 10 OTC brands in India. Personal care products are among the fastest growing consumer segments with a growth rate in recent years at 14 percent. Paras have grown faster and expect to grow by 25 percent in FY 2010-2011. Actis, a PE firm, invested USD 42 mn in 2006 for a minority stake, raising it to a majority shareholding in 2008, which they continue to hold. Actis’ rationale for the initial investment was based on Paras’ ability to create strong brands in niche, fast-growing areas. They were impressed with the company’s ability to compete effectively against global organizations with innovative products; for example, the success of MOOV in a market dominated by market leader Iodex (a Glaxo brand). Actis’ view of Paras noted above is shared by its promoters. As a key company insider commented: “A company goes through three stages: incubation, implementing the initial vision and professionalization.” At the second stage, the team needs to be willing to take risks and follow the founder’s vision. Professionals are likely to be too riskaverse to do so as failure would hurt their long-term career prospects. At the third stage, once the vision has been implemented, professionals need to take charge. It was at that third stage that Paras sought Actis as a PE investor to enable the transformation to a professionally-run company. In fact, the money was the minor part of the transaction in a sense, since it was used primarily to buy out the promoter’s holding rather than to be infused into the company (the company was already cash rich). Paras required the PE firm to possess a deep understanding of the industry as well as understand the company, both of which Actis possessed. As a company insider notes: “PE is expensive money: it should only be used if it comes with other benefits.”

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PE backing provided the company credibility as a professionally run-organization and there was an influx of younger, highly trained talent that replaced family recruits. Paras’ recruitment of the best quality professionals led to positive impacts on operational management with a greater focus on efficiency, tighter financial controls, brand leveraging and an improved marketing and distribution strategy. The transformation of Paras from a family run to professional company faced the challenges of cultural transformation and was not a simple task but accomplished by focusing on these key areas and showed clear results. EBITDA margins rose from 20 percent prior to PE funding to about 30 percent afterwards. Subsequent to the Actis investment, the company has also expanded internationally, especially in the Middle East and North Africa.

Impact of PE on Paras
As is evident from the above, Actis’ impact was transformative in the sense of changing how the company was run, while being supportive of a quality that was already ingrained, that of conceptualizing and developing a range of high-margin products that could successfully compete with large players, many of which are global organizations. Actis achieved its transformation by getting to know the company, and then bringing in talent in selected areas that were critical for raising margins and enabling the efficient introduction of new products, while retaining the innovative core intact. Among the many positive effects was a change in practice in procurement, governance and reporting, thus enabling a stronger brand being built? As a result, revenue growth rates rose to 40 percent and gross margins rose by 10 percent. Actis also supported the strategic shift in sales and distribution networks; as well as international expansion. Critically, Actis was able to bring in a sophisticated board support through a domain expert and bring on board a prominent business leader (who is their advisor) as an advisor to the company.

Impact of PE on the industry
The investment shows that a domestic company can succeed while competing with global organizations. Although there are other successful examples, such as Dabur, Paras is a special case of achieving this through professionalizing a family-run firm in a credible way, with a majority of non-family ownership, while retaining the benefits of incorporating the initial promoters into the core management structure.

