Description
This is a presentation describes concept of private equity in detail.
Apparel Retail Industry
PRIVATE EQUITY – Key to growth
Contents
1.
2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. What is Private Equity How are PE firms structured? Private Equity Vs Venture Capital Venture Capital Growth Capital Management Buyout Leveraged Buyout Private Investment in Public Equity(PIPE) Overview of Investment Process Advantages & pains of PE Examples of benefitted investee companies Overview PE in India in 2008 Top PE deals in India Profile of Top players in PE Value addition by PE Firms Current global outlook of PE Future Outlook….
2
What is Private Equity (1/2)?
• Companies/entrepreneurs can raise equity capital through 2 main sources – Public
Markets (IPOs, rights issues, follow-on offerings, QIPs, GDR/ADR) & Private Markets (Private Equity (PE))
• PE can be of various types:
1. Angel investments: very early-stage, highest risk, smaller investment size 2. Venture capital: Start up-stage; post proof of concept; high risk, high return 3. Growth capital: At inflexion point in terms of growth and scale;
4. Leveraged Buyouts (LBO): Taking a public company private using debt 5. Management Buyout (MBO): Similar to LBO but driven by existing management
team
6. Hedge Funds: Combination of alternative investment classes; High risk – High
Reward.
•
Objective of all private equity investors is to get a suitable return (IRR) on exit (i.e., sale of their stake in the investee company)
1
What is Private Equity (2/2)?
• There are different “types” of Private Equity investors, namely:
1. Sovereign Wealth Funds: Owing affiliation to various Governments, Central banks
etc. (e.g., Temasek, GIC, ADIA)
2. “Pure” Private Equity Funds: Players like KKR, TPG, Warburg, Carlyle, Blackstone
who raise money from various “limited partners” (LPs; described in detail later)
3. “Affiliated” or “Sponsored” Funds: Players like Goldman Sachs Principal
Investments, Citigroup Venture Partners, Merrill Lynch PE – in which an investment bank is the major sponsor – money coming from either the firm?s proprietary capital or from HNI clients of the Wealth Management division
4. Hedge funds: Players like Quantum, D E Shaw who, in addition to secondary
markets, also put in direct PE infusion into companies
5. Endowments: Players like CALPERS, CALSTERS, TIA-CREEF, Harvard
Foundation; who, in addition to being LPs in PE funds, also put in money directly
6. Corporate arms: Business houses/”rich individuals” have also started their own PE
outfits – Dell Capital, Intel Capital, Premji Investments, Tata Capital etc.
2
How are PE firms structured?
• Organized as Partnerships or as “Limited
Liability Companies (LLC)” depending on jurisdictions & regulations
PE Fund
• Also need various registrations in „tax haven
locations? like Mauritius, Cayman Islands, Cyprus, Bermuda etc. in which to set up the main funds with “advisory outfits” in the country of actual operations
General Partner
Limited Partner
• Two types of partners:
1. General Partners (GPs): Responsible
for day-today control and management of the funds
• Fund managers • Management fees (as % of Funds Under Management) + carried interest (% of profit earned above “hurdle rate” *
2. Limited Partners (LPs): Contributors of
capital from which the GPs invest; few LPs (called „anchor LPs?) also have seats on the Investment committee (IC)
3
• Financial Investors • Can be institutions OR HNIs • Assured return on investment – “hurdle rate” • Additional profit participation if fund earns more
* The rate of return that a fund promises before its general partners
receive an increased interest in the proceeds of the fund
Private Equity v/s Venture capital
Private Equity • Often PE and VC are used interchangeably but that?s not the right way….. •Investment at any stage in the life of the company • Includes VC, LBO, MBO, Growth capital etc • Moderate risk • Large and established companies • Higher success rate VC • Subset of PE • Start up stage investment • Very high risk • Target smaller companies • Lower success rate
MBO
Growth Capital
LBO
4
Venture Capital
• Venture Capital (VC) primarily
finances start-up ventures to attract capital
• The VC is ready to take significant
risk for the investment being made
• Very few investments of the VCs are
successful
• VCs generally earn higher returns
than market in case of successful investments
• Take active role in the management
of investee companies
• Due to large capital outflow and
development of new technologies VCs have developed specialization
5
Venture Capital
• Stages in VC funding • Seed capital stage: To develop product or business ideas and to undertake market Research • Start-up stage: The investee company has a thorough business plan and is ready to initiate its marketing effort.
