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Report on

“Private equity: way to Indian

Submitted by: sandeep arora

partial fulfillment of the requirements of MBA
program of
Institute of technology and management

Submitted To: Prof Vivek Bhatia
Faculty Guide

Acknowledgement …………………………………………………….....3
Abstract ..................................………..…………………………………..4
Objective ………………………………………………………………....6
Understanding private equity
Definition ………………………………………………………………...8
Industry size …………………………………………………………….11
Investment Patterns……………………………………………………13
Taxation issues …………………………………………………………15
Indian perspective ………………………………………………………16
SEBI’s concern …………………………………………………………17
Stages of PE investment in Indian scenario …………………………....18
Role’s played by private equity in Indian economy ……………………20
Role’s played by private equity in growth of Indian economy ……...…26
Some other roles ……………………………………………………..…27
PE capital is more than just money …………………………………….29
PE investments: Current Trends ………………………………………..31
Comparison with senior debt …………………………………………..36
Why PE firms choose India: Warburg & bharti’s case …………….…..38
References ……………………………………………………………..43


I take this opportunity to express my profound and sincere gratitude to
Prof. Vivek Bhatia (Faculty member) 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.

This project I am sure will help me in understanding the global
investment pattern and factors influencing it from a different dimension
which is so very critical to be successful.

I also acknowledge and thank with deep sense of gratitude, the staff of
ITM-library for their constant support and invaluable suggestions right
from the conception to the design and completion of the project.


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. Private equity is one such investment
avenue which is broadly defined as involved investment in equity linked to an asset
that is not listed and therefore not publicly traded in the stock markets. At present
private equity firms have invested even in listed companies, though the buyout by an
investor occur through a negotiated process and these buyouts turnout to be hostile or
friendly depending on whether the negotiation is with controlling interest or not.
With increasing number of deals the subject becomes an important aspect of
Indian economy as this could lead the Indian economy in either direction. The Bull
Run by foreign companies in the private equity market has begun. The market
position has revealed that there were entry barriers in this particular field because of
the red tape restrictions on the ownership and other such factors which have made the
entry of foreign players in the Indian market a cumbersome process.
The present market scenario is transforming, as doors have been widened for
foreign players to enter. Private equity investment in India first chased IT and
outsourcing during their boom period, but now the opportunities are expanding in
sectors such as pharmaceuticals and finance. The profits are expanding 20-30%
annually drawing some big names to the industry. This situation demands a study to
be conducted to figure out the success path for the firms entering and presently
working in the industry and how these firms are finding and creating new economy to
earn huge profits.
The project would deal with understanding the role of private equity in India,
analyzing their investment strategies, their particular strategies, by studying their
entry strategies into Indian 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 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, buyout financing,
financing restructuring of companies and providing mezzanine capital. 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.


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.

Study would be mainly focused on the analysis and use of secondary data.
Extensive use of Cygnus, various journals, magazines and different online resources
would be used to construct the investment pattern. The entry strategies of the Private
Equity firms with respect to the legal structure will be understood. Various surveys
and data sources would be used to figure out the current investments in the economy.
Study would not be limited to the study only, but analysis of various deals and
the pattern of investment would also be done.
It would also include various regulatory norms for the private equity
investment in India and the benefits and hazards of PE over public equity.


Private equity is medium to long-term finance provided in return for an equity
stake in potentially high growth unquoted companies. Some commentators use the
term “private equity” to refer only to the buy-out and buy-in investment sector.
Others, in Europe but not the USA, use the term “venture capital” to cover all stages,
i.e. synonymous with “private equity”. In the USA “venture capital” refers only to
investments in early stage and expanding companies. To avoid confusion, the term
“private equity” is used throughout this Guide to describe the industry as a whole,
encompassing both “venture capital” (the seed to expansion stages of investment) and
management buy-outs and buy-ins.

What is private equity?
Private equity provides long-term, committed share capital, to help unquoted
companies grow and succeed. If you are looking to start up, expand, buy into a
business, buy out a division of your parent company, turnaround or revitalize a
company, private equity could help you to do this. Obtaining private equity is very
different from raising debt or a loan from a lender, such as a bank. Lenders have a
legal right to interest on a loan and repayment of the capital, irrespective of your
success or failure. Private equity is invested in exchange for a stake in your company
and, as shareholders; the investors’ returns are dependent on the growth and
profitability of your business.
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. Private Equity investments can be divided into
the following categories:
• Venture capital: an investment to create a new company, or expand a smaller
company that has undeveloped or developing revenues

• Buy-out: acquisition of a significant portion or a majority control in a more
mature company. The acquisition normally entails a change of ownership
• Special situation: investments in a distressed company, or a company where
value can be unlocked as a result of a one-time opportunity (Changing
industry trends, government regulations etc.)

Private equity firms generally receive a return on their investments through one of
three ways: an IPO, a sale or merger of the company they control, or a
recapitalization. Unlisted securities may be sold directly to investors by the company
(called a private offering) or to a private equity fund, which pools contributions from
smaller investors to create a capital pool.

Considerations for investing in private equity funds relative to other forms of
investment include:
• Substantial entry costs, with most private equity funds requiring significant
initial investment (usually upwards of $1,000,000) plus further investment for
the first few years of the fund.
• Investments in limited partnership interests (which is the dominant legal form
of private equity investments) are referred to as "illiquid" investments which
should earn a premium over traditional securities, such as stocks and bonds.
Once invested, it is very difficult to gain access to your money as it is locked-
up in long-term investments which can last for as long as twelve years.
Distributions are made only as investments are converted to cash; limited
partners typically have no right to demand that sales be made.
• If a private equity firm can't find good investment opportunities, it will not
draw on an investor's commitment. Given the risks associated with private
equity investments, an investor can lose all of its investment if the fund invests
in failing companies. The risk of loss of capital is typically higher in venture
capital funds, which invest in companies during the earliest phases of their
development, and lower in mezzanine capital funds, which provide interim
investments to companies which have already proven their viability but have
yet to raise money from public markets.

• Consistent with the risks outlined above, private equity can provide high
returns, with the best private equity managers significantly outperforming the
public markets.

