PRIVATE EQUITY

AND PLACEMENTS
(CHAPTER 11 & 12)

Copyright © 2017 McGraw Hill Education, All Rights Reserved.

PROPRIETARY MATERIAL © 2017 The McGraw Hill Education, Inc. All rights reserved. No part of this PowerPoint slide may be displayed, reproduced or distributed in any form
or by any means, without the prior written permission of the publisher, or used beyond the limited distribution to teachers and educators permitted by McGraw Hill for their individual
course preparation. If you are a student using this PowerPoint slide, you are using it without permission.
Private Placements - Overview

Private
Placements

Unlisted Listed
Companies Companies
Private Placements - Overview

Private Placements

Private Placements made with a Private Issues of equity made with a

fund raising objective
 Early Stage Venture Capital
 Later Stage Private Equity
 Institutional Placements
 Non-institutional Placements
 International Capital Markets
strategic objective
 Promoters and promoter group
 Employees and senior management
 Bonus issues
 Induction of strategic investors
 Induction of JV partners
Private Placements - Overview

Privately Placement of Debt

Securities in Capital Market

PSU Bonds Bonds from Banks Corporate Debt

and Institutions Securities
Private Placements - Overview

Privately Placement of Equity

Venture Capital Institutional Private Institutional and Non-

(Early Stage) Equity (Later Stage) Institutional Placements
INTRODUCTION
 Equity financing from private sources serves the following objectives for
corporate businesses –
 Provide initial start-up capital until the business is ready for external formal institutional
financing.
 Provide the promoters’ contribution required to avail bank financing.
 Provide balance in the capital structure by providing the required equity to support
leveraging.
 Provide growth financing
 Provide financing for purposes that are not amenable to debt financing.
 Provide equity financing until the company is mature enough for public equity from capital
market.
 Equity from private sources is sourced from promoters, persons belonging
to the promoter group, collaborators, joint venture partners, financial and
strategic investors.
 Financial investors can be institutional or non-institutional such as angels,
Seed, HNIs and family offices.
 The term ‘private equity’ refers to the institutional sources of equity which
are organised as funds. It starts typically with what is popularly referred to
as Series A funding.
 GLOBAL-PRIVATE EQUITY HISTORY
Investments focused on
breakthrough
technologies in
electronic, medical and
Specialized
data-processing (e.g., A second major wave An attractive
investment
Intel, Apple, Lotus, of opportunities investment
firms, which
Informal market, Genentech), as well as driven by advances in environment and
experienced
funded largely by some non-tech networking, increased
significant
wealthy successes communications and specialization of
growth in the
individuals (e.g., Federal Express) the Internet. private equity firms
late 1950s

Originally Post WWII 1960s and 1970s 1980s 1990s Today

Company assets Buyout firms focus

Buyout firms were largely
were used as more on operational
successful deploying divestiture
collateral for improvements
strategies
debt, which LBO firms now
The term “private equity” was
leveraged commonly purchase
adopted by the LBO industry to
reliable cash related businesses,
soften its image, but the term soon
flows combine pieces into a
became synonymous with all
bigger company, then
private investing
use economies of scale
to increase sales and
profits
Venture Capital Leveraged Buyout
More equity is used
than in the past 7
PRIVATE EQUITY SPECTRUM
 Private equity investments have a wide spectrum
 VC - PE – PIPE – M&A – BUYOUTS – DISTRESSED
ASSETS
The Private Equity Spectrum

PRIVATE EQUITY PHASE

VENTURE CAPITAL IPO

Seed Early Stage Later Stage Consolidation Phase

Stage (Growth Phase) (PIPE Financing,
Acquisition Financing
Strategic Sale, LBOs)

GROWTH PATH OF A COMPANY

 Venture Capital

 Financing of the following types of business ventures -

 Entrepreneurs who have a proven track record but no capital to fund their business plans.
 Product oriented businesses that require capital to commercialise a new product or
application.
 A new technology venture that requires funding for further development and
commercialisation.
 Early Stage Business Plans which need capital to commercialise a business model.
 Successive round of financing after first round of financing until the business crosses the
initial mortality phase and attains critical mass.

