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
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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

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3) Private equity funds are helpful when it comes to facilitating mergers and acquisitions.ADVANTAGES OF PRIVATE EQUITY 1) Funds gotten through private equity are crucial for the growth of industry and the development of innovative products. 6) The general partner runs the company. 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. 2) Private equity funds are used for expanding working capital. cannot interfere in the management of the company. . and help it develop. 4) Private equity funds make a company·s balance sheet stronger. so the investing partner. or the limited partner.

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. .DISADVANTAGES OF PRIVATE EQUITY 1)Since private equity funds are not open to investment on the stock market.

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. In addition. originally set up by George Soros and Chemical Bank in October 1994. . There are no legal or regulatory differences between venture capital and private equity firms. the limits on their activities. 2. thus establishing the agency·s authority over the funds. 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. and IFCI). Before guidelines were issued in September 2000.The Securities and Exchange Board of India (SEBI) issued its Regulations for Venture Capital in 1996. and incentives for them to finance and rescue troubled companies. commercial banks (including foreign banks).SEBI GUIDELINES 1. ICICI. was the first such overseas private equity fund. under current central bank regulations. Foreign venture capital funds have been permitted to operate in India since 1995. Indocean Venture Fund (now Indocean Chase). The Government first permitted financial institutions (Industrial Development Bank of India. and subsidiaries of commercial banks to establish venture capital companies under guidelines issued in 1988. 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.

the income of a private equity fund is taxed only in the hands of the investor. the Government has allowed private equity funds ´pass-throughµ status. The regulatory environment for the private equity industry was simplified in 1995²2000. Following amendments to the 2000 budget. . 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. meaning that the distributed or undistributed income of the funds is not taxed. 4. To avoid double taxation. 3. exit pricing and repatriation of capital were regulated by the Reserve Bank of India (RBI). While the foreign direct investment route offered minimum investment restrictions for private equity funds. 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.

5. and each fund must have at least Rs50 million in capital. (iv) A fund must invest 66. It cannot invest in associated companies of ventures that it finances. In September 2000 SEBI announced the guidelines that now govern venture capital investment. (ii) Each investor in a venture fund must invest at least Rs500. After another set of amendments in April 2004.3% category in preferential allotments of equity shares of a listed company. subject to a 1-year lock-in. (v) The April 2004 amendments removed the previous 1-year lockup period for IPO subscriptions.67% (lowered from 75% in April 2004) of its investible funds in unlisted equity or equity-linked instruments. They also allowed investments within the 33. The remaining 33. and in equity shares or equity-linked instruments of a listed company that is financially weak. . and private equity funds must submit quarterly reports to it. based on the January 2000 recommendations of the Chandrashekhar committee on venture capital.000.3% 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. (iii) A fund may invest in one company up to 25% of the fund·s capital. 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. SEBI was also made the sole regulatory authority.

such as BTS India Private Equity Fund. 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. gold financing companies. To replace the profitability requirement. they reflect the strong commitment of the Indian Government to support the provision of long-term equity finance to domestic entrepreneurial companies . In addition. and equipment leasing and hirepurchase companies registered with the RBI.(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. (ix) In April 2004 the SEBI also removed some previous restrictions and allowed venture funds to invest in real estate companies. (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. 6. These regulations have significantly improved the regulatory environment for private equity funds operating in India.

the investors become limited partners. . The private equity company encourages individuals and institutions to invest in the private equity fund.PRIVATE EQUITY: HOW IT WORKS? Private equity funds are set up as limited partnerships. This way. though the general partner controls the company management. These limited partnerships are controlled by private equity companies that are the general partner in the limited partnership.

or investor. while the limited partner provides funds for investing. . The limited partner. When the general partner thinks that a particular investment is feasible. it asks the limited partner to invest the amount it guaranteed. mergers. The general partner chooses the investment portfolio of the partnership. in turn profits through sales. recapitalization or initial public offering.

a bright future.  Young  Promise of . population. policies.  Changing government  Huge potential.WHY INDIA??  Growing economy.