For the above mentioned reasons, private equity fund investment is for those who can
afford to have their capital locked in for long periods of time and who are able to risk
losing significant amounts of money. This is balanced by the potential benefits of
annual returns which range up to 30% for successful funds.

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 -:



Nearly $135 billion of private equity was invested globally in 2005, up a fifth on the
previous year due to a rise in buyouts as market confidence and trading conditions
improved. Buyouts have generated a growing portion of private equity investments by
value, and increased their share of investments from a fifth to more than two-thirds
between 2000 and 2005. By contrast, the share of early stage or venture capital
investment has declined during this period. Private equity fund raising also surpassed
prior years in 2005 and totaled $232 billion, up three-quarters on 2004.
Prior to this, after reaching a peak in 2000, private equity investments and funds
raised fell in the next couple of years due to the slowdown in the global economy and
declines in equity markets, particularly in the technology sector. The fall in funds
raised between 2001 and 2003 was also due to a large excess created by the end of
2000 of funds raised over funds invested.
The biggest fund type in terms of commitments garnered was buyout, with 188 funds
raising an aggregate $212 billion. So-called mega buyout funds contributed a
significant proportion of this amount, with the ten largest funds of 2006 raising $101
billion alone—23% of the global total for 2006. Other strong performers included real
estate funds, which grew 30% from already strong 2005 levels, raising an aggregate
$63 billion globally. The only fund type to not perform so well was venture, which
saw a drop of 10% from 2005 levels.

The regional breakdown of private equity activity shows that in 2005,
• North America accounted for 40% of global private equity investments (down
from 68% in 2000) and 52% of funds rose (down from 69%).
• Between 2000 and 2005, Europe increased its share of investments (from 17%
to 43%) and funds raised (from 17% to 38%).
• This was largely a result of strong buyout market activity in Europe.
• Asia-Pacific region’s share of investments increased from 6% to 11% during
this period while its share of funds raised remained unchanged at around 8%.

The biggest fund type in terms of commitments garnered was buyout, with 188 funds
raising an aggregate $212 billion. So-called mega buyout funds contributed a
significant proportion of this amount, with the ten largest funds of 2006 raising $101
billion alone—23% of the global total for 2006. Other strong performers included real
estate funds, which grew 30% from already strong 2005 levels, raising an aggregate
$63 billion globally. The only fund type to not perform so well was venture, which
saw a drop of 10% from 2005 levels.
In terms of the regional split of fundraising, the majority of funds raised in 2006 were
focusing on the American market, with 62% of capital raised in 2006 focusing on the
US. European focused funds account for 26% of the global total, whilst funds
focusing on Asia and the Rest of World account for the remaining 11%.
An Interesting aspect of private equity is the Private Equity Secondary Market.
The private equity secondary market (also often called private equity secondary or
secondaries) refers to the buying and selling of pre-existing investor commitments to
private equity and other alternative investment funds.
Sellers of private equity investments sell not only the investments in the fund but also
their remaining unfunded commitments to the funds. By its nature, the private equity
asset class is illiquid, intended to be a long-term investment for buy-and-hold
For the vast majority of private equity investments, there is no listed public market;
however there is a robust and maturing secondary market available for sellers of
private equity assets.
Driven by strong demand for private equity exposure, a significant amount of capital
has been committed to dedicated secondary market funds from investors looking to
increase and diversify their private equity exposure.


Private equity fundraising
Private equity fundraising refers to the action of private equity firms seeking capital
from investors for their funds. Typically an investor will invest in a specific fund
managed by a firm, becoming a limited partner in the fund, rather than an investor in
the firm itself. As a result, an investor will only benefit from investments made by a
firm where the investment is made from the specific fund that they have invested in.
The majority of investment into private equity funds comes from institutional
investors. The most prolific investors into private equity funds in 2006 were public
pension funds and banks and financial institutions, which together provided 40% of
all commitments made globally according to data from London-based Private Equity
Intelligence Ltd.
Other prominent groups investing in private equity include corporate pension plans,
insurance companies, endowments, family offices, and foundations.
Another large investor group in private equity funds is so-called fund of funds, which
are private equity funds that invest in other private equity funds in order to provide
investors with a lower risk product through exposure to a large number of vehicles
often of different type and regional focus. Fund of funds accounted for 14% of global
commitments made to private equity funds in 2006 according to Private Equity
Intelligence Ltd.
As fundraising has grown over the past few years, so too has the number of investors
in the average fund. In 2004 there were 26 investors in the average private equity
fund; this figure has now grown to 42 according to Private Equity Intelligence Ltd.
It is also worth noting that the managers of private equity funds themselves will also
invest in their own vehicles, typically providing between 1–5% of the overall capital.
Often private equity fund managers will employ the services of external fundraising
teams known as placement agents in order to raise capital for their vehicles.

The use of placement agents has grown over the past few years, with 40% of funds
closed in 2006 employing their services according to Private Equity Intelligence Ltd.
Placement agents will approach potential investors on behalf of the fund manager, and
will typically take a fee of around 1% of the commitments that they are able to garner.

The amount of time that a private equity firm spends raising capital varies depending
on the level of interest amongst investors for the fund, which is defined by current
market conditions and also the track record of previous funds raised by the firm in
question. Firms can spend as little as one or two months raising capital where they are
able to reach the target that they set for their funds relatively easily, often through
gaining commitments from existing investors in their previous funds, or where strong
past performance leads to strong levels of investor interest.
Other managers may find fundraising taking considerably longer, with managers of
less popular fund types (such as European venture fund managers in the current
climate) finding the fundraising process more tough.
It is not unheard of for funds to spend as long as two years on the road seeking
capital, although the majority of fund managers will complete fundraising within nine
months to fifteen months.
Once a fund has reached its fundraising target, it will have a final close. After this
point it is not normally possible for a new investor to invest in the fund, unless they
were to purchase an interest in the fund on the secondaries market.