 Venture Capitalist plays a high-risk high-return game. The expected returns could be as high
as 4x or even 7x. Investment horizon is usually of 5-7 years. IRRs could range from 60%
upwards.

 Successful deals include Sasken Communication, Yes Bank, Indraprastha Gas, Tejas
Networks, NetDevices, Metahelix, Talisma, Royal Orchid Hotels, Hotel Leela Ventures, Café
Coffee Day etc.
Private Equity Funds

 PEFs are different from conventional VCs in the following

respects –
 VCs provide early stage risk capital while PEFs provide later
stage growth capital.
 Deal sizes in VCs are small, typically 1-3 million USD. PEF deal
sizes can be very large even going beyond one billion USD. Funds
like Blackstone and Carlyle are actually downsizing their
thresholds since the Indian market is not yet mature.
 VCs look for cutting edge business plans which can redefine a
business or product space. PEFs look for market leaders and
strategic buys in any business space including commodities.
 VCs look for exponential returns while PEFs are more like fund
managers looking at superior portfolio returns.
Private Equity Funds

 Pure play private equity funds in India are of recent origin and
mostly from abroad.
 PEFs are later stage and growth financing investors with large
deal sizes and less risk appetite. They are more like large
portfolio managers.
 The PE spectrum also includes specialised buyout funds such as
Blackstone, KKR, TPG Capital and other large PE funds such
as , Bain Capital and Barings PE.
 Sovereign Wealth Funds have become the new breed of PE
investors such as Temasek and GIC of Singapore, Khazanah of
Malaysia, Qatar Foundation, Chinese SWFs are examples.
PRIVATE EQUITY FUNDS – BUSINESS MODEL

 Being later stage investors, PEFs step in mostly when the

company’s market and cash flow model have stabilised.
Sometimes they enter at the pre-IPO stage (mezzanine round).
 PEFs are also active in picking up sizeable stakes through block
deals and negotiated deals in listed companies (known as PIPE
deals).
 PEFs also take stakes in listed companies through the preferential
allotment route and through QIP deals (institutional route).
 One recent phenomenon is PEFs playing active role in
acquisitions and buy out deals either being the lead investors or
by partnering with strategic investors.
 PEFs are also beginning to show interest in investing in distressed
assets either through dedicated funds or through the buy out
route from banks and ARCs.
PRIVATE EQUITY INVESTMENT SPAN
 Start-up to Later stage investments

Seed Stage Early Stage

(Founders/ (Typical Venture Capital Phase)
Associates)

Early Stage Later Stage

(Associates/ Angels (Private Equity)
/ Possibly VCs)

Revenues

Costs

Idea Product Dev/Pre- Cash Negative Phase Cash Positive Phase

Revenue
PRIVATE EQUITY FUNDS – BUSINESS MODEL

 Being later stage investors, PEFs step in mostly when the

company’s market and cash flow model have stabilised.
Sometimes they enter at the pre-IPO stage (mezzanine round).
 PEFs are also active in picking up sizeable stakes through block
deals and negotiated deals in listed companies (known as PIPE
deals).
 PEFs also take stakes in listed companies through the preferential
allotment route and through QIP deals (institutional route).
 One recent phenomenon is PEFs playing active role in
acquisitions and buy out deals either being the lead investors or
by partnering with strategic investors.
 PEFs are also beginning to show interest in investing in distressed
assets either through dedicated funds or through the buy out
route from banks and ARCs.
PRIVATE EQUITY INVESTMENT CONTEXT
STAGE OF INVESTMENT CONTEXT
VC STAGE Companies are generally cash negative, There is rapid growth expectation and
increasing investment requirements. PE investor perceives higher risk with
higher return possibilities. Early investors expect valuation increases in
subsequent rounds.
PE STAGE Business model is stabilised, cash positive operations, funds required for
reaching optimum level of operations to maintain the gains achieved. PE
investor perceives moderate risk and return possibility. Investors expect to exit
in IPO with substantial gains. If IPO is delayed, a buyback may be considered
as an exit route in a pre-negotiated formula.
PIPEs Company is listed and has a position of reckoning. Funds are raised from PE
investors since public equity markets are subdued. PE investors expect upside
when the markets turnaround. Exit is generally through the market.
M&A (MINORITY PE investor investing in secondary shares with less than 25% control. Exit is
STAKES) generally through strategic sale / secondary sale / buyback. No Takeover Code
is involved if not acting in concert.
BUYOUT (WITH Minimum stake acquired is 51-60%. In closely held companies, 100%
TRANSFER OF acquistions are also done, usually along with retirement of existing debt. In
CONTROL) listed companies, buyout may entail de-listing. Exit is generally through
strategic sale or IPO.
PRIVATE EQUITY – EXITS