• Early business stage: The company will have already initiated its selling effort.
• Expansion finance stages • 1st Stage: Financing required for full-scale (that is, of an economic if not optimum size) production or manufacturing and sales facility.
• 2nd Stage: Additional financing, including for essential working capital, to expand
operations for efficient capacity utilization of the plant • 3rd stage: Financing is for major plant expansion projects and introduction of facilities to produce new product lines, and often takes the form of „mezzanine finance?. • 4th Stage: to prepare a company for going public or for strategic acquisition by a larger company, is known as „bridge financing or pre-IPO placement.
6
Growth Capital
•Type of private equity investment • Typically minority stake in relatively
high growth companies
• Generally capital is required for
expansion, entering new markets, acquisition or restructuring
• Structured as common equity,
preferred equity or as structured security instruments
• The investors are generally growth
capital firms, buyout firms or last stage
venture capitals
• Most of the deals in the emerging
markets like India happen through
growth capital
7
Management Buyouts (MBO)
•
MBO – a special form of LBOs - when incumbent management is included in the buying group and key executives perform an important role in the LBO transaction, then such
transactions are called as MBOs
• Critical Issue for MBO: Buying group needs to be fair to minority/outside shareholders to
avoid accusations of securities fraud against controlling shareholders
• Typical stages in an MBO are:
1. Raise the cash required for the buyout (in the form of a bridge loan from the bankers
secured on asset collaterals) and design a new management incentive system
2. Buy all the outstanding shares of the company and take it private 3. Sell off some parts of the firm (considered non-core OR non-value adding) to reduce
the debt
4. Management strives to increase profits and cash flows through various techniques
which it was constrained to use in the earlier structure for a variety of reasons
5. Over time, take a „leaner and meaner? company public and cash out on the ESOPs
earned
8
Leveraged Buyouts (LBO)
• LBO is the acquisition of a company using significant amount of borrowed money (bonds or loans) - typical ratios were as high as 9:1 in the heydays;
• LBOs are rare due to the high funding costs - given freeze in credit markets and banks
distress. • Examples of famous LBOs include RJR-Nabisco (KKR), Debenhams (Merrill, TPG & CVC) • Actual modus operandi of LBOs:
• Public company is taken private by buying out the equity shareholders using debt;
assets of the company itself are used as collaterals • Objective: Adds value by realizing opportunities and introducing efficiencies that were not being captured while the company was operating under a different ownership
structure
• Major downside: Significant risk due to very high leverage – double-edged sword since debt magnifies the upside as well as the downside; also there are some risks of missed upside since a high proportion of cash flows are being diverted to debt servicing
9
Private Investment in Public Equity
• A private investment in public equity, (PIPE) - the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors • Attractive for PE investors where control investments are harder to execute • Generally, companies pursue PIPEs even when capital markets are difficult to raise debt or equity via more traditional means Top five PIPE deals in FY 2008
Source: SMC capital report
10
Overview of PE investment process
Preliminary Screening Management meetings & model assessment Formal due-diligence
3 – 6 months
Investment approvals
Final negotiations & closure
Post this process, several legal/regulatory formalities need to be completed (e.g., information to the stock exchange, Board approval, FIPB consent etc. where ever required) post which, the „money goes in? and the transaction is completed
11
Advantages of Private Equity
Strategic direction: Helping investee companies in strategic decision-making, key
“people decisions”, bringing their own relationships and networks to bear for the
portfolio company (e.g., putting an Indian healthcare company in touch with US healthcare company for best practices sharing)
• Streamlined processes & adherence to regulations – e.g. insistence on the audit
being conducted by top 4 audit firms, having standard operating procedures etc. • Longer investment horizons: Enables a company to plan better & take long-term
value maximizing decisions as opposed to “quarterly earnings-driven” actions only
• Fewer reporting requirements & lesser bureaucracy
• Ability to provide better incentives for managers since the PE firms’ incentives are
fully aligned
12
Pains of Private Equity
Conflict of interest: PE firms involved in running of several companies, some of which could have opposing interests (e.g., in same industry/related industries)
• Strong focus on “exit” : PE firms likely to drive value-maximization from an “exit”
standpoint which may not necessarily be conducive to the firm’s interests (e.g. a
major capex decision could be opposed since it will be a drag on earnings for some
time)
• Lack of transparency: Lesser public accountability (compared to say, a mutual fund
or even a corporate management)
• Use of leverage: In boom times, this can help PE firms to enhance returns multi-fold
but in bad times…..