The most contentious issue is that of taxing these Private equity Funds.
Private equity funds and hedge funds are private investment vehicles used to pool
investment capital, generally for a small group of large institutional or wealthy
individual investors. They are subject to favorable regulatory treatment in the United
States, which allows them to engage in financial activities that are off-limits for more
regulated companies. Both types of companies also take advantage of generally
applicable rules in the U.S. Internal Revenue Code to minimize the tax burden on
their investors, as well as on the fund managers. As media coverage increases in the
United States regarding the growing influence of hedge funds and private equity,
these tax rules are increasingly under scrutiny by members of Congress. Private
equity and hedge funds choose their structure depending on the individual
circumstances of the investors the fund is designed to attract, as discussed below:

Basic Structure: U.S. Domestic Fund
A private equity or hedge fund located in the United States will typically be structured
as a limited partnership, due to the lack of an entity-level tax on partnerships and
other flow-through entities under the U.S. tax system. The limited partners will be the
institutional and individual investors. The general partner will be an affiliate of the
manager of the fund. Typically, the manager of the hedge fund is compensated with a
fee based on 2% of the gross assets of the fund, and a profits interest entitling the
manager (or, more typically, its affiliated general partner) to 20% of the fund's return
(subject to minimum guaranteed returns for the limited partners).

The Indian stock markets witnessed tumultuous times during the years 1999-2000.
There was continuous surge in the stock markets and in 2001, the king pin of these
surges, Ketan Parekh was arrested and put out of action by SEBI. Back then, there
were over 20 companies that had either planned or made allotment of shares during
this period through modes such as preferential and private placements of equity.
While preferential allotment was seen in companies where the promoters' stake is low,
the private placement was made to companies (in the form of strategic investment),
mutual funds, FIIs, or high net worth individuals. Between 1999 and 2000, when the
market was in its infancy, around Rs 6,000 crores were raised by private placement of
Some of the big deals during these periods were:
• HFCL (Rs 735 crores at Rs 1,050 per share and Rs 1,039 crores at Rs 1,450
per share),
• Zee Telefilms (Rs 800 crores at Rs 1,000 per share),
• Pentasoft Technologies (Rs 798 crores at Rs 798 per share)
• Trigyn Technologies (Rs 606.38 crores at Rs 825 per share).

SEBI Concerns:
Between the years 2000 and 2007, a lot of water has flown under the bridge and there
have been many calls to call in for greater regulation of these funds and their target
companies in India because:
• The securities issued by companies through the private placement route get
listed and traded on the stock exchanges after allotment, just like a public
• In turn, they are bought by all kind of investors, including the retail, through
the secondary market. Therefore, this way the transaction in them is at par
with the securities issued through the public issue.

The difference between the two is on the disclosure. In the case of public issue, the
disclosure is broad and the companies are mandated to inform their shareholders
through public announcement and annual reports about the utilization of the funds
In the case of private placement, the disclosure is bare minimum. For instance, the
companies are not required to inform the utilization of funds raised through the
private placement.

India and Private Equity Investments

India has been on the radar for many Private Equity firms(also known as PE firms in
common parlance). Primary factors attracting these funds in India being a vibrant
market and democracy which fosters entrepreneurship as well as new firms. It is these
new firms which know the target market very well who form the basis for new
investment by all Private Equity Firms across the words.
PE(Private Equity) has come a long way from providing fuel (funds) to the fiery
growth of India Inc. It helps investor companies with a whole host of activities —
from forging strategic alliances to assisting in corporate governance, from providing
management advice to budgeting.To gauge the activities of these firms as well as their
investment patterns in India, the following study has been undertaken by me:
Analyze the performance of companies receiving PE funding. I did this by tracking
deals concluded before January ’07, since it’s too early to comment on companies that
received money in ’07. I am in the process of analyzing data for approximately 100
listed companies, spread across sectors like gems and jewellery, tea, shipping,
aviation, edible oil and garments, to name a few. I intend to compare the performance
of companies receiving PE funds with those of their peers in the corresponding
Economic Times sectoral indices that did not get any such funds.
On an average, a preliminary analysis of the Private Equity funding in new, virgin
indutrsies and companies concludes some basic, yet vital and important points:
It is observed that by and large, companies which received funding seemed to do
much better than their peers on the following parameters — profitability, cash profits,
sales and investor returns. There were some intangible benefits too, such as greater
recognition and increased media attention.

The Stages of PE Investment in Indian Scenario

1996-1997 - Beginning of PE activity in India: The Indian private equity (PE)
market roughly started in 1996-1997 and it scaled new heights in 2000 primarily
because of the success demonstrated by India in assisting with Y2K related issues as
well as the overall boom in the Information Technology (IT), Telecom and the
Internet sectors, which allowed global business interactions to become much easier. In
fact, the total value of such deals done in India in 2000 was $1.16 billion and the
average deal size was approximately US $4.14 million.

2001-2003 - PE becomes risk averse and activity declines: Not surprisingly, the
investing in India came “crashing down” when NASDAQ lost 60% of its value during
the second quarter of 2000 and other public markets (including those in India) also
declined substantially. Consequently, during 2001-2003, the PEs started investing less
money and in more mature companies in an effort to minimize the risks.
For example:
(a) The average deal size more than doubled from $4.14 million in 2000 to $8.52
million in 2001
(b) The number of early-stage deals fell sharply from 142 in 2000 to 36 in 2001
(c) Late-stage deals and Private Investments in Public Equity (PIPEs) declined from
138 in 2000 to 74 in 2001, and
(d) Investments in Internet-related companies fell from $576 million in 2000 to $49
million in 2001.This decline broadly continued until 2003.

2004 onwards - Renewed investor interest and activity: Since India’s economy has
been growing at 7%-8% a year, and since some sectors, including the services sector
and the high-end manufacturing sector, have been growing at 12%-14% a year,
investors renewed their interest and started investing again in 2004. As Figure 1

shows, the number of deals and the total dollars invested in India has been increasing
substantially. For example, US $1.65 billion in investments were made in 2004
surpassing the $1.16 billion in 2000 by almost 42%. These investments reached US
$2.2 billion in 2005, and during the first half of 2006, PE firms have already invested
$3.48 billion (excluding debt financing). We forecast that the total investment in 2006
is likely to be $6.3 billion, a number that is more than five times the amount invested
in 2000.