 The normal exits are through strategic acquisition,

takeout by another later stage investor or sale to buyout
funds . IPOs are also possible in few cases.
 Successful IPO exits -
 In Sasken Communication, the exit happened through IPO in
2005 (could not happen in 2003) IL&FS PE.
 In Yes Bank IPO VC investors exited at 3x valuation.
 In Indraprastha Gas IPO -
 Funded at concept stage by VCs in 2000
 VCs contributed 50% of the initial capital prior to IPO with the
Government putting in the rest.
 After a 2 year holding period, IPO was very successful in a weak market
 VCs made 7x return on exit.
 PRIVATE EQUITY – EXITS
 Other PE backed IPO Exits –
 PE fund SIF made an exit from First Source in its IPO in 2007.
 IDFC PE made an exit from GMR Infra and Gujarat State Petronet
Corporation in their IPOs.
 Biocon and MCX are also examples of PE backed IPOs. In MCX, several PSU
banks held stakes including SBI. In the IPO, SBI, BOB and Corporation bank
were sellers.
 The exit of PEs from Just Dial and MCX were landmark exits in 2012-13.
Sequoia Capital, SAIF, Tiger Global and SAP Ventures exited Just Dial in
a very successful IPO (the only such IPO in 2013)
 The revival of the secondary and primary markets in late 2014 has
rekindled the expectation of a bust PE exit season led by IPOs in the
coming few years.
 2012 saw some high profile exits, especially in financial sector - Carlyle's
$1.1 billion exit (in two phases) from HDFC, Temasek's $299 million exit
from ICICI and Warburg's $460 million exit from Kotak Bank. However,
exits continue to be a problem in India unless there is a vibrant primary
market.
PRIVATE EQUITY – EXITS
 During the dull period between 2009-12, most exits were
structured as buybacks rather than through IPOs. Others
were through secondary sale and strategic exit either when
the company was bought over or when projects were sold.
 Exits through buybacks have steadily increased in recent
years, from 11 in 2008 to 50 in 2013, according to data by
private equity research firm VCEdge. There were a total of
172 exits in 2013.
 With limited exits through the capital markets in the last
couple of years and investors not getting the right valuation
for a strategic sale as they hold minority stakes, promoter
buybacks grew in number.
PRIVATE EQUITY – EXITS

 IL&FS Investment Managers registered one of the biggest

buyback exits in India in 2013 by offloading its stake in
Bhartiya Urban Infrastructure and Land Development Co.
IIML had invested $35.89 million in the real estate company
in 2007 and exited the investment for $60.02 million through
a buyback.
 Most buybacks are generally done when the pressure from
the PE investors becomes unmanageable. Buybacks are
generally made before the put option becomes exercisable.
Buying at put option price could be an exorbitant cost for
promoters / company as it would factor in stiff penalties for
delay / failure of alternative exit.
INDIAN PE INDUSTRY TRENDS IN 2015
 According to Venture Intelligence, 2015 provided a bonanza for PE Exits.
Notable large deals are
INDIAN PE INDUSTRY TRENDS IN 2015
 Warburg Pincus made an exit from Quest Global an engineering
services company in December 2015 at 3x return on an investment
made in 2010. The exit was a secondary sale of 25% to Bain Capital
and GIC based on a unicorn valuation. Quest had a topline of $ 300
million and operating profit of $ 84 million. It has some marquee
clients such as Airbus, GE, Rolls Royce etc. Warburg Pincus was
one of the busiest investors in India in 2014 and 2015. In 2014, it
invested Rs. 1200 crore in Kalyan Jewellers.
 Louis Vitton PE belonging to the world’s biggest luxury goods
conglomerate planned to exit Fabindia, an ethnic goods retailer at
4x return on an investment made in 2012. At the time of investment
in 2012 the company was valued at Rs. 1875 crore and the exit price
asked is Rs. 8200 crore.
INDIAN PE INDUSTRY EMERGING TRENDS
 PEs are increasing the buyout space to do control deals so that they
have better control on management and exits.
 PEs such as KKR, Piramal, Tata Capital etc are also providing
structured debt solutions.
 The distressed asset space is attracting PE funds due to the abnormally
high NPA portfolio in banks. KKR is active.
 There would be more consolidation deals in the e-com, ITES and
technology sectors.
 Some large SWFs such as Kuwait, Abu Dhabi, Temasek and large
investors such as Canada Pension Plan (largest globally) have started
direct investments rather than go through GPs.
 Several debt laden large infra groups such as GVK, GMR, Rel Comm,
Jaypee are planning asset and stake sales to big ticket PE funds in
2016.
 Overall there is a huge uptick in PE industry post 2014.
Advantages and Pitfalls