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Shriram Transport Finance-TPG
Shriram Transport Finance (STF), India’s largest commercial vehicle finance company, was established in 1979. As of March 2010, the company runs 479 branches and service centers offering finance for purchasing commercial vehicles, including trucks, threewheelers and tractors. The company also offers ancillary services, including working capital and a cobranded credit card. The company has been consistently profitable for several years. For the financial year ended March 2009, STF’s revenue was INR 36.9 billion and PBT was INR 2.9 billion. It employed 12,500 persons. The company has been quoted on the stock exchanges for several decades. As of March 2010, its market capitalization was INR 91.6 billion. The truck financing business at the time, and even as of 2010, was fragmented and highcost due to the risks and transactions costs of lending to unorganized, single-truck owners. STF catered to this market but was also beginning to access the organized borrowers that were coming into play as the trucking business became more organized in India. These factors had enabled STF to perform well in a regulatory environment that was significantly more favorable to banks than to NBFCs. However, the company was undercapitalized at the time of receiving the PE investment. The company subsequently received multiple rounds of PE investment. In 2005, PE firm Chrys Capital invested USD 30 mn for a 17 percent holding in STF. It exited in 2008-09. Global PE major TPG invested USD 100 mn in 2006 and, as of 2010, remains an active investor. TPG was interested in the financial sector in India, but the banking regulations prevented it from buying a large holding in a regulated bank. TPG was attracted by STF’s stability in terms of customers and credit-ratings, in the midst of the NBFC meltdown at the time. STF further attracted TPG because of its reputation of integrity, efficient management and customer loyalty.

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The first PE funds were used by STF to integrate its regional operations and control them from its home base in Tamil Nadu, as well as to consider international expansion. The second round of investing, from TPG, brought in high standards of credit evaluation and corporate governance. TPG’s portfolio of Asian finance firms, such as First Bank, Korea, provided it with the experience to establish these stronger standards. These were needed as the management was largely promoter dominated, which made credit rating agencies and investors somewhat cautious. Also, their securitization business was relatively undeveloped. Helped by better practices, STF’s portfolio, which was at USD 1 billion in assets when TPG invested, had risen to USD 6.5 billion by 2010.

Impact of PE on STF
PE initially enabled a national strategy, when Chrys Capital invested in STF. Till then, STF’s four regional entities operated independently. Thus, in the words of a company insider: “Chrys Capital provided capital during the growth phase of STF.” TPG’s investment transformed the company through better internal management practices and corporate governance. The same insider notes that, where Chrys Capital enabled growth, TPG “added value”. TPG helped in improving the credit rating of the company and developing the company’s securitization business. TPG, therefore, is an example of a PE investor with deep pockets and experience in running financial firms in Asia and elsewhere bringing these advantages to STF.

Impact of PE on the industry
STF is the country’s largest player in commercial vehicle finance. The primary impact of the PE investment on the industry was to begin the transformation of the business from a fragmented, money-lender dependent business to a more organized business.

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Gokaldas Exports Ltd. – Blackstone Group
Blackstone Group, among the world largest buyout firms, has accelerated its investments in India, pulling off its second buyout deal in less than three months by picking up a 50.1% stake in Gokaldas Exports Ltd, the country’s largest garments exporter, for $116 million and setting aside another $49 million for an open tender mandated under local securities laws for an additional 20% of the target’s shares. The holding of the promoters in Gokaldas Exports, the Bangalore-based Hinduja family (not related to the Hinduja Group) will come down from 70.1% to 20% before the open offer. Blackstone saw large opportunities in the garments outsourcing business and expects firms from its overseas portfolio and extended network to outsource manufacturing to a 400-acre so-called special economic zone that Gokaldas is setting up at Kanakapura outside Bangalore. “We are associated with a large network of retailers through our global portfolio of investments who may want to outsource to India,” said Akhil Gupta, managing director of Mumbai-based Blackstone Advisors India Pvt. Ltd. Companies running operations from special economic zones or SEZs enjoy several incentives. The Gokaldas SEZ, expected to employ around 50,000 people, will house units of several garment manufacturers. The company will have a unit that will employ around 4,000 people in the SEZ. “More companies will outsource (to) us,” said Rajendra Hinduja, managing director of Gokaldas Exports, referring to the benefits of the sale. “We will get access to textile
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companies in the US that have investments from Blackstone.” The names of such companies were not immediately available. Gokaldas earns more than 96% of its revenue from exports to global brands such as Tommy Hilfiger, Nike and Adidas, and to large retailers such as Wal-Mart Inc. and Gap Inc. The Bangalore-based garments firm earned a profit of Rs70.3 crore on revenue of Rs 1,044.9 crore for the year to March. Armed with a stake over 70% in Gokaldas, the buyout firm expects to play a more active role in the company than most of its peers in private equity, who typically play the role of financial investors. Gupta said that apart from participating at the board level (Blackstone will have three board positions at Gokaldas), Blackstone will get involved in actively managing the company by adding professionals, bringing in global best practices such as Six Sigma and beefing up the company’s marketing operations in the US. Blackstone, which will pay Rs275 per share or a premium of 25% for the shares of Gokaldas, had initially prospected the Bangalore target as a ‘growth deal’ with the intention of acquiring a minority stake. Blackstone has invested $525 million, excluding Gokaldas, in India and intends on deploying $2 billion up to 2010. In terms of deal size, this transaction ranks third in India for Blackstone, whose local portfolio is led by a $275 million investment in media house Ushodaya Enterprises Ltd. The financier invested $50 million in mid-sized drug maker Emcure Pharmaceuticals Ltd. Gokaldas employs over 54,000 people in 46 factories and is among the largest employers in the garments business.

