PRIVATE EQUITY

THE ROLE OF PRIVATE EQUITY IN INDIAN MARKET

GROUP MEMBERS :

MANALI CHHEDA
MAYUR NAROLA
NAFISA KURAWEDWALA
PRERNA SUKHANI
 Private Equity
 Private equity is an umbrella term for large amounts of money raised
directly from accredited individuals and institutions and pooled in a
fund that invests in a range of business ventures.

 In finance, private equity is an asset class consisting of equity
securities in operating companies that are not publicly traded on a
stock exchange.

 Investments in private equity most often involve either an investment of
capital into an operating company or the acquisition of an operating
company.

 Capital for private equity is raised primarily from institutional
investors.

 There is a wide array of types and styles of private equity and the term
private equity has different connotations in different countries
 Types of Private Equity
Leveraged buyout
The acquisition of a company using debt and equity finance. As the word leverage

implies, more debt

than equity is used to finance the purchase, eg 90 percent debt to ten per cent

equity. Normally, the

assets of the company being acquired are put up as collateral to secure the debt.

Venture capital
The term given to early-stage investments. There is often confusion surrounding this

term. Many
people use the term venture capital very loosely and what they actually mean is

private equity


Growth capital
Growth capital refers to equity investments, most often minority investments , in

relatively mature
companies that are looking for capital to expand or restructure operations , enter new

markets or
finance a major acquisition without a change of control of the business

Distressed and Special Situations

Distressed or Special Situations is a broad category referring to investments in
 Mezzanine capital
 This is the term associated with the middle layer of financing in
leveraged buy-outs. In its simplest form, this is a type of loan finance
that sits between equity and secured debt. Because the risk with
mezzanine financing is higher than with senior debt, the interest charged
by the provider will be higher than that charged by traditional lenders,
such as banks.

Secondaries

 The term for the market for interests in venture capital and private
equity limited partnerships from the original investors, who are
seeking liquidity of their investment before the limited partnership
terminates.

 An original investor might want to sell its stake in a private equity
firm for a variety of reasons: it needs liquidity, it has changed
investment strategy or focus or it needs to re-balance its portfolio.


 The main advantage for investors looking at secondariesis that they can
invest in private equity funds over a shorter period than they could
with primaries
Advantages of Private Equity


1) Funds gotten through private equity are crucial for the growth
of industry and the development of innovative products.
1)
2) Private equity funds are used for expanding working capital.

 3) Private equity funds are helpful when it comes to facilitating

mergers and acquisitions.


 4) Private equity funds make a company’s balance sheet stronger,

and help it develop.


 5) Private equity funds are a great way to obtain funds for small
businesses and start-ups that have not been able to get loans
or grants.


 6) The general partner runs the company, so the investing partner,

or the limited partner, cannot interfere in the management of
the company.

 Disadvantages of Private Equity

 1)Since private equity funds are not open to investment on the

stock
 market, anybody who wants to sell stocks of a private equity
fund
 finds it difficult to locate a buyer.


 2)There are certain transfer limits on private equity.



 3)Most individuals cannot afford the high investments required

in a
 private equity.

 SEBI GUIDELINES
 1.The Securities and Exchange Board of India (SEBI) issued its
Regulations for Venture Capital in 1996, thus establishing the
agency’s authority over the funds, the limits on their activities,
and incentives for them to finance and rescue troubled companies.
There are no legal or regulatory differences between venture
capital and private equity firms. The Government first permitted
financial institutions (Industrial Development Bank of India,
ICICI, and IFCI), commercial banks (including foreign banks), and
subsidiaries of commercial banks to establish venture capital
companies under guidelines issued in 1988. In addition, under
current central bank regulations, banks’ investments in mutual
funds catering to venture capital funding are considered to be
outside the ceilings applicable to banks’ investments in
corporate equity and debt.