 Private placements are time and cost-effective for the issuer. The
placement requires less amount of paper work, approvals and
clearances and can be placed with a closed community of
investors.
 As long as a company raises equity through private placements
and postpones a public offering, there would be a significant
growth prospect in its IPO pricing.
 A listed company raising equity through private placement (PIPE)
would mean equity expansion without corresponding increase in
floating stock. This is beneficial from the point of view of
prevention of stock volatality and threat of hostile takeover.
 On the flip side, private placements are meant only for informed
investors since the level of scrutiny and disclosures are not on par
with public offers.
 Private placements may not be based on issue related market
factors but more on fundamentals and long term factors.
Private Placement Categories under Statute
 Preferential issues are those that are made to select investors on preferential basis
to the exclusion of everyone else. The act of allotting shares on preferential basis is
referred to as ‘Preferential Allotment’.
 Private Placements are defined as ‘issues made to investors numbering less than
200’. All private placements are executed through preferential allotments.
 The terms ‘preferential issue’ and ‘private placement’ are sometimes used
interchangeably though they have a subtle distinction. The difference between a
private placement and a preferential issue is that in the case of the former, the issue
of shares could be more dispersed among QIB and non-QIB investors and as such
their identity may not be known at the time of the issue. In the case of the latter, the
issue is more focussed and usually to select few QIB investors who would be known
beforehand at the time of seeking necessary approvals from shareholders.
 Preferential issues are generally made to promoters, persons belonging to the
promoter group, collaborators, joint venture partners, financial and strategic
investors. Private placements on the other hand, are made to institutional and non-
institutional investors.
 Preferential Issues in listed companies are known as PIPEs (Private Investment in
Public Equity).
 Those private placements that are made exclusively to QIBs under SEBI
regulations are known as Qualified Institutional Placements or QIPs . Investment
bankers are mandatory in QIPs but not in PIPEs.
PRIVATE PLACEMENTS - OVERVIEW
 The Companies Act 2013 has for the first time defined
‘private placement’ as “an offer or invitation to a
select group of persons (other than by way of public
offer) through issue of a private placement offer
letter ...”
 Private Placement and Preferential Issue distinguished.
Preferential issues by all companies to comply with
same procedural conditions as private placements. E.g.
allotment in 60 days, separate escrow, ROC filings etc.
 Pricing regulation introduced for unlisted companies –
fair value to be certified. Listed companies have a
minimum pricing regulation.
Role Of Investment Banker
 Signing of Mandate – (could sometimes include search
for strategic or JV partners instead of financial
investors).
 Offer formulation –
 Valuation – Pre-Money and Post Money using Conventional
Venture Capitalist Method. Valuers in private placements also
use relative valuation methods extensively apart from DCF in
certain cases.
 Deal Structuring including the instrument on offer keeping in
mind investor perception, regulatory compliance and client’s
requirements.
 Investor presentations
 Term Sheet and Negotiations
 Deal Close
Main Focus Areas

