Exits/Harvesting

 Private equity investment occurs typically through

closed end funds where the private equity firm serves
as the general partner and investors such as pension
funds endowments serve as limited partners.

 Funds are typically 10 years in length meaning that the

fund must liquidate all of its holdings within 10 years of
the start of the fund.
Forms of Private Equity Exits
 There are mostly three forms of exits for private equity
investors

 IPOs-the firm sells itself to the public on an

exchange such as BSE or NSE or international stock
exchange.
 Strategic Sale-is the sale of the firm to another firm
that is in the same business
 Financial Sale-is the sale of the firm to another
private equity firm or other financial institution.
IPO
Why go public?
 Most firms decide to go public when
 The firm has reached the point at which initial
investors have invested the total amount of
capital that they are willing to provide and are
focused on liquidity (a return on their investment)
and
 The firm has made sufficient progress to make a
public offering viable and needs significant
additional capital for research and development
or product launches, or working capital to expand
operations.
 The firm is not able to attract new investors, who
would rather target earlier-stage firms with a
lower valuation.
Advantages
 A public offering of securities provides a firm
access to broader financial markets to fund
capital requirements. Once a firm goes public, it
can use its stock instead of cash to acquire
strategies pieces of technology or other
businesses.
 The firm will also have the benefit of public
visibility, and so long as the firm is performing
well and the market is receptive, the firm can
return to the public market to raise additional
capital.
 Finally, the IPO will value the firm’s share at
many times price paid by the founders and will
afford them access to the public market for sale
their shares.
Disadvantages
 A public firm must meet a host of legal obligations
that are inapplicable to private firms, including
disclosure obligations and fiduciary duties owed to
hundreds of shareholders whom the entrepreneur
and the board have never, and will never, meet.
 The firm will forever in the fishbowl of public
scrutiny. Disclosure requirements will apply not
only to the firm but also to officers and directors,
who must inform the marketplace of the amount
of firms stock they and their family own and of
any sales, gifts, purchases or other changes in
ownership of that stock, including stock option
grants and exercises.
 In addition. Going public is expensive, often
costing more than in SEBI filing fees, state
securities filling fees, stock exchange or over-the-
counter registration fees, legal fees, accounting
fees, printing costs, and increased premiums for
director and officer liability insurance.
 The process consumes an enormous amount of
management time. Once public, the firm will
spend significantly more in legal fees, accounting
fees and printing costs, and increased premiums
for director and office liability insurance. Thus,
once public, the firm will spend significantly more
in legal, accounting and printing fees than in the
past.
 In addition, an entrepreneurs contemplating a public
offering because of the desire for liquidity for his or her
stock should be aware of the restrictions on the sale of
that stock, even if it is fully vested.
 The first impediment to sale is that the investment
banks that manage the public offering will require the
entrepreneurs and all other significant shareholders to
agree to not to sell their stock for at least six months
after the offering.
 Second, after the lock-up period has expired, rules
against insider trading will severely limit when the stock
can be sold without risk.
 Third, because the entrepreneur likely is an affiliate
(an officer, director or owner of more than 5% to 10% of
the outstanding shares), the amount of the stock that
can be sold during any three-month period is limited
under the SEBI laws.
Exit Routes: Pros and Cons
IPO
Pros Cons
Higher valuations Time consuming and costly
affair
Transparency and Fairness Disclosure requirement
Positioning and public Exposed PE firm to the risk
recognition of a significant decline in
firm value
Liquidity Pressure to get profitable
Employee options Partial exit
Lockups
Is the firm an IPO candidate?
 The entrepreneur and the board must determine
whether the firm should pursue an immediate IPO or an
alternative strategy such as waiting under the firm has
made additional progress so that it can command a
higher valuation in an IPO or pursuing a merger with a
private or public firm.
 Factors to consider include:
 The nature of firm’s existing products and product pipeline
 The strength and depth of the firm’s research,
development and management teams;
 The competitive landscape; and
 The firm’s anticipated capital requirements.
 The timing of an IPO is often dependent on conditions
outside of the firm’s control, such as
 General market receptivity to IPOs at the time;
 Whether the relevant industry is “hot”;
 Whether major institutional investors have exceeded the
proportion of their portfolios reserved for investments in
the relevant industry; and
 Whether there has been an announcement of disappointing
financial or regulatory results by a competitor in the
industry that causes the market to be wary of the industry
as a whole.
The IPO Process

 Selecting the managing underwriters

 Timing
 Registration Statement
 Participants in the IPO Process
 Due Diligence
 Determination of Stock Price and Offering Size
 Contents of the Prospectus
Book Building Process