 2. Foreign venture capital funds have been permitted to operate in
India since 1995. They may either hold the shares of unlisted
Indian companies directly (up to a maximum of 25% of equity) or
route their investments through domestic venture capital funds
and companies. Before guidelines were issued in September 2000,
direct exposure by offshore private equity funds in shares of
unlisted companies was treated as a foreign direct investment
and had to be approved in line with the Government’s general
policy on foreign investments. Indocean Venture Fund (now
 3. The regulatory environment for the private equity
industry was simplified in 1995–2000. Foreign
institutional investors participated in the growth of
the private equity industry through the foreign direct
investment regulations of the Government and the
simplified tax administration procedures under the
Indo-Mauritius Double Taxation Avoidance Treaty. While
the foreign direct investment route offered minimum
investment restrictions for private equity funds, exit
pricing and repatriation of capital were regulated by
the Reserve Bank of India (RBI). To bring these capital
flows under the regulation of the venture capital
industry, new SEBI regulations were issued with
simplified exit pricing and repatriation procedures
for foreign investors.


 4. Following amendments to the 2000 budget, the

Government has allowed private equity funds “pass-
through” status, meaning that the distributed or
undistributed income of the funds is not taxed. To
avoid double taxation, the income of a private equity
fund is taxed only in the hands of the investor.
 5. SEBI was also made the sole regulatory authority, and private equity funds
must submit quarterly reports to it. In September 2000 SEBI announced the
guidelines that now govern venture capital investment, based on the January
2000 recommendations of the Chandrashekhar committee on venture capital.
After another set of amendments in April 2004, the following rules now
apply:
 
(i) Foreign venture capital investors can invest in India without the need for

approval from the Foreign Investment Promotion Board if they register with
SEBI.
 

(ii) Each investor in a venture fund must invest at least Rs500,000, and each

fund must have at least Rs50 million in capital.

 

(iii) A fund may invest in one company up to 25% of the fund’s capital. It cannot

invest in associated companies of ventures that it finances.



(iv) A fund must invest 66.67% (lowered from 75% in April 2004) of its
investible funds in unlisted equity or equity-linked instruments. The
remaining 33.3% can be invested in subscriptions to initial public offerings
(IPOs) of companies or in debt instruments of a company in which the venture
fund has already made an equity investment.
 

(v) The April 2004 amendments removed the previous 1-year lockup period for IPO

subscriptions. They also allowed investments within the 33.3% category in

preferential allotments of equity shares of a listed company, subject to a 1-
year lock-in, and in equity shares or equity-linked instruments of a listed
company that is financially weak.


(vi) The removal of the profitability criterion as a listing requirement

had an important effect on the private equity industry as it provided
an exit mechanism for investors. To replace the profitability
requirement, a firm would be delisted if it did not earn a profit
within 3 years of listing.
 

(vii) The acquisition of shares in a venture fund by the investee

company or its promoters is exempt from the provisions of the

takeover code and will therefore not mandate an open offer.
 

(viii) Mutual funds may invest 5% of the capital of an open-ended

scheme and 10% of the capital of a closed-ended scheme in a venture

fund.
 

(ix) In April 2004 the SEBI also removed some previous restrictions and

allowed venture funds to invest in real estate companies, gold

financing companies, and equipment leasing and hire-purchase companies
registered with the RBI.
 

 6. These regulations have significantly improved the regulatory

environment for private equity funds operating in India, such as
BTS India Private Equity Fund. In addition, they reflect the strong
commitment of the Indian Government to support the provision of
long-term equity finance to domestic entrepreneurial companies
Private Equity: How it Works?
 Private equity funds are set up as limited
partnerships.

 These limited partnerships are controlled by
private equity companies that are the general
partner in the limited partnership.

 The private equity company encourages
individuals and institutions to invest in the
private equity fund.

 This way, the investors become limited partners,
though the general partner controls the
company management.
 When the general partner thinks that a particular
investment is feasible, it asks the limited
partner to invest the amount it guaranteed.

 The general partner chooses the investment portfolio
of the partnership, while the limited partner
provides funds for investing.

 The limited partner, or investor, in turn profits
through sales, mergers, recapitalization or initial
public offering.

WHY India??
vGrowing economy.
v
vChanging government
policies.
v
vHuge potential.
v
vYoung population.
v
vPromise of a bright
future.
PRIVATE EQUITY IN INDIA
 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.

 Examples include the retail sector, where 50 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.

 The private equity market in India, which attracted
$2.2 in investment capital in 2005, will reach
nearly $7 billion in 2010.


 Making private equity work in
India
 India is becoming a powerful magnet for private equity
investment.

 To realize its potential, however, private equity
investors and Indian companies must recognize what
each brings to the table. By some measures, India is
poised to become the next big market in private
equity. 