 Business plan, Financial Modelling, Transaction

Structuring
 Unlisted Companies
 Listed Companies – QIP vs Private Placement
 Valuation
 Unlisted – DCF Valuation for foreign investments
 Listed – SEBI Valuation
 Deal Structure – pre-money and post-money
 Infomemo Preparation
 Term Sheet Negotiations – Sell side
KEY ASPECTS OF TERM SHEET

 Transaction and deal structure, considered EV

 Conditions precedent to investment
 Board and Management matters, affirmative and veto
rights
 Anti-dilution rights including ratchets, equity clawbacks
 Investor protection rights – ROFR, Liquidity Preference if
any.
 Earn outs for promoters
 Exit rights – tag along, drag along, buyback
 Representations and warranties
 DDR requirements
 Exclusivity period and expected date of closing
QUALIFIED INSTITUTIONAL
PLACEMENTS
(QIP)
Qualified Institutional Placement

 QIP is a mechanism available for listed companies

to raise equity through the private placement
mechanism without being subject to the restrictions
under the preferential issue route.
 The placement requires the following conditions to
be fulfilled –
 The issue should be only for pure equity or convertible
instruments except warrants.
 The placement should be to QIBs – mutual funds, FIIs,
private equity and venture funds, banks, FIs, insurance
companies, pension funds etc. None of the allottees shall
have any direct or indirect association with the promoter
group.
Qualified Institutional Placement

 The company should be listed on a nation wide electronic stock

exchange (BSE or NSE).
 The company should be compliant with the minimum non-
promoter shareholding norm.
 There should be a reservation of atleast 10% of the offer to mutual
funds. The unsubscribed portion of this reservation can be allotted
to other QIB investors.
 The pricing of a QIP shall be determined in the same way
as in a preferential allotment with respect to the relevant
date. The provisions are identical even in the case of
convertibles, i.e. the price shall be determined with
reference to either the relevant date or the date falling 30
days prior to the proposed conversion date.
 The entire amount due on the share / instrument should be
received at the time of allotment.
 Qualified Institutional Placement

 Convertible issued under QIP should have a

maximum currency of 60 months from the date of
allotment.
 The currency of the shareholders’ resolution shall
be for a period of twelve months.
 If two separate placements are being made under
the same resolution, they shall have a gap of
atleast six months. Therefore, a maximum of two
separate allotments are possible under one
resolution.
 The resolution shall specify the QIP and the
relevant date.
 Qualified Institutional Placement
 The QIP offer document should be prepared in accordance with the disclosure
requirements and should contain inter alia, the following –
 Summary of the Offering and Instrument
 Risk Factors
 Market Price Information and details of trading volumes as prescribed.
 Use of proceeds
 purpose of the issue;
 break-up of the cost of project for which the money is raised through issue;
 the means of financing such project; and
 proposed deployment status of the proceeds at each stage of the project.
 Industry Description
 Business Des cription
 Organizational Structure and Major Shareholders
 Board of Directors and Senior Management
 Taxation Aspects relating to the Instrument
 Legal Proceedings
Qualified Institutional Placement
 Capitalization Statement
 The audited consolidated or unconsolidated financial statements prepared
in accordance with Indian GAAP shall contain the following:
 Report of Independent Auditors on the Financial Statements
 Balance Sheets
 Statements of Income
 Schedules to Accounts
 Statements of Changes in Stockholders’ Equity
 Statements of Cash Flows
 Statement of Accounting Policies
 Notes to Financial Statements
 Statement Relating to Subsidiary Companies (in case of unconsolidated
financial statements)
 Management’s Discussion and Analysis of Financial Condition and Results
of Operations
 Accountants
 General Information
 Qualified Institutional Placement
 The QIP memorandum should be numbered and circulated privately and also
placed on the website of the company and the stock exchange and also sent to SEBI
within 30 days of allotment for record.
 The minimum number of allottees shall be two for an issue below Rs.250 crore and
three for an issue above Rs. 250 crore further subject to the condition that no single
allottee shall get more than 50% of the issue. Each category shall be treated as one
allottee for this purpose.
 The total amount raised under the QIP shall not exceed five times the networth of
the company prior to the placement.
 The shares allotted under QIP can be sold in the secondary market without any
lock-in but not in off-market deals upto a period of one year.
 Appointment of a merchant banker for the QIP is mandatory.
 The merchant banker shall conduct due diligence and issue necessary certificate to
stock exchange on the compliance of the QIP guidelines and apply for listing of the
QIP shares. A copy of the QIP memorandum should also be furnished. The listing
application should also be accompanied by a certificate from the company that the
issue has been made in accordance with the QIP guidelines and other necessary
undertakings under the Listing Agreement.
Preferential Issue Vs QIP - Assessment