• Excessive profit maximization drive, sometimes at the cost of social responsibility?
13
Examples of benefitted investee companies
Investee Suzlon Energy Year Net sales EBITDA EBITDA % PAT PAT % FY 04 791.15 184.04 23.3% 145.9 18.4% Investor Chrys Capital FY 05 1917.5 472.71 24.7% 361.46 18.9% FY 06 3788.46 1003.09 26.5% 821.19 21.7% Date 12/4/2005 Rs. Crores FY 07 5380.37 1294.54 24.1% 1061.14 19.7%
Investee Bharati Tele
Investors Sequoia Capital, Westbridge Capital Partners, CISCO systems
Date 12/6/2005
Year Net sales EBITDA EBITDA % PAT PAT %
FY 05 7903.03 2900.64 36.7% 1210.67 15.3%
FY 06 11231.47 4069.62 36.2% 2012.08 17.9%
FY 07 17851.6 7265.45 40.7% 4033.23 22.6%
Rs. Crores FY 08 25761.11 10746.88 41.7% 6244.19 24.2%
14
Overview of Private Equity in India
• Notwithstanding the contraction of capital raising in 2008, private equity funds' interest in
India is not waning
• There are 78 funds (exclusively focusing on India) on road in 2009 looking to raise $24 billion
• The concern is how many of the funds would be able to meet their targets • Last year, only about 16 of the 84 funds were able to close, raising a total of $4.56 billion
compared to 37 funds closed in 2007 which raised a total of $9.68 billion
Pan Asia PE Funds with an India focus Year No. of funds Aggregate capital raised/sought raised/sought ($bn) 2005 21 3.7 2006 57 26.9 2007 62 31 2008 49 36.8 2009* 117 59.2 *On road
PE funds focusing exclusively on India Year No. of funds Aggregate capital raised/sought raised/sought ($bn) 2005 16 2.8 2006 36 9.6 2007 35 9.5 2008 30 9.2 2009* 78 24 *On road
source: VC Circle
15
Overview of Private Equity in India
• Over the year, India Inc has shown its resilience by being an important destination for International Private Equity funding. • In the year 2008 PE investments in India have declined as an effect of the global economic
slowdown in the financial markets
• The value of PE deals during the first half of 2008 was $7.1 billion, the second half was $3.5 billion
PE Market - Comparison 2008 PE Transaction size ($bn) No. of Deals Average Deal size ($mn) Deals > $100 mn % of deals in unlisted companies 10.59 312 39 28 79% 2007 19.03 405 55 53 86%
* all the values are approximate
16
Top PE deals in 2008
Investor Fund Investee Company Sector Stake Deal size (USD millions) 640 450 325 278.69 250
Providence Equity Partners Symphony Capital MPC Synergy
Aditya BirlaTelecom
Telecom
20% NA NA 3% NA
DLF Assets (Property fund Real estate & Infrastructure of DLF Ltd.) Management Phoenix Mills Ltd. Real estate & Infrastructure Management Power & Energy Real estate & Infrastructure Management
Orient Global Tamarind Fund Cairn India Ltd Pte Ltd DE Shaw Mack Star Marketing
Kohlberg Kravis Roberts & Company
Bharti Infratel (wholly Telecom owned subsidiary of Bharti Airtel Ltd)
Indiabulls Power Services Power & Energy Textile & Apparels
2%
250
Farallon Capital
23% 25%
246.88 225
GIC Special Investments Pte Reid & Taylor India Ltd. Ltd. ( bought from S Kumars Nationwide Ltd.) 17
Profiles of Top PE players
Name of the Fund KKR Stage Mature/ Hedge funds/ VC fund Mature Past Investments in India Flextronics, Bharti Infratel
Blackstone Advisors India Pvt Ltd
Warburg Pincus Temasek Holdings Apax Partners Carlyle India Advisors Ltd Chrys Capital
Allcargo, MTAR Techonologies, Nagarjuna Constructions, Gokaldas Exports Intelenet Global Services, Emcure Pharmaceuticals, Nuziveedu Seeds
