Discussion Materials

January, 2017

1

Table of Contents

Section 1 Introduction to Private Equity

Section 2 Private Equity Environment in India : Investment Analysis

Section 3 Global Scenario

Section 4 Private Equity Environment in India : Exit Analysis

Section 5 Process and Documentation

Section 6 Industry Challenges

2

Section 1

Introduction to Private Equity

3

Role of PE in different stages of Company Life Cycle

• Own Funds

• Family &

Friends’ funds

Idea

Generation

Venture Capital

• Start-ups and

early stage

companies

• High risk

investment

• Higher dilution

Buyouts

• Matured

companies with

stable cash flows

• Ideal for

promoters looking

for exit

• LBOs / MBOs

Pre-IPO

• Sets valuation

benchmark for the IPO

• Investors include

hedge funds, select PE

funds

Growth Capital

• Mid to Late stage

companies

• Relatively lower

risk

• Significant target

segment for PEs

in India

Mezzanine /

Structured Finance

• Dilution is based

on performance

parameters

• Provides comfort

to investor if the

execution risk is

high

Initial

Funding

IPO

• Private Equity

Investors invest

as anchor

investors in IPO

• In some IPOs

Private Equity

investors part exit

QIP

• Private Equity

investors invest in

listed companies

through QIP

• Higher liquidity for

the investors

PIPEs

• Higher level of

liquidity

• Less stringent

covenants

• Instruments

include

preferential

allotment

4

Why Should Corporates go for Private Equity?

+

Finance

Best practices in financial reporting

and systems control; building

budgets and forecasts; assistance

in additional capital raising

Imparts Credibility

Enhanced credibility and visibility

with clients, suppliers, banks and

competitors; strengthens corporate

brand identity

Global Network of Strong Relationships

Through other portfolio companies;

through people network

Value

Addition

Long Term Partnership

Offers guidance and exercises

oversight over strategic decision

making through active board

participation

Managing Growth

Optimal organizational structure

and development, counseling

management on important matters

Corporate Governance

Systems to enforce stricter

accountability and transparent

disclosure; stronger internal control;

effective functioning of the board

5

PE Funds in India: Select Players

Global PE Funds Home Grown FundsSovereign Funds / Family Office Funds

/ Pension Funds

DNA of Private Equity Funds

Limited

Partners (LPs)

• Pension Funds

• Endowment Funds

• Insurance Companies

• Family Offices

• Fund of funds

• Banks

Private Equity

Funds

• Structured as Trust /

Company / LLP

• Have a finite life -

typically 7 to 10 years

• Generally follows the

2:20 fee structure

• Cannot re-invest

proceeds from exit

6

Section 2

PE Environment in India: Investment Analysis

7

Evolution of PE Industry in India

• SEBI (Venture capital

funds) regulations issued

• International PE funds like

Warburg Pincus enter

Indian market

• Domestic Funds like

ChrysCap commence

operations

1995 – 2000

• Government Committee

highlighted the need to

foster venture capital as a

source of funding new

entrepreneurs and

technology

1973

• Guidelines for venture capital

funds (VCFs) announced in 1988

• ICICI venture (earlier called

TDICI) is set up

• Regional capital funds APIDC

Venture Capital and GVFL are

set up

1988 – 1989

• Deal activity picks up

slowly

• Warburg Pincus exits

Bharti with 6x returns

• Leading international

funds like Temasek,

GAP, Carlyle, TPG set

up operations

2001 – 2005

• Investments and exits

come to a standstill on

account of the global

slowdown

2009

• Consumer

Technology is the new

sector attracting huge

investments

• More than USD 10 Bn

invested in Consumer

Technology from 2014

onwards

2014 onwards

• Deal activity jumps up

significantly with USD 35 bn

being invested in 839 deals

• Leading international funds like

KKR, Bain, Blackstone, Apax,

Goldman, Providence set up

operations

2006 – 2008

• Deal making resumes

with USD 7.5 Bn

invested in 2010

• Investments gradually

form an increasing

pattern from 2012

onwards

2010-13

From a Modest beginning in 1973, PE has now been well established in India

8

Private Equity Investment Trend

USD Bn

Source JM Financial Database

PE Investment Trend in India

8.0

15.9

11.4

3.4

7.5

8.2

7.0

8.3

10.4

18.5

11.4

0

2

4

6

8

10

12

14

16

18

20

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

USD 110 Bn invested in India by PE in the last 11 years

9

41%

9% 9%5% 5%

3% 3% 2%

23%

0%

10%

20%

30%

40%

50%

IT/ITES Financial Services Healthcare Consumer Real Estate Power & PowerAncillary

Education Infrastructure Others

No. of Deals By Sector : Last 5 Years

Sectoral Analysis

Source JM Financial Database

22%

11% 10% 8% 7%4% 4% 4%

17%

13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

IT/ITES Financial Services Real Estate Healthcare Power & PowerAncillary

Infrastructure Auto & Auto Ancillary Consumer Others

Consumer

Technology

35%

Deal Value By Sector : Last 5 Years

10

Section 3

Global Scenario

Private Equity Vs. World Assets Under Management$ Bn

Source PwC Report 2015

Private Equity AUM

3,272

7,400

64,300

1,02,000

0

20,000

40,000

60,000

80,000

1,00,000

1,20,000

2012 2020P

World Asset Under Mgmt.

