PRIVATE EQUITY

INVESTMENT PROCESS

Presentation for WIRC - ICAI

March 28, 2009

Structure of Presentation
Introduction to Private Equity Private Equity Placement Process Private Equity Placement Process Approaches to Valuation Due Diligence Exercise Due Diligence Exercise Key Issues in DD/ SPA & SHA Certain Minimum Rights to PE Investors Monitoring Exit SEBI norms for private equity p q y

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Global Private Equity Syndrome
1. 2. 2 3. 4. 5.

Prematurely grey hair Inability to remember city or country in which one is awakening Persistent daze / jet lag / hoarse throat Equating sleep on an airplane with real sleep Inabilities to remember (or be present at) birthdays, anniversaries, or school conferences Contact with new f i d concerned about h ldi charitable di C ih friends d b holding h i bl dinners i your h in honour or naming school buildings for you Frequent musings about the fairness of pre‐nuptial agreements q g p p g Doubling of golf handicap every 6 months Ability to schedule annual physical only every five years Frequent spousal / child discussions about the value of sound estate planning

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89 billion Source: IVCA. Grant Thornton  . Years denote Calendar years 4 .2 • First half of 2009 saw 93 deals raising a total of USD 2. in 2007‐ 2008 USD 25 billion was invested across 700 deals in 2 years • Average deal size has come a long way from USD 4 million in 1996 to ~USD 40 million currently • Private Equity deals peaked in 2007 with 387 companies raising USD 14 2 billion 14. g . Venture Intelligence. total investment of USD 20 million in 1996.Private Equity in India – Growth over the years • Starting from a meagre five deals and a .

 VC Circle  Years denote Calendar years Yea de ote Cale da yea In all US$ 50 billion will be invested in Indian markets over the next 3 years In all US$ 50 billion will be invested in Indian markets over the next 3 years 5 .PE Fund Raising for Indian Markets • Total US$ 27 billion in Private Equity capital has been raised in the last 4 years by India focused funds • More than 400 funds are active in the Indian Market and around 100 of them have been raised in the last four years • At the start of 2009 78 PE fu d were o ta t 2009. funds e e on the road to raise US$ 24 billion funds for India focused investments • Some very large funds operating and/ or being raised are infrastructure focused Source: Preqin.

to help balance the investment cycles 6 .  Data for 2009 includes flows from Jan  Sep 09 Data for 2009 includes flows from Jan – Sep 09 • FDI inflows have been on an uptick since the past few years g g y p • Net FII flows are strong in good market conditions but dry up in difficult economic scenario • Direct Investments are long term and considered stable.Net FII and FDI Flows Source: Reserve Bank of India.

Similar to a PE fund which can be either pure equity or structured to private/ public companies Funds focused on distress and invest in turnaround situations III. products. (1) Buyout Fund Growth Capital Fund Proprietary Book of Banks Distress/ Special Situation Hedge Funds Venture Vent re Capital Use leverage to do buyout deals. delivery channels etc. typically big deal sizes and long term g financial and strategic decision Classic PE investors providing capital to established businesses to attain explosive growth through expansion – geography. short term focus Typically provide the first round of capital to companies. V. IV. VI. VI Public market fund with high return and high risk appetite.Classification of Private Equity Funds I. II. smaller size and long term horizon 7 .

000 $2.000 $4.000 $2 000 $1.000 $3.Classification of Private Equity Funds $6.000 (2) Fund S Size in US$ $ million $5.000 $0 0 2 4 6 Buyout Fund Hedge Fund Growth Capital Distress/ Special Situations Venture Capital 8 10 Proprietary Book Investment Time Horizon in Years 8 .

PE – What do they bring besides Capital 9 .

Challenges to PE in India 10 .

The PE  placement process T+2 Information  Memorandum  Circulation T+4 T+8 T+12 T+16 K I C K  O F F Business  Evaluation Negotiations and g Term Sheet Financial  and  Legal Due  Diligence Share Purchase  Share Purchase Agreement and  Closure Weeks 11 .

Valuation Rationale etc. Information memorandum. Short list PE investors based on industry.The PE  placement process Information Memorandum Circulation Business plan review by financial advisors in conjunction  with the top management team of the company p g p y Preparation of sales collateral specific to the company and  deal Varied forms of sales collateral are prepared by the Financial  Advisors – Teasers. type and stage of investment Touching base with the  targeted PE Investors Circulation of specific sales collateral Wk 1-2 12 .  Model. Valuation Rationale etc. Financial  Model. size of  investment.