PE investment expands beyond IT and ITES: A very important feature of the
resurgence in the PE activity in India since 2004 has been that the PEs are no longer
focusing only on the IT and the ITES (IT Enabled Services, commonly known as
“Business Process Outsourcing” or BPO) sectors. This is partly because the growth in
the Indian economy is no longer limited to the IT sector but is now spreading more
evenly to sectors such as bio-technology and pharmaceuticals; healthcare and medical
tourism; auto-components; travel and tourism; retail; textiles; real estate and
infrastructure; entertainment and media; and gems and jewellery. Figure 2 shows the
division across various sectors with respect to the number of deals in India in 2000,
2003 and the first half of 2006.

Percentage of the number of deals by PEs in various sectors
Sectors 2000 2003 2006(Q1&Q2)
IT & ITES 65.5 49.1 23.18
Financial Services 3.13 12.3 9.7
Manufacturing 3.0 1.8 19.3
Medical & Healthcare 2. 7.0 8.3
Others 25.2 29.8 37.9
Total 100 100 100

Important roles played by PE in the growth of Indian Economy

“Private Equity in India: Adding Human Capital to the Value-Creation “
If you are a global company and India is not part of your plan, then you have
missed the bus…..said by - Dr. Manmohan Singh, Prime Minister of India
In the days before economic liberalization, it was just established industrial
houses such as Tata or Birla which had easy access to the capital markets and money
resources largely on the basis of their pedigree.
The investment environment has radically changed since then. A whole new
breed of entrepreneurs now occupies front ranking positions in their respective fields.
Many of the old business houses which had the foresight to embrace change, have
restructured, re-focused and have flourished. The rest have withered into
insignificance. And in their stead, many have emerged who could become future stars
in manufacturing, technology or knowledge-based services. Indeed the investment
environment is so attractive that investors are flocking to scores of funds, domestic
and international, taking a heavy exposure on the future of these companies. Besides
foreign institutional investors and mutual funds, private equity funds are also taking
concentrated bets across companies and segments. Many India-dedicated funds have,
and are, being set up to finance and to provide resources to the organizations as they
know the potential of these organizations.
And allocations in existing ones are being ramped up for corporate in south Asia,
India and China. Draper Fisher recently announced plans for setting up a $200 million
fund for startups. Timothy Draper, founder of Draper Fisher Jurveston, a Silicon
Valley venture fund, on his first exploratory visit to the country in October went on
record to say that he was adopting a contrarian approach. "Now that everyone's
crowding in China I have to go someplace different. And that place is India." Draper
is also contemplating to set up an office in India. Draper is well known for funding
Sabeer Bhatia of Hotmail, the free internet e-mail service which was subsequently
sold to Microsoft for over $400 million. There are several other PEs which are
rushing to India. Unlike Draper, they are not contrarians but are willing to bet on the
India growth story. Among them is west Bridge Capital Partners, a Mauritius based

company focusing on IT and BPO businesses and having offices in Silicon Valley and
Bangalore. It recently procured subscriptions to its second India VC fund of $200
million. “One major draw in favour of India is the diversity of enterprises which span
over virtually all sectors,” says Dhananjay Mungale a financial expert, who quit his
high-profile job at DSP Merrill Lynch to set up his own advisory venture. The breadth
of opportunity in India is much higher than places like Indonesia, Malaysia or
Taiwan, he says.
Many of the private equity funds tend to seek a place on the board and
participate actively in laying down the policy framework to ensure quicker rise of the
enterprise. This is especially helpful in case of new economy businesses where
traditional assessment by investors may not get the same valuation as may be received
from a private equity investor. Again this is helpful in case of an unlisted company.
India’s private equity sector is moving to the big league. Fund sizes have
increased dramatically from US $10 to US $25 million just a few years ago, to
between US $400 million and US $1 billion today. The minimum deals now start at
around US $25 million, eclipsing the average deal size of US $8 million in 2002.
With the strong global interest in the Indian market continuing, the challenge is no
longer about raising private equity funds, but how to extract value from the portfolio
investments, turning the focus from financial capital to human capital.
During the first half of fiscal year 2005-06, US$7.96 billion of foreign direct
investment (FDI) poured into India — more than triple the FDI in the corresponding
period a year before. This is set to explode further, with sweeping reforms by the
Indian government to loosen restrictions on FDI across various sectors, which will
lead to more international corporations and financial investors entering the Indian
market. Examples include the retail sector, where 51 percent FDI is now allowed in
single brand products; the telecoms services sector, where the FDI limit has been
raised from 49 percent to 74 percent; and selected infrastructure sectors, such as the
development of new airports, laying of natural gas pipelines, petroleum infrastructure,
captive mining of coal and lignite, mining of diamonds and precious stones, as well as
the development of townships where complete foreign ownership is now welcome.

Role of Private Equity players
 Provides Fund irrespective of market conditions for –
 Expansion Capital

 Acquisition Capital/Change of control
 Restructuring Businesses
 MBOs, Divestments, Consolidation
 Restructuring B/S
 Shoring up Promoter stakes
 Privatisation (Public to private)

 To enable entrepreneurs achieve success that may otherwise have been beyond
reach by providing resources over and above money.

 Money can be availed through any other form of funding. But, money alone can not
catalyse the working of your organisation, thus along with the resources PE players
also provides risk management tools ensuring high degree of success to the

 PE players also facilitate and promote building businesses and teams ensuring high
standard of corporate governance.

 Success of PE Fund is dependent on success of the venture. PE funds make sure
that their star entrepreneur are helped with all the resources and learning which can
be mustered by the fund to help him realise his dream.

The different major roles played by Private Equity players in the economy are as
follows -

• Financial
– Equity
– Quasi Equity
– Shareholder’s Loans
– Guarantees
• Managerial
– Board inputs: Industry specialist Independent Directors
– Investment professionals with experience & knowledge of building
• Networking
– Global access to valuable group of people and skills
• Fast track partnership.