Mature/Growth/VC Laqshya Media, Gujarat Ambuja, Havells, Gangavaram Port Mature Mature Mature/Growth ICICI Bank, Bharti Airtel, Apollo Hospitals Enterprise Ltd Repco Home Finance, HDFC, Allsec Technologies, Claris Lifesciences, Financial Software, Learning Mate Solutions, Newgen Imaging Axis Bank, Bajaj Auto Finance, Balkrishna,Centurion Bank, Hathway, Idea Cellular, ING Vysya Bank, Intas Pharma, JMT Auto, Mahindra Finance, Mankind Pharma, Moser Baer, NewPath, Parksons, Redington, Shriram Group, Spanco Tele, Titagarh Wagons NCDEX, Cremica, On mobile, IL&FS Transportation Networks ICSA (India) Ltd., National Stock exchange, Spice Jet, Fulford India Ltd Sigma Electric Manufacturing Corp., Tejas Networks India Ltd., Vatika Group Bharti Infratel Ltd., India Infoline
Growth
Goldman Sachs
Mature/Growth
18
Value addition by PE Firms
• In-house consulting firm: • Captive consulting outfit, Capstone focuses on due diligence of
•
target (~70% work) as well as PMI (~30% work) – comprises ~20 partners Has hired ex-BCG consultant, Dean Nelson to lead consulting assignments with portfolio companies alongwith Capstone
• Partner/Entrepreneur-In-Residence: • Hire industry veterans from various sectors (hi-tech, ITES,
pharma) as „Operating Partners? who not only add value in the deal evaluation stage but also take-over & run the company post acquisition (esp, during the initial days of management shake-out) till the new management is hired
• In-house operations group: • Uses Operations group to develop in-depth, independent value
creation plan before acquisition closes, and already starts planning implementation • Plan is used as basis for discussion with target management or as reason for hiring new management
19
Current Global Outlook of PE
• PE firms have enjoyed extraordinary growth and returns over past 5 years, but with the collapse in the debt market PE firms are undergoing severe consequences
• After the unprecedented financial events of the past year, private equity is operating in an
environment where fundraising will become more competitive • As per research done by Boston Consulting Group at least 20% of the 100 largest LBO
firms will go out of business
• Industry experts believe that the industry is at an inflexion point, the investors need to look long and hard at how they create value in the investee company
• The economic slowdown is forcing private equity firms to focus on earnings growth as the
primary driver of internal rates of return.
20
Future Outlook…..(1/2)
Key Predictions of experts:
• Private equity activity may moderate but will remain strong • Demand for investment capital from companies in the region will rise • Local private equity firms will be the most active investors • Some new global players will enter the market • Minority stake transactions will predominate • Investment opportunities will be better than before • Sovereign wealth funds in the region will focus more of their attention on the region
21
Future Outlook…..(2/2)
? Rapid growth of emerging markets • Billions of people will achieve relative prosperity • Opportunities for investment and development will abound
?Technological innovation
• Technology is evolving at a more rapid pace than at any time in human history • This will increase productivity and living standards globally • Improvements in science and medical technology will directly benefit millions of people
? New Private Equity Deals Look Different
• More private equity firms are investing alongside corporate partners or sovereign wealth funds. Example: Blackstone and NBC Universal?s $3.5 billion joint acquisition of the Weather Channel • Longer holding periods due to more time spent on improving operational performance of portfolio companies • Exits will be delayed until the financial crisis subsides
22
Apparel Retail Industry
PRIVATE EQUITY – Key to growth
Thank You
doc_492271023.ppt
This is a presentation describes concept of private equity in detail.