 Book building is a mechanism with which an IPO can

take place. The offering firm indicates a price range,
including an upper and lower limit, rather than a single
offering price for shares. Investors are free to bid within
the range and the price is then determined by orders
placed.
 Details of the book-building are as follows:
 The company, in consultation with its lead merchant
bankers, determines an indicative price range and
announces the public issue.
 Investors interested in the issue submit their bid and
application form, noting their price and volume options to
members of the syndicate, who are electronically linked. A
bid, when submitted, is uploaded to a platform and
investors can track the book’s status on their bidding
terminals. Investors can then revise their bids before the
offer closes.
 Once the bidding period is over, the lead manager
ascertains demand and decides the issue price and
allocation pattern in consultation with the issuer.
In Case of Book Built Issue-
Fixed Price Issue
 In case an issuer company makes an issue of 100% of the
net offer to public through voluntary book building
process under profitability route:
 Not less than 35% of the net offer to the public shall be
available for allocation to retail individual investors
 Not less than 15% of the net offer to the public shall be
available for allocation to non-institutional investors, i.e.,
investors other than retail individual investors and
qualified institutional investors
 Not more than 50% of the net offer to the public shall be
available for allocation to qualified institutional buyers
In Case of Compulsory Book-
Built Issues
 According to SEBI, the shares should be allocated on a
proportionate basis, as follows:
 75% of the total offer must be allocated to qualified
institutions bidders.
 15% or less must be available for allocation to non-
institutional bidders.
 10% must be allotted to retain individual bidders.
 If the issue remains under subscribed in the non-institutional
and retail individual bidder categories, spill-over to any
other category or a combination of categories is allowed
at the discretion of the selling shareholders and company, in
consultation with the stock exchange.
 In case of over subscription of an issue, allotment of shares
in the non-institutional and retail individual bidder
categories is done on a proportionate basis, while
allotment in the qualified institutional bidder category is
done on a discretionary basis.
 Only retail individual bidders are allowed to revise their
bids during the offer period, while qualified institutional
bidders and non-institutional bidders are not allowed to do
so.
In Case of Fixed Price Issue
 The proportionate allotment of securities to the
different investor categories in a fixed price issue is as
described below:
 A minimum 50% of the net offer of securities to the
public shall initially be made available for allotment to
retail individual investors.
 The balance net offer of securities to the public shall be
made available for allotment to:
 Individual applicants other than retail individual investors
and
 Other investors including corporate bodies/institutions
irrespective of the number of securities applied for
Category of Investors
 Retail Individual Investors: means an investor who
applies or bids for securities of or for a value of not
more than Rs 200,000.
 Non Institutional Investors-: all applicants other than
QIBs or individuals applying for more than Rs 200,000
are considered as NIIs. Typically, this category includes
High net worth individuals and corporate bodies.
 Qualified Institutional Buyers: are those institutional
investors who are perceived to posses expertise and the
financial strength to evaluate and invest in the capital
markets. A QIB is defined by SEBI as mutual funds, FIIs,
PFIs, SDCs, PF, NIF, Insurance funds etc.
The Role of Lockups
 Generally PE firms are not permitted from divesting any
of their equity holdings in the first 180 days following
the IPO. The period of time is referred to as the IPO
lockup.

 When the issuing firm and the investment bank enter

into an agreement to offer securities in an IPO, they
sign an underwriter agreement.

 The agreement typically include a covenant such as:

 “the selling securityholders agree that without
your (the investment bank’s) prior written
consent, the selling securityholders will not,
directly or indirectly, sell, offer, contract to sell,
make any short sale, pledge or otherwise dispose
of any shares of common stock or any securities
convertible into or exercise for or any rights to
purchase or acquire common stock for a period of
180 days following the commencement of the
public offering of the stock by the underwriters”
 Thus, lockup typically 180 days in length, prevents
a surplus of stock hitting the market all at once.
The agreement to not to sell or sell-shorty their
equity holdings is governed only by this underwriter
agreement. It is not mandated by SEBI or any
securities Laws that regulate insider trading.

 When a firm’s equity comes off of lockup, the stock

price experiences a significant stock price decline,
even though the date is fully known and the
expiration is fully anticipated.
 In addition, insider trading has to be regulated by
the firm itself.

 After the lockup expires, private equity managers

often continue to hold the shares in the company
for months or even years.