The chart below shows the different roles played by Private Equity firms –:

Reasons for Private equity players entering into India
The strong interest in India has resulted in very bullish stock market conditions, with
trading volumes increasing substantially. This has eased exit possibilities, with most
of the early domestic and foreign entrants such as Actis Partners, Warburg Pincus,
Citigroup Venture Capital, Barings and West Bridge Capital reaping significant
multiples on their investments. It is little wonder that other global private equity
players such as 3i, Blackstone and Goldman Sachs have been setting up shop in India,
each with deep pockets.
The most of the private firms in India is still in the need of capital to expand
them, in spite of having the required technology, labour and knowledge they are not
able to become productive to the economy. Thus the advent of private equity players
has provided an opportunity for these firms to grow with the economy.
Private Equity players have came to India with a research back up and thus they
know the potential of these firms and thus there has been reduction in the corpus
amount invested in China than in India, which definitely gives a hunch where the
Indian economy is booming.

How the Indian firms will perform will largely depends on their
How successful these firms will perform in the big league of high stakes private
equity plays over the long run could depend heavily on one key factor — their teams
of professionals.
A recent global survey by McKinsey & Company revealed that Indian business
leaders are much more optimistic about the future than their international peers are.
Yet Indian business leaders see the high cost and low availability of talent as the
single greatest constraint on their companies — it’s a problem that worries them much
more than it does their counterparts around the world. Similarly, top on the agenda of
India’s private equity firms is finding the right leadership teams to drive business.
To date, private equity firms have focused on different stages of a portfolio
company’s evolution, entering at an early stage with venture capital funds, later for
growth capital, and even after listing as a Private Investment in Public Equity (PIPE)
deal players emerging in the Indian market. Firms that focus on a few narrowly
defined industry sectors are better positioned to build upon and translate their
expertise into value-creation potential, transaction pricing, and higher potential
returns over the long run. It is therefore no longer sufficient to look primarily at the
skill sets and track records of investment professionals. Firms need to ensure that their
executives think and act like owners, and will take active responsibility for the proper
guidance of portfolio companies.
We also envisage that more private equity firms will hire operating partners who
become deeply involved in the management of buy-out investments and other
portfolio companies. In many cases, private equity firms retain the incumbent
management, preferring not to rock the boat when buying out a company. As
seasoned managers with in-depth industry or functional expertise, operating partners
act as sage counselors and critical advisors on operating, financial, and strategic issues
for the portfolio companies’ management teams. With a clear mandate to add value to
an investment within a fixed timeframe, they can adopt a less sentimental approach

and focus unflinchingly on results to make fast decisions and act rapidly where
necessary. An alternative to hiring operating partners is to create management buy-in
teams. Here, private equity firms enter into joint investments in specific portfolio
companies with a small group of seasoned professionals who are looking for a new
challenge, and who have the funds for a small co-investment amount as “sweat
equity”. It has been shown that running the business as an owner inevitably helps
unlock value. The benefit of this joint management ownership program is that it
instantly puts in place highly motivated owner executives to run the company from
day one.

Reasons for Private Equity players being accepted in Indian
Economy are –
Another practice that private equity players in India have yet to actively adopt is
to supplement executive teams in portfolio companies with a talented board of
directors, who not only play an active role in formulating the company’s strategies but
also use their network of relationships, contacts and managerial expertise to
implement various strategic initiatives for the company — whether it is to tie up a
joint venture, to acquire another company, or to diversify into a new area through a
greenfield project. These board members are expected to devote a significant amount
of time outside board meetings to contribute to the company’s growth and value
The private equity industry in India is at a key injection point. Investors the world
over are increasing their allocations on India. The robust economy, supportive
government, and recent industrial reforms could see several hundred billion dollars
channeled to the newly opened infrastructure sector alone.

Role played by PE in the growth of Indian economy
Since 2004, India has witnessed a tremendous rise in Private Equity financing.
Indian companies are creating partnerships with PE firms on a scale that has not been
witnessed before. Is this good for the Indian economy? What kind of value does this
relatively new form of financing offer to Indian entrepreneurs?

Private Equity boosts the Indian economy

According to the Private Equity Impact study and research findings - A
quantitative comparison of Private Equity- and Venture Capital-backed companies
against their non Private Equity-backed peers and relevant market indices, in terms of
key economic parameters like Sales, Profitability, Exports, Wages and Research &
In accordance with the research reports and findings from the study:

 PE-backed companies grew at a significantly higher rate compared to non
Private Equity backed companies as well as market indices like the Nifty and
CNX Midcap.

Comparative Annual Sales Growth (2000-2006)
25.0% 22.9%


15.0% 13.0%



PE-Backed Non PE Nifty CNX CNX
Pharma Midcap

Source: ICFAI reader august 2007
 Wages at Private Equity-backed companies grew at a significantly higher rate
compared to their peers who are not PE-backed.
 About 96% of top executives at Private Equity-backed companies believe that
without Private Equity financing, their companies would not have existed or
would have developed slower.
 More than 60% of top executives at Private Equity-backed companies said that
the number of employees at their companies had increased after the PE

Roles played by PE in the growth of Indian economy –
 PEs not only provides resources of funds to the new ventures but also focuses
on identifying and upgrading both product/process innovation and
management functions in accordance to the global economy.
 PEs plays a critical rule in the innovation process, not only as a source of
finance to innovation but through other functions that lie at the core of high
tech Development.
 PEs bridge between sources of finance, entrepreneurs, scientists, suppliers,
and customers by providing not only the required sources of funds but also an
added value of technologies and requirements.
 PEs typically also add value to their portfolio companies through assistance in
strategic decisions in the day to day management of the firms.
 PE capitalists with technology & entrepreneurial background generate more
value added than PEs with financial background

Some other important roles are -

1.) Intermediation and Market Building - The enhanced access to business
and advisory/consultancy services and to knowledge/technology that PE
provide will contribute to the emergence of new markets in the global
economy. Moreover PEs help enterprises global product and global capital
markets. This is particularly important for SMEs and clusters wanting to
expand the range of markets in which they would like to operate e.g new
markets for intermediate inputs which the Globalization process is opening.

2.) Source of External Capabilities - PEs complement the capabilities of
innovative SMEs, sometimes in those areas were entrepreneurs are less likely
to be knowledgeable and capable e.g. export marketing; know whom,
management, etc.