Apparel Retail Industry
PRIVATE EQUITY – Key to growth
Contents
1.
2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. What is Private Equity How are PE firms structured? Private Equity Vs Venture Capital Venture Capital Growth Capital Management Buyout Leveraged Buyout Private Investment in Public Equity(PIPE) Overview of Investment Process Advantages & pains of PE Examples of benefitted investee companies Overview PE in India in 2008 Top PE deals in India Profile of Top players in PE Value addition by PE Firms Current global outlook of PE Future Outlook….
2
What is Private Equity (1/2)?
• Companies/entrepreneurs can raise equity capital through 2 main sources – Public
Markets (IPOs, rights issues, follow-on offerings, QIPs, GDR/ADR) & Private Markets (Private Equity (PE))
• PE can be of various types:
1. Angel investments: very early-stage, highest risk, smaller investment size 2. Venture capital: Start up-stage; post proof of concept; high risk, high return 3. Growth capital: At inflexion point in terms of growth and scale;
4. Leveraged Buyouts (LBO): Taking a public company private using debt 5. Management Buyout (MBO): Similar to LBO but driven by existing management
team
6. Hedge Funds: Combination of alternative investment classes; High risk – High
Reward.
•
Objective of all private equity investors is to get a suitable return (IRR) on exit (i.e., sale of their stake in the investee company)
1
What is Private Equity (2/2)?
• There are different “types” of Private Equity investors, namely:
1. Sovereign Wealth Funds: Owing affiliation to various Governments, Central banks
etc. (e.g., Temasek, GIC, ADIA)
2. “Pure” Private Equity Funds: Players like KKR, TPG, Warburg, Carlyle, Blackstone
who raise money from various “limited partners” (LPs; described in detail later)
3. “Affiliated” or “Sponsored” Funds: Players like Goldman Sachs Principal
Investments, Citigroup Venture Partners, Merrill Lynch PE – in which an investment bank is the major sponsor – money coming from either the firm?s proprietary capital or from HNI clients of the Wealth Management division
4. Hedge funds: Players like Quantum, D E Shaw who, in addition to secondary
markets, also put in direct PE infusion into companies
5. Endowments: Players like CALPERS, CALSTERS, TIA-CREEF, Harvard
Foundation; who, in addition to being LPs in PE funds, also put in money directly
6. Corporate arms: Business houses/”rich individuals” have also started their own PE
outfits – Dell Capital, Intel Capital, Premji Investments, Tata Capital etc.
2
How are PE firms structured?
• Organized as Partnerships or as “Limited
Liability Companies (LLC)” depending on jurisdictions & regulations
PE Fund
• Also need various registrations in „tax haven
locations? like Mauritius, Cayman Islands, Cyprus, Bermuda etc. in which to set up the main funds with “advisory outfits” in the country of actual operations
General Partner
Limited Partner
• Two types of partners:
1. General Partners (GPs): Responsible
for day-today control and management of the funds
• Fund managers • Management fees (as % of Funds Under Management) + carried interest (% of profit earned above “hurdle rate” *
2. Limited Partners (LPs): Contributors of
capital from which the GPs invest; few LPs (called „anchor LPs?) also have seats on the Investment committee (IC)
3
• Financial Investors • Can be institutions OR HNIs • Assured return on investment – “hurdle rate” • Additional profit participation if fund earns more
* The rate of return that a fund promises before its general partners
receive an increased interest in the proceeds of the fund
Private Equity v/s Venture capital
Private Equity • Often PE and VC are used interchangeably but that?s not the right way….. •Investment at any stage in the life of the company • Includes VC, LBO, MBO, Growth capital etc • Moderate risk • Large and established companies • Higher success rate VC • Subset of PE • Start up stage investment • Very high risk • Target smaller companies • Lower success rate
MBO
Growth Capital
LBO
4
Venture Capital
• Venture Capital (VC) primarily
finances start-up ventures to attract capital
• The VC is ready to take significant
risk for the investment being made
• Very few investments of the VCs are
successful
• VCs generally earn higher returns
than market in case of successful investments
• Take active role in the management
of investee companies
• Due to large capital outflow and
development of new technologies VCs have developed specialization
5
Venture Capital
• Stages in VC funding • Seed capital stage: To develop product or business ideas and to undertake market Research • Start-up stage: The investee company has a thorough business plan and is ready to initiate its marketing effort.