Fund sizes have increased dramatically from US $10 to US $25 million just a few years ago. where the FDI limit has been raised from 49 percent to 74 percent. to between US $400 million and US $ 1 billion today. will reach nearly $7 billion in 2010. . The private equity market in India.2 in investment capital in 2005. the telecoms services sector.PRIVATE EQUITY IN INDIA India·s private equity sector is moving to the big league. Examples include the retail sector. where 50 percent FDI is now allowed in single brand products. which attracted $2.

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making India the fastest-growing private equity market in Asia. with a 67 per cent compounded annual rate since 2002. . India is poised to become the next big market in private equity. By some measures. And there is certainly big interest: Well over 100 private equity funds are scouting for deals. To realize its potential. however.MAKING PRIVATE EQUITY WORK IN INDIA India is becoming a powerful magnet for private equity investment. private equity investors and Indian companies must recognize what each brings to the table.

with survey respondents indicating that Indian businesses are less hamstrung by government regulations and have an easier time recruiting experienced managers. . In general. 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. a majority anticipate that China and India will be on par as Asia's most attractive destinations for private equity investment. Over the coming three years. moreover. The survey gathered the opinions of nearly 150 global PE investors active in India. while 40 per cent agreed that India is more attractive than China. India is perceived to be a friendlier investment environment than China. their local counterparts.

. Nevertheless. three-quarters anticipate at least doubling the amount they invest over the next three years. via a research it was found that 71 per cent Chinese corporate accounts suffer from a lack of transparency. There was broad agreement among PE investors and Indian executives who responded to the survey about which sectors are most appealing. Among firms. But there was also consensus about bottlenecks that may diminish India's attractiveness. For example. They also say it is easier to negotiate and close a deal in India compared with China. compared to just half as many who said Indian companies' finances are difficult to track. private equity firms are rolling out plans that reflect their confidence that India presents attractive opportunities. however. In one important area. China is given an edge over India:Valuations are more expensive in India.

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. private equity firms should be willing to invest patience as well as cash in cultivating relationships. . Also ranking high were worries about whether the supply of skilled workers can keep pace with the demand. For their part. Not surprisingly." More than 40 per cent thought that high asset values will continue to crimp opportunities for private equity. poor infrastructure was the No 1 concern. 68 per cent of respondents described it as a "challenge" or "major challenge. Indian executives will have to discover what these deep-pocketed newcomers can do help their companies flourish.

Private Equity catalyzes innovation in the economy .BENEFITS OF PRIVATE EQUITY 1. Private Equity funding provides long term perspective Profitability 3. Private Equity-backed companies create well-paying jobs 5. Private Equity boosts the Indian economy 2. Private Equity-backed companies generate foreign exchange earnings 4.

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. . Private Equity investors provide strategic and operational guidance to the companies they invest in. Private Equity for Indian companies can create enormous growth opportunities to compete in the global market and boost the growth of Indian Economy.PRIVATE EQUITY CAPITAL IS MORE THAN JUST MONEY Apart from providing capital. Their strategic input is more than just financial monitoring. like Strategic Decision making. Recruitment and Marketing. Financial Advise.

´Acquisitions are the easiest way to grow as we don·t need to reinvent the wheel.CASE: PRIVATE EQUITY CAPITAL IS MORE THAN JUST MONEY Blackstone bought 50. The Executive Director of GEL says that.1 per cent of the 70. . a bigger company will boost its bargaining power while negotiating contracts with buyersµ.1 per cent stake held in Gokaldas by the Bangalore-based Hinduja family. The Hindujas still continue to have management control.

. has the experience to infuse the necessary capital. Blackstone. 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. process know-how. industry networking and management specialists. being a large US private equity giant.CONTD.

Warburg Pincus. biotechnology. Citigroup and Actis capital.THE OPPORTUNITY All the leading international PE Funds have been active in India in recent months. GIC and Temasek holdings. media and entertainment and real estate and retailing. besides two leading funds from Singapore. In 2007-08. they include the Blackstone group. Kohlberg Kravis Roberts & co (KKR). aggressively buying into companies showing promise in sectors like information technology. nearly 400 PE deals were struck by these international funds. telecommunications. . healthcare. Goldman sachs. the Carlyle group.

especially in the real estate and hospitality sectors. is now beefing up its presence in India and looking at various options. invested $40 million in real estate projects in India. including setting up an asset management company. (Pragnya. other smaller private investors are also striking smaller deals. a brokerage unit. the US finance major. Goldman Sachs. a Mauritius-based PE fund. wealth management division and a commodities outfit.) . Besides American and Europe PE majors. It is also keen on setting up a non-banking finance company.