3.) Facilitating Complex Contracting - This is particularly so in relation to
marketing agreements, alliances, strategic partnerships, M&A, etc—many of
these critical for fast access to global product markets. A central condition for

success in many of these is prior experience which entrepreneurs frequently do
not have. A PE sector may eventually have such capabilities and thereby have
a strong impact on innovative enterprises quest to rapidly build global market

4.) Promoting International Links – It provides promotion and global links to
the enterprise thus increasing the industry visibility of the firms to go for
global expansion with the right partner.

5.) Supporting of the Global Expansion of Promising Innovative
SMEs - The value roles of PE is to provide equity based (generally private)
finance and support organizations could play important roles in promoting
innovative SMEs and clusters in industrializing economies PE could become a
pillar of the Knowledge Economy—by facilitating the provision of services to
Innovative SME’s; by being a node of three overlapping networks; and
because its capabilities are largely based on tacit knowledge. Moreover, by
promoting SME they are promoting invention (and indirectly innovation and
diffusion), self-organization and creation of new teams & tacit knowledge, and
the continuous building of new markets. Interactive learning lies at the basis of
these processes.

6.) Facilitate the Transition to a Learning Economy – Since the PE are
learned and qualified investors, this could provide enterprise a new learning
environment that constitute a key sector in the creation, diffusion and
adaptation of tacit knowledge, codified knowledge and technology

Private Equity catalyzes innovation in the economy

Research and Development (R&D) activity – that helps launch innovative
products and services – is key to spurring economic demand. Lack of capital to invest

in R&D has long been a factor that has held back corporate India. Private Equity
capital is helping address this issue. About thirty percent of top executives from
Private Equity-backed companies surveyed said they utilized PE funding to invest in
R&D initiatives.
Private Equity-backed companies invest more in R&D activities compared to their
non PE-backed counterparts.
R&D investments by Private Equity-backed IT companies grew at almost twice that
of CNX IT index companies.

Growth in R & D Spending

40% 29%
PE Backed IT Cos. CNX IT

Source :ICFAI reader august 2007

Private Equity capital is more than just money

Apart from providing capital, Private Equity investors provide strategic and
operational guidance to the companies they invest in. A vast majority of top
executives from the PE-backed companies felt that their Private Equity investors
made far greater contributions than just provision of capital. Entrepreneurs cited
strategic direction, financial advice, top management recruitment and marketing as the
main areas where Private Equity fund managers add value.
Private Equity firms are active investors and adopt a hands-on working relationship
with their portfolio companies. Their strategic input is more than just financial
monitoring. Eighty percent of the top management at PE-backed companies said they
interact with their investors on a weekly or monthly basis.

Private Equity investments in 2006-2007 : Current trends

Before moving to year 2006 let us see through the graph the Private Equity
investment in India till 2005 -:

Private Equity Investments in India
2000 1997
Amount (US$ Millions)

1500 1999
1000 2001
590 507
500 2002
500 250 2003
20 80 2004

Private Equity firms invested a record $7,460 million over 299 deals in India during
the 12 months ending December 2006. The amount invested during the year was over
three times that during the previous year. (These figures exclude investments in real

Despite the headline grabbing mega deals, the bulk of the investments were in the sub
$25 million category, with the maximum number of investments falling in the $10-25
million range.

By Industry

Information Technology and IT-Enabled Services (IT & ITES) continued to remain
the favorite industry among PE investors during 2006. Other industries that attracted
significant PE investor attention during the year included Manufacturing, BFSI
(Banking, Financial Services and Insurance), Healthcare & Life Sciences and
Engineering & Construction.

By Stage

Late-stage investments accounted for 36% of all deals while PIPEs (PE
investments in listed companies) accounted for 22% of the deals. Early-stage
investments accounted for about 20% of deals during 2006.

Current Trends and Future Prospects
The technology boom of 2000 and the outsourcing wave have affirmed India
position as a provider of high quality products and services at highly competitive cost.
A buoyant Indian economy, the change in spending patterns and rising income levels
in the working population have acted as a catalyst for domestic demand. In the wake
of increasing competition and slow economic growth in developed economies India,s
importance is growing, not just as a low cost outsourcing destination but also as a
potential market offering high growth.

Key factors that have contributed to the steady inflow of investment in India are - :

 Growing consumer demand and India, s consequent emergence as a high
demand and quickly expanding market.
 Growing recognition as a high quality, low cost production and Research and
Development destination.
 Infrastructure growth and public private partnership in infrastructure projects.

 Competitive business models focused on exports and outsourcing from small
and medium sized companies.
 Government inclination and reforms which create an investment friendly
 A sizeable, multi-talented workforce and established management capabilities.

All of the above factors have contributed to the Indian growth story, which has, apart
from the traditional PE funds, attracted the attention of a cross-section of investors
ranging from high net worth individuals, pension funds and universities in developed
countries to propriety funds of the investment banking firms. The assets invested in
emerging economies generally form bout 5-10% of their total investment corpus.
Besides looking to optimize the risk-return profile, these investors also want to hedge
their investments in developed economies. Business models in emerging economies,
built to cater to export led demand, shift the risk back to the developed economies.
This is where the large Indian market, fuelled by increasing consumerism, has
provided investors with a natural hedge. Indian business models , essentially built to
cater to domestic demand , have interested PE players and a larger component of PE
investments are being made in this space , as PE players consider this model to be
more stable. These trends are expected to continue in the short to medium term.
Accordingly, while IT and ITes are still in favored sectors, healthcare, automotive
ancillaries, hospitality, real estate, infrastructure, entertainment and media and
services have also witnessed significant action and hold promise for a lot more.

Apart from valuations issue in recent times PE players have been concerned about the
slow down in the government economic reforms policy – key areas of concern include

• Opening up of sectors such as retail to foreign investments.
• Labour reforms.
• Providing greater operational autonomy in sectors such as telecom and media.
• Facilitating smoother entry and exit norms for foreign investment.