• Early business stage: The company will have already initiated its selling effort.
• Expansion finance stages • 1st Stage: Financing required for full-scale (that is, of an economic if not optimum size) production or manufacturing and sales facility.
• 2nd Stage: Additional financing, including for essential working capital, to expand
operations for efficient capacity utilization of the plant • 3rd stage: Financing is for major plant expansion projects and introduction of facilities to produce new product lines, and often takes the form of „mezzanine finance?. • 4th Stage: to prepare a company for going public or for strategic acquisition by a larger company, is known as „bridge financing or pre-IPO placement.
6
Growth Capital
•Type of private equity investment • Typically minority stake in relatively
high growth companies
• Generally capital is required for
expansion, entering new markets, acquisition or restructuring
• Structured as common equity,
preferred equity or as structured security instruments
• The investors are generally growth
capital firms, buyout firms or last stage
venture capitals
• Most of the deals in the emerging
markets like India happen through
growth capital
7
Management Buyouts (MBO)
•
MBO – a special form of LBOs - when incumbent management is included in the buying group and key executives perform an important role in the LBO transaction, then such
transactions are called as MBOs
• Critical Issue for MBO: Buying group needs to be fair to minority/outside shareholders to
avoid accusations of securities fraud against controlling shareholders
• Typical stages in an MBO are:
1. Raise the cash required for the buyout (in the form of a bridge loan from the bankers
secured on asset collaterals) and design a new management incentive system
2. Buy all the outstanding shares of the company and take it private 3. Sell off some parts of the firm (considered non-core OR non-value adding) to reduce
the debt
4. Management strives to increase profits and cash flows through various techniques
which it was constrained to use in the earlier structure for a variety of reasons
5. Over time, take a „leaner and meaner? company public and cash out on the ESOPs
earned
8
Leveraged Buyouts (LBO)
• LBO is the acquisition of a company using significant amount of borrowed money (bonds or loans) - typical ratios were as high as 9:1 in the heydays;
• LBOs are rare due to the high funding costs - given freeze in credit markets and banks
distress. • Examples of famous LBOs include RJR-Nabisco (KKR), Debenhams (Merrill, TPG & CVC) • Actual modus operandi of LBOs:
• Public company is taken private by buying out the equity shareholders using debt;
assets of the company itself are used as collaterals • Objective: Adds value by realizing opportunities and introducing efficiencies that were not being captured while the company was operating under a different ownership
structure
• Major downside: Significant risk due to very high leverage – double-edged sword since debt magnifies the upside as well as the downside; also there are some risks of missed upside since a high proportion of cash flows are being diverted to debt servicing
9
Private Investment in Public Equity
• A private investment in public equity, (PIPE) - the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors • Attractive for PE investors where control investments are harder to execute • Generally, companies pursue PIPEs even when capital markets are difficult to raise debt or equity via more traditional means Top five PIPE deals in FY 2008
Source: SMC capital report
10
Overview of PE investment process
Preliminary Screening Management meetings & model assessment Formal due-diligence
3 – 6 months
Investment approvals
Final negotiations & closure
Post this process, several legal/regulatory formalities need to be completed (e.g., information to the stock exchange, Board approval, FIPB consent etc. where ever required) post which, the „money goes in? and the transaction is completed
11
Advantages of Private Equity
Strategic direction: Helping investee companies in strategic decision-making, key
“people decisions”, bringing their own relationships and networks to bear for the
portfolio company (e.g., putting an Indian healthcare company in touch with US healthcare company for best practices sharing)
• Streamlined processes & adherence to regulations – e.g. insistence on the audit
being conducted by top 4 audit firms, having standard operating procedures etc. • Longer investment horizons: Enables a company to plan better & take long-term
value maximizing decisions as opposed to “quarterly earnings-driven” actions only
• Fewer reporting requirements & lesser bureaucracy
• Ability to provide better incentives for managers since the PE firms’ incentives are
fully aligned
12
Pains of Private Equity
Conflict of interest: PE firms involved in running of several companies, some of which could have opposing interests (e.g., in same industry/related industries)
• Strong focus on “exit” : PE firms likely to drive value-maximization from an “exit”
standpoint which may not necessarily be conducive to the firm’s interests (e.g. a
major capex decision could be opposed since it will be a drag on earnings for some
time)
• Lack of transparency: Lesser public accountability (compared to say, a mutual fund
or even a corporate management)
• Use of leverage: In boom times, this can help PE firms to enhance returns multi-fold
but in bad times…..