The PE  placement process Business Evaluation E l Initiating discussion with PE investors and review of  Information Memorandum Information Memorandum Financial Advisors continuously keep in touch with  investors and help resolve queries of the investors  Further information flow and clarifications Market intelligence check on the business and industry  g y players Preliminary site visit and initial negotiations Wk 2-4 13 .

 terms and  valuations Submission and signing of term sheet Wk 4-8 14 .The PE  placement process Negotiations And Term Sheet Multiple rounds of Investor Meetings Investors get comfortable with the business  I t t f t bl ith th b i model. management and growth plans of the  company and means and ways to achieve them Detailed negotiations on investment structure. industry.

The PE  placement process Financial and Legal Due Diligence Law firm appointed for  legal due diligence CA firm appointed for accounting due diligence CA fi i t df ti d dili Factory and site visits Client referral checks Detailed report of the findings submitted to the PE  Investor  I t Any flags raised are discussed with the company and  appropriate steps taken appropriate steps taken Wk 8-12 15 .

The PE  placement process Share Purchase Agreement And Closure Lawyers draft the Share Purchase Agreement on the lines  of the term sheet executed between the investor and the  of the term sheet executed between the investor and the company Process of fund transfer and share certificate issuance  clearly defined and closing date confirmed to all parties  involved Signing of SPA and transfer of funds to happen on the  Si i f SPA d t f ff d t h th closing date Wk 12-16 16 .

Approaches to Valuation Different assets may be valued using different valuation techniques. Usually there are three approaches to valuation which are as follows: Approaches to Valuation pp Cost based Market based Income based Net Asset Value Stock Market Quotes Profit Earning  Capacity Value Discounted Cash Discounted Cash Flows Fair Market Value Fair Market Value Market Comparables Market Comparables Precedent Transactions 17 .

 if any Investments • • Method of valuation of investments (subsidiaries if any) Adequacy of provisions Ad f i i Liabilities  • Terms of the loans Inventory details  Extent of working capital finance  Taxation matters Contingent liabilities and implications thereof 18 .Due diligence (DD) exercise Revenue and profitability trends • Break‐up of various costs and operating margins Fixed Assets Fixed Assets • • Schedule of depreciation Revaluation of assets.

 pending or potential litigation / claims by or against the Company.Due diligence (DD) exercise‐Cont’d Review of documents relating to title to property and other assets Review of leasehold agreements and comment on significant issues relating to the same Review of agreements. trade union agreements and  Review contractual arrangements with employees trade union agreements and comment of potential liability if any  Review of all statutory compliance including status of licenses and permits essential for  running the business   running the business Review of current.  or its directors and comment on potential liability Review of such other matters that maybe relevant to the transaction  19 . contracts entered into by the company with major suppliers and  customers Review contractual arrangements with employees.

Key Issues in Due Diligence Accounting Methodologies Past/ Current/ Future tax liabilities Past/ Current/ Future tax liabilities Contingent Liabilities Legal contracts entered in to by the client with customers/ suppliers Legal contracts entered in to by the client with customers/ suppliers Clearances specific to business Debtors greater than normal Debtors greater than normal Corporate MIS 20 .

Key Issues in SPA/ SHA Unusual findings from DD  Reps & Warrants Board Resolutions Indemnification Conditions Precedent 21 .

Certain minimum rights to PE Investors Buyback clause In the event of IPO not being undertaken. most investors typically seek  dollar‐adjusted 18‐24% p. quarterly financials and other confidential information presented to the Board apart  from Annual audited account Board Representation Change of Statutory Auditor to Big 4 MNC firms Change of Statutory Auditor to Big 4 MNC firms 22 . IRR Information requirements A private equity investor looks for several information rights including access to monthly  MIS. Such buyback arrangements can be with  y y g either the Company. or – the Promoter Return Expectations: Depending on specifics of the investment. typically in 3‐5 year timeframe.a. most investors  include buyback clause for their investment exit.