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Success of Private Equity in India
Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows in the second half of the year, this recovery in the primary markets did not help the PE activity. The number of Private Equity deals (PE) in 2009 slid to a 4-year low, according to a new report on PE activity in India. Despite a surge in the secondary market in response to negative investor sentiments, the PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in 2008 and 2007 respectively. This was a decline of 39% over 2008 and 53% on 2007 levels. In terms of deal value, 2009 raised $3.35 billion from the market — the lowest in the last four years — as compared to $10.59 billion in 2008 and $19.03 billion in 2007. Out of the 191 deals, as many as 118 came in the second half of 2009, garnering $1.8 billion and accounting for more than 50% of the total deal value in 2009. Telecom, Media & Technology emerged as the hottest sector of 2009. It accounted for 60 deals in 2009. Telecom, Media & Technology sector witnessed 31.4% of total deals followed by Industrials and Real Estate & Infrastructure with 22.5% and 11.5%. India accounted for 6 per cent of total global PE deals volume in 2009, while only 2 per cent in terms of deal value. The deal activity in India declined by 39 per cent and 68 per cent in terms of deal volume and deal size respectively in 2009 as compared to 2008. Some reasons for success of private equity in India are: Better environment for investment- The Indian economy has been enjoying a period of sustained growth at around 8 per cent a year. The latest boom has attracted the attention of private equity houses who have been participating in an unprecedented number of investment deals. In sharp contrast to the time private equity funds invested in India from a base overseas (for example Singapore), many private equity firms have now established a presence in the country, spurred on by a bullish market and some spectacular and well documented exits. This reflects the importance of understanding

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local markets and working closely with promoters (families or controlling shareholders), as well as the benefits of local decision making.

Innovative ideas- The Indian private equity market is different from that of Europe or the United States in that small family-owned and family-managed businesses account for a high proportion of the market and therefore investment opportunities are higher than Europe and US. The next generation having different mindset and they believe in innovation, i.e. Ranbaxy, which sold its stake in Daiichi, was result of innovative mindset. The average deal size in India is significantly lower than in China or South Korea, for instance, but 6,000 companies are listed on Indian exchanges, a huge number by any standard, and the rising performance of the stock market since 2004 has resulted in substantial wealth creation for families with majority stakes in listed companies. Improvement in management skills- Among non-listed family companies there has been a traditional reluctance to share ownership and surrender control. However, there are signs that private equity firms are willing to play a more active advisory role in parallel with their ability to raise growth capital — a prospect that owners and promoters are starting to find attractive. As well as providing capital and financial expertise, private equity firms are in a unique position to introduce new disciplines and much needed structural reforms, for example looking closely at the quality of management teams or challenging companies to introduce leadership succession plans. Investors’ role in decision taking- An aspect of private equity that companies find attractive is that they gain an investment partner who is able and willing to provide continuous advice and support. Here the Indian connection becomes important, since many Indian companies understandably want Indian solutions to Indian problems. Many companies appreciate being able to have in-depth discussions with their investment partners about a variety of business decisions, for instance advertising investment, merchandising or retailing. Globalization- There has been phenomenal growth in the value of private equity investment in India over the past decade. With an expanding domestic market and additional opportunities brought by globalization, the impact of private equity on Indian business is likely to increase further in the coming years.