• Excessive profit maximization drive, sometimes at the cost of social responsibility?
13
Examples of benefitted investee companies
Investee Suzlon Energy Year Net sales EBITDA EBITDA % PAT PAT % FY 04 791.15 184.04 23.3% 145.9 18.4% Investor Chrys Capital FY 05 1917.5 472.71 24.7% 361.46 18.9% FY 06 3788.46 1003.09 26.5% 821.19 21.7% Date 12/4/2005 Rs. Crores FY 07 5380.37 1294.54 24.1% 1061.14 19.7%
Investee Bharati Tele
Investors Sequoia Capital, Westbridge Capital Partners, CISCO systems
Date 12/6/2005
Year Net sales EBITDA EBITDA % PAT PAT %
FY 05 7903.03 2900.64 36.7% 1210.67 15.3%
FY 06 11231.47 4069.62 36.2% 2012.08 17.9%
FY 07 17851.6 7265.45 40.7% 4033.23 22.6%
Rs. Crores FY 08 25761.11 10746.88 41.7% 6244.19 24.2%
14
Overview of Private Equity in India
• Notwithstanding the contraction of capital raising in 2008, private equity funds' interest in
India is not waning
• There are 78 funds (exclusively focusing on India) on road in 2009 looking to raise $24 billion
• The concern is how many of the funds would be able to meet their targets • Last year, only about 16 of the 84 funds were able to close, raising a total of $4.56 billion
compared to 37 funds closed in 2007 which raised a total of $9.68 billion
Pan Asia PE Funds with an India focus Year No. of funds Aggregate capital raised/sought raised/sought ($bn) 2005 21 3.7 2006 57 26.9 2007 62 31 2008 49 36.8 2009* 117 59.2 *On road
PE funds focusing exclusively on India Year No. of funds Aggregate capital raised/sought raised/sought ($bn) 2005 16 2.8 2006 36 9.6 2007 35 9.5 2008 30 9.2 2009* 78 24 *On road
source: VC Circle
15
Overview of Private Equity in India
• Over the year, India Inc has shown its resilience by being an important destination for International Private Equity funding. • In the year 2008 PE investments in India have declined as an effect of the global economic
slowdown in the financial markets
• The value of PE deals during the first half of 2008 was $7.1 billion, the second half was $3.5 billion
PE Market - Comparison 2008 PE Transaction size ($bn) No. of Deals Average Deal size ($mn) Deals > $100 mn % of deals in unlisted companies 10.59 312 39 28 79% 2007 19.03 405 55 53 86%
* all the values are approximate
16
Top PE deals in 2008
Investor Fund Investee Company Sector Stake Deal size (USD millions) 640 450 325 278.69 250
Providence Equity Partners Symphony Capital MPC Synergy
Aditya BirlaTelecom
Telecom
20% NA NA 3% NA
DLF Assets (Property fund Real estate & Infrastructure of DLF Ltd.) Management Phoenix Mills Ltd. Real estate & Infrastructure Management Power & Energy Real estate & Infrastructure Management
Orient Global Tamarind Fund Cairn India Ltd Pte Ltd DE Shaw Mack Star Marketing
Kohlberg Kravis Roberts & Company
Bharti Infratel (wholly Telecom owned subsidiary of Bharti Airtel Ltd)
Indiabulls Power Services Power & Energy Textile & Apparels
2%
250
Farallon Capital
23% 25%
246.88 225
GIC Special Investments Pte Reid & Taylor India Ltd. Ltd. ( bought from S Kumars Nationwide Ltd.) 17
Profiles of Top PE players
Name of the Fund KKR Stage Mature/ Hedge funds/ VC fund Mature Past Investments in India Flextronics, Bharti Infratel
Blackstone Advisors India Pvt Ltd
Warburg Pincus Temasek Holdings Apax Partners Carlyle India Advisors Ltd Chrys Capital
Allcargo, MTAR Techonologies, Nagarjuna Constructions, Gokaldas Exports Intelenet Global Services, Emcure Pharmaceuticals, Nuziveedu Seeds