 And once they decide to liquidate their positions,

they can sell the shares on the open market
IPO Valuation to Select the
Final Offering Price
 Industry
 Size(sales and/or Assets)
 Growth
 Risk
 Leverage
 Operations
 Geography
Multiple Method

  
Once the comparable firm or firms have been selected,
the value of the issuing firm can be derived by
multiplying the selected market multiple of the
comparable firm by the relevant operating statistic. For
example

 = Share price
 = Share price
 = Share price
 DCF as the IPO Valuation Methodology
 WACC
 APV
 CCF
SALE
IPO VERSUS SALE OF THE
FIRM
 Because of the disadvantages of going public, an
entrepreneur considering a public offering may wish to
think about selling the firm instead.
 Indeed, the sale alternative is a far more common path to
liquidity for the entrepreneur, particularly done with a
firm experiencing slow but steady growth, or in an
industry not currently favored by investment bankers.

 Often a larger corporation in the same general line of

business will be interested in the purchase.
 Potential buyers often surface about the time a firm is
ready to go to public because they are well aware that
once a firm is public, they will have to pay a 15% to 30%
premium over the public market price to induce the target
firm’s board to approve the same.
 In any event, there are many professionals
available to help interested entrepreneur find an
appropriate buyer, including business brokers and
corporate finance professionals at investment
banks.
Sale versus IPO
 The sale of a firm can offer several advantages
compared to a public offerings.
 In a cash sale, the shareholders of the target firm can
lock in their gains and have immediate liquidity,
although they will have to pay taxes on their gain. The
target shareholders will not be subject to the risk that
stock market conditions will change and the IPO will be
called off, or to market risk on their shares if the IPO
does proceed.
 If the sale is to be for stock of the acquiring firm, the
sellers will face certain restrictions on disposition of the
stock, particularly if the transaction is to be tax free.
 Although market risk remains in a stock-for stock deal
because the entrepreneur now holds stock of a public
limited firm, the market price of a more established
firm is usually less volatile than that of a newly public
company whose share price can be depressed for years
if early quarterly earnings for not meet the
expectations of the market.
 In addition, the entrepreneur acquiring stock of a
merger or acquisition can engage in certain hedging
activities against market risk that would be precluded
by a lockup agreement with investment banks.
 The sale of a business enables entrepreneur to
avoid having to deal with the countless pressures
of being a public company, including meeting of
exceeding revenue and earnings estimates quarter
after quarter, dealing with stock analysis who are
constantly seeking information and assurances and
communicating with and owing duties to
shareholders the entrepreneur has never met.
 However, there are some disadvantages of sale
too.
 The price paid per share by the buyer will usually be
less than the firm could obtain in a public offering
 The entrepreneur’s upside (potential profit) is
capped at the purchase price if the consideration is
cash or is determined by the stock market
performance of the acquiring firm, if the
consideration is stock. Many entrepreneurs do not
want to let control of their upside slip from their
own hands.
Sale-Strategic

Pros Cons
Complete exit Resistance from the
management
Synergies from the deal Competitive risk
Higher price Can be slow or risky to
complete. Antitrust concerns
Sale-Financial

Pros Cons
Complete exit Low selling price
No anti trust issue Because of the use of debt,
the deal may not go through
Quick
Eliminate the issue of
competitive risk
Partial Exit-Leveraged
Dividend Recapitalizations
 A form of partial exit that grown in popularity over the
past several years
 In a leveraged divided recap, the firm issues new debt
that is then paid out in the form of a special dividend
to existing shareholders.
 Unlevered dividends recaps are also possible, where the
firm issues a special dividend using cash on hand.
However, due to the fact that only cash on hand in paid
out, unlevered recaps are much smaller than leveraged
dividend recaps.
Leveraged Dividend
Recapitalizations
Pros Cons
Provides significant return to Increases the risk
equity holders
Allows PE firms to retain the Reaps are not a full exit,
upside as their share of the thus PE firms continue to
equity remains unaffected hold a substantial fraction of
the equity

PE firms retain control of Is dependent on the ability

the firm to raise new debt
JUST DIAL
1. What are the value drivers in the JustDial business
model?
2. What is JustDial’s current financial position?
3. What is JustDial’s competitive advantage over local
and global competitors?
4. What is the rationale behind JustDial’s IPO?
5. Discuss in detail the book-building process JustDial
adopted to raise funds? What is the “safety net
mechanism” the JustDial IPO provided to retail
investors?
6. What are pros and cons of a company’s going public?
7. What are JustDial’s future opportunities?
8. What are JustDial’s future concerns?
9. Was the timing of JustDial’s IPO appropriate?
10. Could JustDial’s price range of Rs 470-530 be justified?
Should Mani lower the price range or delay the IPO? As an
investor, would you be ready to participate in JustDial’s
IPO?
11. Would this IPO be successful in the market, and would
it be able to meet the expectations of private equity
investors, who had come a long way and had supported the
company at every step?
 Assumptions
Assumtions Sheet