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Future of Private Equity in India
After a euphoric two years, the second half of 2008 and the first half of 2009 have mirrored global trends difficult for PE investments in India. Until last year’s credit crunch, deal sizes had been increasing and were hotly competed for at high premiums. Today, the PE landscape has changed due to the global financial crisis. There have been fewer exits and lower volumes. Allocations to PE funds by Limited Partners (LPs) are down, some even requesting a rescheduling of existing commitments. In response, some PE funds, notably some global funds, have reportedly reduced their management fees and reduced LP commitments. It is likely that India will continue to be among the developing world’s largest destinations for growth capital, while control and buyout deals will be sought only by the largest funds. However, deal volume and average deal size have declined, driven by declining capital overall, with recovery only in Q2 2009. PE funds will find another change in their operating environment: that global LPs are likely to invest in fewer funds than before, picking those whose management teams have operating experience and a track record. The reduction in capital from overseas may be offset to an extent by the emergence of a number of domestic LPs investing from family and corporate accounts. Overall, however a smaller PE industry is likely, this is a healthy development. Previously, about 350 funds were active. The market was oversupplied with capital relative to the quality of targets. The future of PE is bright in India because India is an untapped market for private equity. The spending of infrastructure is in large amount in India. Another reason for opportunities in India is that India is one of the few growing economies in the world even in recession. The collapse of the IPO market is a factor, leading to a shift in exit to lower-yielding strategic and secondary sales. However, older funds with investments three years or longer on average are yet exiting with high returns.

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Driven by less capital, higher due diligence and lower deal closure, the PE industry is turning to more intensive portfolio management. Providing financial support is now less important than operational and strategic support, quality corporate governance and regulatory compliance. As the PE industry settles into its new habitat of a tighter investment funnel and longer-term holdings, investment choices will shift to domestic demand-driven and non-cyclical industries like infrastructure, healthcare and education. The logic of investing in scale and in locations of growth means that India will likely be at the forefront of a global PE recovery. The year ahead should be viewed as an opportunity to build value in portfolio firms, and thus to show that PE is an integral part of India’s future.

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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 and Chemical Bank in October 1994, was the first such overseas private equity fund.

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 IndoMauritius Double Taxation Avoidance Treaty. While the foreign direct investment route offered minimum investment restrictions for private equity
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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 Chandra shekhar 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 Rs 500,000, and each fund must have at least Rs50 mn 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

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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 instruments of a listed company that is financially weak.

(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

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World’s Top 10 Private Equity Firms
According to an updated 2009 ranking created by industry magazine Private Equity International the largest private equity firm in the world today is TPG, based on the amount of private equity direct-investment capital raised over a five-year window. As ranked by the PEI 300, the 10 largest private equity firms in the world are:

2009 PEI 300 Rank
1 2 3 4 5 6 7 8 9 10

Firm name
TPG Goldman Sachs Principal Investment Area The Carlyle Group Kohlberg Kravis Roberts Apollo Global Management Bain Capital CVC Capital Partners The Blackstone Group Warburg Pincus Apax Partners

Fort Worth(Texas) New York Washington DC New York New York Boston London New York New York London

Five-Year Fundraising Total ($m)
$ 52,352 $ 48,993 $ 47,732 $ 40,460 $ 35,183 $ 34,949 $ 33,726 $ 30,800 $ 23,000 $ 21,336

(Source: PEI Media 300)