Mature/Growth/VC Laqshya Media, Gujarat Ambuja, Havells, Gangavaram Port Mature Mature Mature/Growth ICICI Bank, Bharti Airtel, Apollo Hospitals Enterprise Ltd Repco Home Finance, HDFC, Allsec Technologies, Claris Lifesciences, Financial Software, Learning Mate Solutions, Newgen Imaging Axis Bank, Bajaj Auto Finance, Balkrishna,Centurion Bank, Hathway, Idea Cellular, ING Vysya Bank, Intas Pharma, JMT Auto, Mahindra Finance, Mankind Pharma, Moser Baer, NewPath, Parksons, Redington, Shriram Group, Spanco Tele, Titagarh Wagons NCDEX, Cremica, On mobile, IL&FS Transportation Networks ICSA (India) Ltd., National Stock exchange, Spice Jet, Fulford India Ltd Sigma Electric Manufacturing Corp., Tejas Networks India Ltd., Vatika Group Bharti Infratel Ltd., India Infoline
Growth
Goldman Sachs
Mature/Growth
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Value addition by PE Firms
• In-house consulting firm: • Captive consulting outfit, Capstone focuses on due diligence of
•
target (~70% work) as well as PMI (~30% work) – comprises ~20 partners Has hired ex-BCG consultant, Dean Nelson to lead consulting assignments with portfolio companies alongwith Capstone
• Partner/Entrepreneur-In-Residence: • Hire industry veterans from various sectors (hi-tech, ITES,
pharma) as „Operating Partners? who not only add value in the deal evaluation stage but also take-over & run the company post acquisition (esp, during the initial days of management shake-out) till the new management is hired
• In-house operations group: • Uses Operations group to develop in-depth, independent value
creation plan before acquisition closes, and already starts planning implementation • Plan is used as basis for discussion with target management or as reason for hiring new management
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Current Global Outlook of PE
• PE firms have enjoyed extraordinary growth and returns over past 5 years, but with the collapse in the debt market PE firms are undergoing severe consequences
• After the unprecedented financial events of the past year, private equity is operating in an
environment where fundraising will become more competitive • As per research done by Boston Consulting Group at least 20% of the 100 largest LBO
firms will go out of business
• Industry experts believe that the industry is at an inflexion point, the investors need to look long and hard at how they create value in the investee company
• The economic slowdown is forcing private equity firms to focus on earnings growth as the
primary driver of internal rates of return.
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Future Outlook…..(1/2)
Key Predictions of experts:
• Private equity activity may moderate but will remain strong • Demand for investment capital from companies in the region will rise • Local private equity firms will be the most active investors • Some new global players will enter the market • Minority stake transactions will predominate • Investment opportunities will be better than before • Sovereign wealth funds in the region will focus more of their attention on the region
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Future Outlook…..(2/2)
? Rapid growth of emerging markets • Billions of people will achieve relative prosperity • Opportunities for investment and development will abound
?Technological innovation
• Technology is evolving at a more rapid pace than at any time in human history • This will increase productivity and living standards globally • Improvements in science and medical technology will directly benefit millions of people
? New Private Equity Deals Look Different
• More private equity firms are investing alongside corporate partners or sovereign wealth funds. Example: Blackstone and NBC Universal?s $3.5 billion joint acquisition of the Weather Channel • Longer holding periods due to more time spent on improving operational performance of portfolio companies • Exits will be delayed until the financial crisis subsides
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Apparel Retail Industry
PRIVATE EQUITY – Key to growth
Thank You
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