Tax Rate 34%

Secured Loan 1.49
Interest on Secured Loan 8.85%

All numbers are in Rs. Million except per share data FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

Income
Adjustment in Income during the Year - - - - - - - - - -
Growth in Income from Operations 44% 23% 52% 37% 44% 60% 60% 60% 60% 60% 60%
Growth in Other Income 11% 192% -35% 109% 96% 91% 65% 90% 86% 83% 81%

Expenditure
Operating & other Expenses as % of Revenue 35% 30% 26% 24% 25% 22% 21% 20% 18% 18% 18%
Personnel Expenses as % of Revenue 60% 61% 51% 53% 50% 46% 42% 38% 34% 30% 26%
Charges on Credit card as % of Revenue 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Interest on Secured Loans 0.02 0.00 0.25 0.10 0.13 0.09 0.05 0.00 0.00 0.00 0.00
Financial Expenses 0 0 0 0 0 0 0 0 0 1 1

Balance Sheet
Growth on Capital Advances NA 16% 117% 84% 101% 92% 97% 94% 96% 95% 95%
Investments
Opening Balance 421 416 808 1,182 1,568 1,568 1,568 1,568 1,568 1,568 1,568
Less: Cancelled Preference Share Investment - - - (145) - - - - - - -
Closing Balance       421 416 808 1,037 1,568 1,568 1,568 1,568 1,568 1,568 1,568

Sundry Debtors No. of Days 2 2 0 0 1 1 1 1 1 1 1

Other Current Assets, Loans & Advances as % of Revenue 9% 2% 5% 3% 4% 3% 4% 4% 4% 4% 4%
Secured Loans (See workings) 3 1 1 - - - - -

Sundry creditors (see Workings) 28 14 32 77 16 184 121 344 326 747 970
Deferred revenue 344 383 413 678 678 678 678 678 678 678 678
Sundry deposits 1 0 0 1 1 1 1 1 1 1 1
Other liabilities 75 88 134 182 182 182 182 182 182 182 182
Total       448 486 579 939 877 1,046 983 1,206 1,188 1,608 1,832

Equity Shares (63827967 equity shares of Rs. 10 each) 638 638 4,238 4,238 4,238 4,238 4,238
Add: New Issue (360000000 equity shares of Rs. 10 each) 3,600 - - - - -
Total Equity Share Capital               638 4,238 4,238 4,238 4,238 4,238 4,238

Workings
Sundry creditors 16 28 19 30 49 44
Sundry creditors in Days 20 25 20 23 27 40 40 40 40 40 40

Repayment Schedule
Opening Balance 1 1 1 - - - -
Interest Payment (0.13) (0.09) (0.05) - - - -
Principal Repayment (0) (0) (1) - - - -
Closing Balance               1 1 - - - - -
Valuation

Risk Free Rate (RBI 10 year issued on April 16, 2007 maturity onApril 16,7.49%
2017)
Beta 1.20
Equity Risk Premium (based on last one year market return) 12%
Cost of equity (WACC) 22%
Terminal Growth Rate 5.9%
Value of the IPO

 Value per share based on our assumptions was

Rs 621
Conclusion
 It presents the challenges of valuing a fast
growing company in a nascent sector.
 Business model is completely new and industry
comparable are not available for its valuation.
 The IPO is being criticized by market analysts
decrying overvaluation.
 Bottom line: investors should not rely blindly on
the analysis of market experts. Instead, they
should do their own analysis based on the
fundamentals of the company in order to
determine the fair price of the issue.
What happened?
 JustDial did not revise the price band of its IPO
and finally floated it on the market at the
stipulated price and time.
 The issue closed on May 22, 2013 and was
oversubscribed by 11.63 times.
 The company’s shares were listed on June 5,2013
at RS 590 which is at a premium of 11.32% from
the offer price of RS 530 for institutional investors
and a 22% premium for retail investors.
 On the first day the stock surged by as much as at Rs
612.35. On the first day the stock surged by as much
as at Rs 612.35. In Apirl 2014, the stock price hovered
around Rs1200-1400, providing a return of more than
100% to investors.

 JustDial’s share price performance clearly negates the

opinion of market experts by providing superior
returns to its investors and proving that it is not
always wise to act according to the advice of the
experts.
THANKS