 And there is certainly big interest: Well over 100
private equity funds are scouting for deals, making
India the fastest-growing private equity market in
Asia, with a 67 per cent compounded annual rate
since 2002.


 The survey gathered the opinions of nearly 150
global PE investors active in India, their local
counterparts, and Indian entrepreneurs and
executives.

 Among the highlights: Sixty per cent of survey
respondents said the investment climate in India
is more attractive than in Japan or South Korea,
while 40 per cent agreed that India is more
attractive than China. 
 Over the coming three years, moreover, a majority
anticipate that China and India will be on par as
Asia's most attractive destinations for private
equity investment.

 In general, India is perceived to be a friendlier
investment environment than China, with survey
respondents indicating that Indian businesses are
less hamstrung by government regulations and have
an easier time recruiting experienced managers. 


 They also say it is easier to negotiate and close a
deal in India compared with China. For example, via
a research it was found that 71 per cent Chinese
corporate accounts suffer from a lack of
transparency, compared to just half as many who
said Indian companies' finances are difficult to
track. 

 In one important area, however, China is given an

edge over India: Valuations are more expensive in
India. Nevertheless, private equity firms are
rolling out plans that reflect their confidence
that India presents attractive opportunities. 

 Among firms, three-quarters anticipate at least
doubling the amount they invest over the next
three years. There was broad agreement among PE
investors and Indian executives who responded to
the survey about which sectors are most appealing.
But there was also consensus about bottlenecks
that may diminish India's attractiveness. 
 Not surprisingly, poor infrastructure was the No 1
concern; 68 per cent of respondents described it as
a "challenge" or "major challenge." More than 40 per
cent thought that high asset values will continue
to crimp opportunities for private equity.

 Also ranking high were worries about whether the
supply of skilled workers can keep pace with the
demand, as well as concerns that onerous government
regulations could curb India's appeal.

 Whether India's young private equity market
ultimately delivers on its promise will depend on
how Indian companies and PE investors learn to
capitalise on each other's strengths.

 Indian executives will have to discover what these
deep-pocketed newcomers can do help their companies
flourish.

 For their part, private equity firms should be willing
to invest patience as well as cash in cultivating
relationships. 
Benefits of Private Equity
1. Private Equity boosts the Indian economy
2. Private Equity funding provides long term

perspective - Profitability
3. Private Equity-backed companies generate

foreign exchange earnings

4. Private Equity-backed companies create well-

paying jobs
5. Private Equity catalyzes innovation in the

economy

 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.

 Their strategic input is more than just financial
monitoring. Eighty percent of the top management at
PE-backed companies interact with their investors on a
weekly or monthly basis.

 PE Investor contributes to various business operations
of a company, like Strategic Decision making,
Financial Advise, Recruitment and Marketing.

 Private Equity for Indian companies can create enormous
growth opportunities to compete in the global market
and boost the growth of Indian Economy.

Case: Private Equity capital is more
than just money
 Blackstone bought 50.1 per cent of the 70.1 per
cent stake held in Gokaldas by the Bangalore-
based Hinduja family.

 The Hindujas still continue to have management
control.

 The Executive Director of GEL says that,
“Acquisitions are the easiest way to grow as
we don’t need to reinvent the wheel, a bigger
company will boost its bargaining power while
negotiating contracts with buyers”.
Contd.
 Hindujas are also clear that it would not have
been possible for their family to go to the
next orbit of growth on their own.


 Blackstone, being a large US private equity

giant, has the experience to infuse the
necessary capital, process know-how, industry
networking and management specialists.

 The Opportunity
 All the leading international PE Funds have been
active in India in recent months; they include the
Blackstone group, Goldman sachs, Warburg Pincus,
the Carlyle group, Kohlberg Kravis Roberts & co
(KKR), Citigroup and Actis capital, besides two
leading funds from Singapore, GIC and Temasek
holdings.


 In 2007-08, nearly 400 PE deals were struck by these

international funds, aggressively buying into
companies showing promise in sectors like
information technology, biotechnology, healthcare,
telecommunications, media and entertainment and
real estate and retailing.
 Goldman Sachs, the US finance major, is now beefing
up its presence in India and looking at various
options, including setting up an asset management
company, a brokerage unit, wealth management
division and a commodities outfit. It is also keen
on setting up a non-banking finance company.