In spite of the above, there appears to be enough momentum at this point of time to
ensure that there will be no slowdown in PE activity in the near future. For example, a

large number of domestic funds are finding great value in retail business in India, both
in the hope of a policy change in the future and the expected growth in the sectors in
times to come. The Indian economy grew 8.9% during the first quarter of 2006-2007,
which is the highest first quarter growth in six years. This growth is expected to
continue in the near future – and combined with an increase in domestic demand and
a friendly business environment, can be expected to ensure that PE funds remain
highly focused on India.
Private equity investment in India is forecast to grow rapidly over the next few years
as overseas investors continue to be attracted by the country’s strong growth
prospects. According to consultants Bain & Co, the value of Indian private equity
investments is set to grow to $7bn a year by 2010, compared with $2.2bn in 2005.
US entertainment giant Walt Disney is planning to become the first foreign media
group to release original, local language programmes for the Indian children’s TV
market. Disney recently acquired Hungama, an Indian children’s channel, and is
working on two Hindi-languages TV series to be shown on its Disney Channel.
US IT group IBM is to establish a software development centre in Calcutta, creating
3,000 jobs, while fellow US computer company Dell is to invest up to $60m to build
its first manufacturing plant in India.

Comparison of private equity with alternate source of financing:

A provider of debt (generally a bank) is rewarded by interest and capital
repayment of the loan and it is usually secured either on business assets or your own
personal assets, such as your home. As a last resort, if the company defaults on its
repayments, the lender can put your business into receivership, which may lead to the
liquidation of any assets. A bank may in extreme circumstances even bankrupt you, if
you have given personal guarantees. Debt which is secured in this way and which has
a higher priority for repayment than that of general unsecured creditors is referred to
as “senior debt”.
By contrast, private equity is not secured on any assets although part of the non-equity
funding package provided by the private equity firm may seek some security. The
private equity firm, therefore, often faces the risk of failure just like the other
shareholders. The private equity firm is an equity business partner and is rewarded by

the company’s success, generally achieving its principle return through realizing a
capital gain through an “exit” which may include:
• Selling their shares back to the management
• Selling the shares to another investor (such as another private equity firm)
• A trade sale (the sale of company shares to another)
• The company achieving a stock market listing
Although private equity is generally provided as part of a financing package, to
simplify comparison we compare private equity with senior debt.

Private equity compared to senior debt

Private equity Senior debt
Medium to long-term. Short to long-term.
Not likely to be committed if the safety of
the loan is threatened. Overdrafts are
Committed until “exit”. payable on demand; loan facilities can be
payable on demand if the covenants are
not met.

Provides a solid, flexible, capital base to A useful source of finance if the debt to
meet your future growth and equity ratio is conservatively balanced
development plans. and the company has good cash flow.

Good for cash flow, as capital
repayment, dividend and interest costs
Requires regular good cash flow to
(if relevant) are tailored to the
service interest and capital repayments.
company’s needs and to what it can

The returns to the private equity investor
Depends on the company continuing to
depend on the business’ growth and
service its interest costs and to maintain
success. The more successful the
the value of the assets on which the debt
company is, the better the returns all
is secured.
investors will receive.
If the business fails, private equity
investors will rank alongside other
If the business fails, the lender generally
shareholders, after the banks and other
has first call on the company’s assets.
lenders, and stand to lose their

If the business appears likely to fail, the
If the business runs into difficulties, the
lender could put your business into
private equity firm will work hard to
receivership in order to safeguard its loan,
ensure that the company is turned
and could make you personally bankrupt
if personal guarantees have been given.

A true business partner, sharing in your
risks and rewards, with practical advice
Assistance available varies considerably.
and expertise (as required) to assist your
business success.

Why Are Private Equity Firms Looking Hard at India?

In March, when the international private equity firm Warburg Pincus sold a
$560 million stake in Bharti Tele-Ventures, India's largest publicly traded mobile
telephony company, it created a sensation both in that country and among private-
equity investors around the world. The transaction, on the Bombay Stock Exchange,
was the largest block trade ever on the Indian market. It was also consummated in a
breathtaking 28 minutes, prompting stock market observers in India to remark on the
unexpected depth and maturity of their equity markets.

Private equity investors marveled at the profitability of the investment -- in a market
that was in its infancy barely a decade ago. Money from U.S. private equity investors
was going to Asia back then, but it was to destinations such as Indonesia and
Thailand. India did not figure in most investors' definitions of "Asia" -- or at least not
in any major way. The March transaction was the largest of a series of retrenchments,
over several months, that saw Warburg reduce its 18.5% stake in Bharti to about 6%.
Warburg, which invested nearly $300 million in Bharti between 1999 and 2001,
walked away with a profit of $800 million from selling two-thirds of its holdings. At
Bharti's current share prices, Warburg's remaining 6% stake in the company is worth
some $700 million, or more than twice what it originally invested. Bharti, which trails
privately held Reliance Infocomm, had a sallow $100 million market capitalization
when Warburg entered the scene. It now has a market capitalization of $15 billion. In
1999, Bharti had 104,000 subscribers. It now has 14 million.
So is the Bharti deal the tip of the iceberg or, alas, the entire iceberg? Two Warburg
veterans at the center of the firm's activities in India from its inception in 1994 are
emphatic that the Indian story is no one-deal wonder.
India has done well by Warburg, generating returns in "the mid-30s over 10 years,"
the firm's co-president, Charles R. Kaye, said during a presentation on October 11
organized by the University of Pennsylvania's Center for the Advanced Study of
India. (Kaye will return to Philadelphia next month to speak at the Wharton India
Economic Forum on November 17 and 18.) In turn, the firm has favored India.
Warburg is the largest private equity investor in India by far, having ploughed $811
million into the country as of mid-2005. This amount is more than twice the $362
million Warburg has invested in China, according to data provided by the National
Venture Capital Association in Arlington, Va.
Bears and Bulls
Warburg's vote of confidence in India is not universally shared. Globetrotting
financial commentator Jim Rogers has written off the country as a haven for slow-
moving bureaucrats who are insensitive to the needs of business. He has predicted a
gloomy future for India not only as an economy but also as a country -- predicting its
breakup into smaller nation states, torn apart by ethnic and religious strife.
But Rogers drove through India and sought out its most difficult political and
economic terrain. Warburg has an office there. Rogers was dejected by the country's