INDIA·S largest commercial bank. State Bank of India. and recent industrial reforms could see several hundred billion dollars channeled to the newly opened infrastructure sector alone. They include the Anil Dhirubhai Ambani group. Investors the world over are increasing their allocations on India. But many private Indian business groups have also set up private equity funds and venture capital funds. supportive government. the Aditya Birla group and the Future group. 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 robust economy. The private equity industry in India is at a key inflection point. .

PE investment provides additional capital & brings additional business expertise & improved governance. It was very difficult for private equity players to invest as entrepreneurs were reluctant to relinquish control of their business. CDC 2008 outlook . entrepreneurs ran family owned businesses & looked to the next generation to take over the business.µ Richard Laing.IMPORTANCE OF PRIVATE EQUITY ´Five years ago. Chief Executive. Now increasingly second generation family members accept that ceding control of part of the business is not a bad thing.

company«. Investments by stage 33% 63% would have developed the same way would have existed PIPE buyout 22% 36% 4% 3% 15% 20% other early stage growth stage late stage 4% would not have existed .without PE funding.

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% 20% 40% 60% 80% .

PRIVATE EQUITY INVESTMENTS IN INDIA Total FDI : USD 30 Billion Private equity : USD 6 Billion till June/July 2008 Real estate sector : USD 10 Billion Private equity investments in India (USD Million) 500 000 1500 1000 500 0 1996 1999 00 005 Private equity investments in India (USD Million) .

VALUE ADDITION TO THE INVESTEE COMPANY Higher returns exports Higher Innovation .

REASON FOR UNDERPERFORMANCE OF PE Low Standards of Corporate Governance Limited Legal Recourse Dysfunctional Capital Markets .

Go local .Creative exit strategies .Improving access to public equity markets .More discerning deal selection .Add value .SOLUTIONS RETHINKING THE APPROACH .

DEVELOPMENT FINANCE INSTITUTIONS MUST PROVIDE LEADERSHIP .Support creative new initiatives . .Training for fund managers .LOCAL GOVERNMENTS MUST PROMOTE EMERGING MARKET DEVELOPMENT .Financing that attracts additional investors .Liberalizing investment restrictions for local institutional investors.Assist with policy and regulatory reform .Promoting sound corporate governance standards.Protecting shareholder rights .

CASE STUDY WARBURG ²PINCUS-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 ² 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 ² Sector ‡ Lack of Regulatory Clarity ‡ Economic viability of Telecommunication Project ‡ Restriction on Licenses ‡ Monthly Fixed License fee to government ‡ No investor interest ² No clarity on Exit route ‡ Bharti having presence only in North India .

2% of total GDP ‡ FDI was only about 1% of GDP ‡ First Investment done banking upon the ´India Growth Storyµ ‡ Foreign Exchange fluctuation was a matter of concern ‡ Investment in Unorganized Sector ‡ Investment in a privately owned company .Landmark Transaction ‡ The Deal equaled one ² third of total PE investments in India till date ‡ PE investments in India were only 0.

WP ² Information Gaps ‡ ‡ ‡ ‡ ‡ ‡ ‡ Bet on forecasts Loss making business Entering as a minority stakeholder Ambiguity in Government Policies Fragmented Sector ² Cost efficiency Mobile telephony was still a Luxury among Indians Business model based on Cost-Volume-Pricing .

Initial Suboptimal Strategy ² Bell North WP -Change in Plans ² Pan India Presence ‡ Growth Plans !!! BT .SINGTEL .Management Approach to build business from scratch WP .Adhoc structure WP ² Buy back stakes to reduce to conflicts of interest ‡ Inclusion of Strategic Partners .Shareholder Value & Corp Governance ‡ Think Big !!! BT.Time sensitive: Growth by Acquisition ‡ Restructuring the corporate structure BT.

Exit .

CONCLUSION Private equity 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. 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 running business from any other source. However. not open for public trading and not affordable to minor investors and individuals. they are Forming .

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