 Besides American and Europe PE majors, other smaller

private investors are also striking smaller deals,
especially in the real estate and hospitality
sectors. (Pragnya, a Mauritius-based PE fund,
invested $40 million in real estate projects in
India.)
 But many private Indian business groups have also set up
private equity funds and venture capital funds. They
include the Anil Dhirubhai Ambani group, the Aditya
Birla group and the Future group.

 INDIA’S largest commercial bank, State Bank of India, has
also entered the PE segment

 The Insurance Regulatory and Development Authority of
India allows even insurance companies to invest up to
five per cent of their investible corpus in VC funds
that invest in infrastructure projects.

 The private equity industry in India is at a key
inflection 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.

Importance of private equity
 “Five years ago, entrepreneurs ran family owned
businesses & looked to the next generation to
take over the business. It was very difficult for
private equity players to invest as entrepreneurs
were reluctant to relinquish control of their
business. Now increasingly second generation
family members accept that ceding control of part
of the business is not a bad thing; PE investment
provides additional capital & brings additional
business expertise & improved governance.”
 Richard Laing , Chief Executive ,
 CDC 2008 outlook
Role of a PE investor
Private Equity Investments in
India
 Total FDI : USD 30
Billion
 Private equity :
USD 6 Billion
till June/July
2008
 Real estate
sector : USD 10
Billion

Value Addition to the investee company
Higher returns

Higher exports

Innovation
Reason for underperformance of PE
 Low Standards of Corporate Governance

 Limited Legal Recourse

 Dysfunctional Capital Markets

Solutions
 RETHINKING THE APPROACH
 - Go local
 - Add value
 - More discerning deal selection
 - Creative exit strategies
 - Improving access to public equity markets
 LOCAL GOVERNMENTS MUST PROMOTE EMERGING
MARKET DEVELOPMENT
 - Protecting shareholder rights
 - Promoting sound corporate governance
 standards.
 - Liberalizing investment restrictions for local
 institutional investors.
 DEVELOPMENT FINANCE INSTITUTIONS MUST
PROVIDE LEADERSHIP
 - Training for fund managers
 - Financing that attracts additional investors
 - Assist with policy and regulatory reform
 - Support creative new initiatives

CASE STUDY
WARBURG – PINCUS - BHARTI
One of the most reputed PE firms of US
Investments worth more than $ 26 billion
In more than 100 Companies
Presence in US, Europe & Asia
One of the first PE investors in India
 Positive Macro Factors –
Sector
National Telecom Policy encouraging
vDomestic Private Investment
vForeign Direct Investment

Competition to Fixed Line Service Providers

vHigh Installation Fees
vOrder Backlog

Mobile Telephony considered as a status symbol
Markets were Price Elastic
No Player having Pan-India presence
Telecommunication is a pre-requisite for Growth
 Negative Macro Factors – Sector

Lack of Regulatory Clarity


Economic viability of Telecommunication Project

Restriction on Licenses

Monthly Fixed License fee to government

No investor interest – No clarity on Exit route

Bharti having presence only in North India
 Landmark Transaction
The Deal equaled one – third of total PE
investments in India till date
PE investments in India were only 0.2% of
total GDP
FDI was only about 1% of GDP
First Investment done banking upon the
“India Growth Story”
Foreign Exchange fluctuation was a matter
of concern
Investment in Unorganized Sector
Investment in a privately owned company
 WP – Information Gaps

Bet on forecasts
Loss making business
Entering as a minority stakeholder
Ambiguity in Government Policies
Fragmented Sector – Cost efficiency
Mobile telephony was still a Luxury among
Indians
Business model based on Cost-Volume-Pricing
Shareholder Value & Corp
Governance
Think Big !!!
BT- Initial Suboptimal Strategy – Bell North
WP -Change in Plans – Pan India Presence
Growth Plans !!!
BT - Management Approach to build business from
scratch
WP - Time sensitive: Growth by Acquisition
Restructuring the corporate structure
BT- Adhoc structure
WP – Buy back stakes to reduce to conflicts of
interest
Inclusion of Strategic Partners - SINGTEL
Exit
conclusion
 Private equity funds are an excellent
investment options for venture
capitals and other organizations
looking for long-term investment in
projects that will bring in good
returns.

 However, they are not open for public
trading and not affordable to minor
investors and individuals.

 Forming a private equity fund is a good
option for small business owners who
have not been able to source funds for
their start-ups or long running
THANK YOU