 Currency of shareholders’ resolution – Preferential Issue has to completed in

15 days while QIP can be executed within 12 months. This provides greater
flexibility for the company in negotiating the terms and finding appropriate
investors.
 The shares issued to investors under preferential issue are locked in for one
year. There are also other lock-in restrictions. However, shares issued under
QIP are free from lock-in for secondary market sales. This provides better
flexibility for the investors and a premium to market price for the company.
 Convertibles issued under QIP have a currency of 60 months vis-à-vis 18
months in a preferential issue. This provides a staggered dilution and better
investor perception and market capitalisation.
 There are however restrictive covenants on the number of investors and the
maximum allotment per investor under QIP while no such restrictions exist
under preferential issue.
 The cost of a QIP would be higher since there is a requirement for
appointment of a merchant banker and due diligence and preparation of QIP
document.
 The level of disclosures in QIP are higher than in a preferential issue.
INDIAN PE INDUSTRY FACT SHEET
 PEs invested $93 billion between 2001 and 2013 (McKinsey)
 As of early 2015, only 31% of the capital invested between 2000 and 2008 could
exit.
 Returns were 25% (as against public equity returns of 18%) between 1998-2005
and fell short of benchmark return of 18.5% (based on risk-free return of 9.5%,
currency, country and volatality risk of 9.5%) in subsequent years - 7% between
2006-09 (as against public equity returns of 12%).
 India is a smaller market for PE – 10,440 companies with revenues of Rs. 150
crore and above (excluding PSUs and listed companies) in 2013 as compared to
41,150 in China and 16.700 in Russia. Brazil is also bigger in the SME segment.
 Indian companies go public prematurely leaving less room for PE. 2013 data
shows 3800 listed companies with average revenue of Rs. 200 crore.
 70% of PE investments go into family owned businesses.
RECENT TRENDS AND CASES
 In August 2009, HDFC (the largest mortgages company in India),
raised Rs. 4.3 billion by a QIP issue of NCDs with warrants, the first
such issue in the private placement market.
 The warrant would freeze the conversion price to the warrant
holder for three years at Rs. 3000 per share. However, the warrant
had an issue price of Rs. 275 keeping in line with SEBI guidelines.
So the effective price for the share was Rs. 3275.
 The coupon on the debenture was 7.15% for a two year tenor and
7.85% for a three year tenor.
 Both the NCDs and warrants would be separately listed on the stock
exchange.
 One of the biggest investors in the issue was LIC (India’s largest
insurance company).
RECENT TRENDS AND CASES
 Between 2008 and 2013, preferential allotments were quite significant
due to slack equity markets. 2013 recorded the highest ever
mobilisation of Rs. 44, 784 crore through this route after Rs. 43, 106
crore in 2000 according to Prime Database.
 2014 saw a reversal of the trend due to the bouncing back of the
markets. It recorded significant drop in preferential allotments and
corresponding increase in QIP issues.
 Preferential issues also came under flak after SEBI passed orders
against companies such as First Financial Services, Radford Global
and Moryo Industries for bringing in funds through preferential issues
and diverting to related parties through illegitimate loans. SEBI order
specified money laundering schemes in these cases.
RECENT TRENDS AND CASES
 The year 2015 saw an uptick in Preferential Issues and PIPE
deals. According to datacompiled by VCEdge there was a
40% jump.
 The highest PIPE deals in a decade were recorded in 2013 at
$2 billion.
 Many PIPE deals were in the financial sector (NBFCs) on a
expectation of liberal banking policies and strong economic
growth.
 Largest PIPE deal in 2015 was Temasek’s $150 million
investment in Glenmark Pharma.
 Most PIPE deals were structured as QIPs rather than
Prferential Allotments since FVCIs are classified as QIBs
under the FVCI Regulations.