Because private equity firms are continuously in the process of raising, investing and distributing their private capital rose can often be the easiest to measure. Other metrics can include the total value of companies purchased by a firm or an estimate of the size of a firm's active portfolio plus capital available for new investments. As with any list that focuses on size, the list does not provide any indication as to relative investment performance of these funds or managers. Additionally, Preqin (formerly known as Private Equity Intelligence) an independent data provider, ranks the 25 largest private equity investment managers. Among the larger firms in that ranking were Alp Invest Partners, AXA Private Equity, AIG Investments, Goldman Sachs Private Equity Group and Pantheon. The European Private Equity and Venture Capital Association ("EVCA") publishes a yearbook which analyses industry trends derived from data disclosed by over 1, 300 European private equity funds.

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Comparing the Indian PE Environment to Other Countries
Situation in => Tax Regulation Cheap dept Institutional Equity Developed Countries Stable Low-cost Available Available Typical Developing Countries Unstable High-cost NA Depends on the Regulatory/ tax/ professional service (differs by country) Underdeveloped Absent Important High May or not be needed depending on the kind of firms invested in Small Underdeveloped Higher Intermediated Low Higher India Unstable High-cost NA Available

Equity Markets “Agency conflict” in public companies Corporate governance Economic growth GPs with operating skills Fund size Public markets for exit PE portfolio risk relative to market Access to deals Professional Services Quality Holding period of investment

Developed Present Not a concern Low Not needed Large Developed At market or lower Proprietary High 3.5 years

Developed Absent Important High Needed Small to large Developed Higher Intermediated High Higher

(Source: KPMG- The Indian PE Model)

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KSL is the torch-bearer of the seventy-year old financial services group of Khandwala lineage. Incorporated as specialized Broking, Portfolio Management, Investment Banking, and related financial services arm of the Group in 1993 Top Management has combined wealth of experience in Indian Financial market of several decades. Innovative initiatives as Principal broking Member of National Stock Exchange in PMS and Indian Capital Market Developments Caters to several leading Foreign Institutional Investors, Mutual Funds, Banks, Corporate and High Net-Worth Individuals

Business Segments
Market Intermediation Capital Market Futures & Options Wholesale Debt Market Currency Derivates Investment Banking Merchant Banking Mergers & Acquisition Strategic Partnership Capital Raising and Debt Raising / Syndication Corporate Advisory and Restructuring Portfolio Management Services Wealth Advisory Services Investment Advisory Services

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Board of Directors
Mr. S. M. Parande, Chairman Mr. Paresh J. Khandwala, Managing Director Mr. Rohit Chand, Director Mr. Kalpen Shukla, Director Mr. Ajay Narasimhan, Vice Chairman & Managing Director – TruMonee Financial Limited

Registered & Head Office Mumbai Vikas Building, Ground Floor, Green Street, Fort, Mumbai- 400 023 Tel No: +91 22 2264 2300; Fax No. +91 22 2261 5172; Email: corporate@kslindia.com; URL: www.kslindia.com Branch Office: Pune C8/9, Dr. Herekar Road, Off. Bhandarkar Road, Pune- 411 004 Tel No: (91) (20) 2567 1404; Fax No. (91) (20) 2567 1405; E-mail: pune@kslindia.com Corporate Office 1st Floor, White House Annexe, White House, 91, Walkeshwar Road, Walkeshwar, Mumbai – 400 006 Boardline: +91 22 4200 7300; Fax No.: +91 22 4200 7378 Branches HG 3, International Trade Center, Majuragate Crossing, Ring Road, Surat - 305002, Gujarat Boardline: +91 261 307 6276 201/202, Shoppers Plaza, Parimal Chowk, Waghawadi Road Bhavnagar - 364001, Gujarat Boardline: +91 271 8222 1391

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• www.wikipedia.org/wiki/Private_equity • www.privateequity.com • www.indiavca.org


• www.warburgpincus.com
• Private Equity International

Research by VCCEdge, April ‘10

KPMG – PE Report May ‘10

Annual Report of Bharti Airtel, 2008-2009.

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