 shall have the right to participate in the sale. wherein the  conversion price is adjusted downwards or buyback clauses adjust for such dilution to allow  investors protect the percentage holding/IRR. or transfer any of their equity stake in  the Company exceeding XX% to any third party. p g promoters diluting to friends and families or related entities at cheap valuation.Certain minimum rights to PE Investors Anti‐dilution or Ratchet clause “Ratchet clauses” or “anti‐dilution protection” refer to mechanism through which investors  p protect themselves from significant dilution. For example. to protect oneself against the risk of  g p . investors  typically seek “ratchet” provisions built in the conversion/buyback terms. q y g p y 23 . with the written consent of the Investor  the Company exceeding XX% to any third party with the written consent of the Investor during the tenure of the Agreement. investors protect the percentage holding/IRR Drag Along Investor shall have the right to drag along the holding of the Core Promoters and their  Relatives and investment companies to the extent of XX% stake of the Company to facilitate an  exit through a strategic sale or any other means.  Tag Along In the event of the Promoters proposing to sell. assign. in a single transaction or a series of related  transactions. the Investors. at their option. in  p p proportion to their equity shareholding in the Company at that time.

 organization and  q qualification. accuracy and completeness of  . execution and delivery. . no default. insurance adequacy. no material undisclosed liabilities. 24 . we believe that on a minimal basis as well. capitalization. etc. given buyback provisions. no conflict with agreements and charter  consent taxes insurance adequacy no conflict with agreements and charter provisions. but not limited to. validity and enforceability of  agreements. such  investors will like to monitor the cash‐flow of the Company and as such prefer to have a say  in Capital Budgeting  i C i lB d i Other cash outflow related decisions such as working capital management. financial statements. taxes. actions  pending. cause all employees and consultants to execute  and deliver nondisclosure and development agreements for the term of their engagement  with the Company plus six months in a form reasonably acceptable to the Board of Directors  p yp y p and no material adverse change. issuance of the shares.Certain minimum rights to PE Investors Customary Reps & Warrants Customary representations and warranties including. authorization. y p information.  Cash flow Protection Cash‐flow Protection While a typical investor seeks significant say in the operations and management of the  Company. taxes. compliance with laws and environmental regulations. governmental  consent.

Certain minimum rights to PE Investors Voting Rights Term sheets often address issues of control in order to allow investors in a  p y g g g company to add value and also to exercise control if things go wrong. They are negotiated on a case‐by‐case basis and often  depend on other aspects of the deal. or things  f d k dd b h d h that the portfolio company promises to do (positive covenants). they may  negotiate provisions that give them control if certain events occur. The golden rule  pp g often applies: he who has the gold makes the rules.  Covenants Most preferred stock issues and debt issues have associated covenants. Failure to comply with covenants can have  d d th t f th d l F il t l ith t h serious consequences to the company such as automatic default and payments  due.  25 . While  investors may not want majority board control if things are going well. and not to do  (negative covenants).

Monitoring The Investor post investment closely follows the growth of the investee company Makes sure the business plan presented during the investment is strictly  Makes sure the business plan presented during the investment is strictly followed Various ways in which a PE investor plays a role post investment: a ious ays i ic a E i es o p ays a o e pos i es e Steering the company through board representation Making strategy for 5 years and   Making strategy for 5 years and Help in strengthening the management team wherever required Marketing the company and its products within its network and do synergistic tie‐ups  Marketing the company and its products within its network and do synergistic tie ups cross sell within its investee companies 26 .

Exit Modes Available IPO Divestment/ Secondary buyout M&A Leveraged Buyout (LBO) Buyouts y Management Buyback Strategic Buyout g y Management Buyout 27 .

Mega Exits Through IPO 28 .

Mega Exits Through Other Modes 29 .

 30 days prior to the date of  during 6 months preceding relevant date i e 30 days prior to the date of meeting u/s. 81 (1A) of the Companies Act Average of the weekly high and low of the closing prices during 2 weeks  preceding relevant date Instruments allotted on preferential basis shall be locked in for 1 year 30 .Guidelines for preferential allotment Special resolution of the shareholders must be passed under S. 81 (1A) of  the Companies Act SEBI Guidelines Issue price shall be not lower than the higher of the following Average of the weekly high and low of the closing prices of the shares  during 6 months preceding relevant date i.e..

SEBI takeover code Open offer  When the acquirer acquires 15% or more of shares Public offer should be made for minimum 20% of the voting capital of  the company Offer price should not be lower than the highest of the following Offer price should not be lower than the highest of the following Negotiated price at which trigger limit was reached (15th percent) Price paid by acquirer for acquisition of shares during 26 week period  preceding public announcement  e edi ubli a ou e e t Average of weekly high and low of the closing prices of the shares of  the target company during 26 weeks preceding date of public  announcement Average of daily high and low of the closing prices during 2 weeks  p preceding date of public announcement g p 31 .

Questions ? 32 .

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