decaying roads and bridges. Warburg investors see investment opportunity in them.
Rogers hated the rickety telephone landlines he encountered in India. Warburg
investors, like millions of Indians who are simply bypassing the landlines and
migrating to mobile telephony, fell in love with Bharti.
The Indian government reluctantly embarked upon political and economic reforms in
1991, after years of stifling government control of business and profligate spending
on propping up failing state-run enterprises brought the country to the brink of
bankruptcy. The reforms have continued unimpeded through four different coalition
administrations with seemingly disparate economic ideologies, according to Dalip
Pathak, the managing director at Warburg who spearheads the firm's strategy in India.
"There may be debate about the pace of reform, but not about its direction. Indian
businessmen today very rarely point to government as an obstacle," Pathak says. As
for that vaunted Indian bureaucracy, he mentions that Warburg repatriated its profits
in 48 hours. It's easy to take money out of India, perhaps even easier than bringing it
in, he jests.
What has Warburg discovered in India during the last decade? Pathak lists the
developments that are exciting investors like him: Foreign institutional investment has
boomed (more than $12 billion in 2003-04) as curbs on foreign investment in Indian
industries have been relaxed; there is a virtually open skies approach to investment
from the United States; and gross domestic product has grown at rates between 6.5%
and 8% in recent years. The volatility of the Indian rupee has been curbed and
inflation has declined. "There are smart people running that economy," Pathak says.
Declining inflation has meant lower interest rates, and in turn has goosed the equity
markets. Since October 2004, the Bombay Stock Exchange's Sensitive Index, or
Sensex, of 30 blue chip stocks has added 2,500 points, to cross 8,000. "We made a big
bet on interest rates coming down, and it was the right bet to make," Pathak says. He
even compares India favorably with parts of Europe in one surprising aspect: "Labor
issues are far more difficult in France than in India," he says.

High Confidence
One of the biggest changes Pathak says he has noticed has nothing to do with
numbers. "There has been a complete change in the confidence level of people in
India," he says. The "tipping point" here was the contribution of Indian information

technology companies to averting a worldwide Y2K meltdown. Suddenly, India's
small IT companies went global, and the government -- long accustomed to regulating
big industry but unfamiliar with IT -- had nothing to do with it. Now "most people
believe they will not let government get in their way," Pathak says, "and that's why
we keep putting money there."
There's a swagger in the step of India's business, and the country's government is
showing signs it has caught the contagion, Kaye says. According to a 2003 Goldman
Sachs report, "India's economy could be larger than all but the U.S. and China in 30
years." It's a prediction that doesn't appear far-fetched to Kaye and Pathak.
As Warburg's substantial divestment from Bharti shows, however, the investment
firm has not lost its head over India. "Bharti has reached the scale and quality level
that ensures it will have a long and bright future," Kaye says. But that very milestone
means it is "less appropriate from a risk-reward perspective." That's investor-speak for
"there's not enough upside left" in the company.
Warburg's other notable holdings in India include Rediff Communication, the
country's largest consumer web portal; Gujarat Ambuja Cement; Sintex Industries, an
industrial plastic-goods manufacturer with a 60% share of the market for water-
storage tanks; Kotak Mahindra, a financial services conglomerate; Nicholas Piramal
India, a major pharmaceutical company, and WNS Global Services, a business
process outsourcing company.
As the list shows, Warburg's bets in India are hardly reckless. The firm generally
sticks to the tried, true, big and stock-market listed. That is rarely a winning strategy
for a private equity investor in the United States, but can be in India, where the pent-
up demands of a billion people leave plenty of room to grow for even the largest
conglomerates. So in India, the investment firm is not spending much time seeking
out early-stage companies or funky technology. In fact a couple of its forays into tech
were jettisoned. They involved minor investments, under $2 million each, Pathak
"Larger companies are less risky; listed companies are less risky," he says, citing the
transparency afforded by India's capital markets. One other reason to pick big over
small, in Pathak's view: Bigger Indian companies are increasingly seeking capital and
acquisitions abroad, and if they play foul with Warburg, "they know they will never
get investment abroad."

But success has brought competition. Several significant names in the U.S. private
equity world are now operating in India, among them Intel Capital, Oak Hill Capital
Management, the Carlyle Group, Citigroup Venture Capital International, General
Atlantic Partners, CSFB Private Equity, and the California Public Employees
Retirement System, or CalPERS. Most of them have invested only in the double digits
so far -- Citigroup has invested as little as $23 million. But "we need to keep on our
toes," Pathak says. Warburg is now looking to participate in India's raging real estate
market, he adds. "Last year we were not." A growing number of Indian financial
institutions, including Kotak, have created venture funds to tap into the sector's
potential. Indian news media say fund managers expect returns of 20% to 30% a year.

Big Pool
"Being smart and having a lot of money is not a differentiator anymore," Kaye
says. So Warburg is working assiduously to become a recognizable brand in India. It
is doing that in part by staying close to the market, operating from offices in the
commercial hub of Mumbai. Unlike many private equity firms, Warburg invests
through a single fund worldwide. That allows it to be nimble in adapting to change,
Kaye says. Warburg has more than $10 billion under management invested in more
than 100 companies in Asia, Europe and the United States. In August it raised $8
billion more -- the largest single pool of capital the firm has raised since it was set up
in 1966.
In India, Kaye and Pathak expect the thirst for capital will be unquenched for years to
come. Just infrastructure improvements -- greater power generation, better highways
and more efficient ports -- are estimated to require $20 billion to $25 billion in
investments each year. For policy makers in India, Kaye says, the main social
challenge is to lift 200 million people out of abject poverty. Infrastructure projects, far
more than IT, have the potential to generate the large numbers of jobs needed to
accomplish that task, he adds.
Towards the end of their session, a seminar participant asked Kaye and Pathak to
describe their "most pessimistic scenario" for India's future. Both men were silent.
That silence spoke as loudly as their optimistic presentation about the possibilities
India holds for investors like Warburg.



Books and Journals

• The Economist (ICFAI Gurgaon Library)
• The Fortune Business Magazine (ICFAI Gurgaon Library
• Private Equity Investing – David Gladstone & Laura Gladstone.
• ICFAI Journal – ICFAI Reader (April 2005 & August 2007).
• Private Equity in India – Satish Juneja.