11

Global Private Equity Scenario

All Private Equity Assets under Management, 2000 - 2015$ Bn

370 356 460 548 668 892 1,256 1,202 1,414 1,791 2,056 2,361 2,583 2,718 2,822

374 402 401 404 556799

1,002 1,0751,066

1,0001,028

9661,240 1,254 1,343

744 758 861 952 1,224

1,691

2,258 2,277 2,480

2,791 3,084

3,327 3,823 3,972 4,165

0

1,000

2,000

3,000

4,000

5,000

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Dec-1

4

Ju

n-1

5

Unrealized Portfolio Value Dry Powder

Global PE Capital raised$ Bn

93

207

349

538

666 681

318 299352

405

547 555 527

0

100

200

300

400

500

600

700

800

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Note

1. Includes funds with final close and represents year funds held their final close; distressed PE includes distressed debt,

special situation and turnaround funds; other includes PIPE and hybrid funds

Source Preqin Fund Manager Profiles and Performance Analyst 2016

Top Listed Private Equity Funds Globally Mkt Cap (USD) in Bn

Blackstone Group LP 30.8

Partners Group Holding AG 13.0

KKR & Co LP 12.5

3i Group PLC 8.2

Apollo Global Management 8.1

Oaktree Capital Group LLC 6.3

Carlyle Group 5.2

Ares Management 3.7

Source Bloomberg

12

Section 4

PE Environment in India : Exit Analysis

13

Value Creation Drivers

• Returns generated by operational improvement driven by:

– Revenue expansion

– Margin improvement

– Add-on acquisitions

– Organic growth

• Returns generated by timing the business cycle driven by:

– Buying low and selling high

• Multiple expansion: Difference between entry and exit multiple

– Multiple uplift x Exit EBITDA

• Multiple uplift: Exit EV / EBITDA – entry EV / EBITDA

• Returns generated by paying down debt

– Entry net debt – exit net debt

• Improves the Return on Equity for equity shareholders

EBITDA Generation

Multiple Expansion

Debt Reduction

1

2

3

14

Exit Options

• Listing Company on stock exchange, involves offering portion of the PE shares to the public and coupled with fresh capital raising

• This has traditionally been the preferred mode of exit

• IPO gives higher valuation as compared to the other exit options, so long as the markets are buoyant

• The main challenge is that valuation is dependent on prevailing capital market conditions

PE –

Public

Market

• Selling the PE fund’s stake through open market transactions on a public stock exchange

• It is one of the most common modes of exit in India

• It is the least time consuming and the simplest route of exit for a PE investor

• Similar to an IPO the main challenge here is that valuation is dependent on prevailing capital market conditions

PE – Open

Market

Sales

• Selling the PE fund’s stake to a strategic player or merger with another Company

• M&A transactions are less impacted by conditions in capital market due to their strategic nature

• Strategic buyers pay a higher premium due to operational synergies or to get a head start into a new market

• If a majority stake is on offer it is possible for the seller to get a high control premium

PE –

Strategic

• Selling the PE fund’s stake to another financial buyer or another PE investor

• Different funds have different expertise and may want to enter a firm at a later stage of growth that best suits their skills and target

• Companies that have had a PE investor for some time usually have better processes and corporate governance standards

PE to PE

• Purchase of own shares by the Company / Promoters from the PE fund at a mutually agreed internal rate of return

• Guarantees a minimum agreed return for the PE investor

• This exit option is considered difficult to implement due to lack of enforceability

• Option of last resort and is tried when the other exit routes do not give favourable valuations

Buyback

15

Private Equity Exit Trend

Source JM Financial Database

2.0

3.0

4.4

2.1

6.6

4.1

6.8

3.1

3.5

6.4

5.5

0

1

2

3

4

5

6

7

8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

No. of

Deals42 68 123 88 115 848128

Private Equity Exits in IndiaUSD Bn

103 140 80

USD 48 Bn of PE exits in India in the last 11 years

16

Section 5

Process and Documentation

Process

• Materials comprise of Teaser, Information Memorandum and Financial Model

• Capture the right positioning which is key in generating investor interest

• Key target investors to be identified based on deal size, sector interest, orientation and

hunger for the deal

• Optimum set to ensure bandwidth of the management is utilized well and also good

enough to create competitive tension

• IM and Model to be shared post signing the NDA

• Meeting with investors to bring investors up the curve to save management time

• Deal contours explained

• Management meetings to focus on strategy and partnership related aspects

• Indicative term sheets from investors will outline the deal and rights parameters

• Shortlist based on terms, level of engagement, high probability of closure, potential

value add and importantly chemistry with the investor

• Diligence could be aided by Vendor Due Diligence in order to economize on

management bandwidth

• Final negotiations, transaction documents

• Conditions precedents to be complied with

• Funding

Preparation of Materials

Targeting the Correct

Investor Universe

Meetings with

Investors

Term Sheets

from Investors,

Shortlist and

Diligence

Closing

17

18

Documentation – Typical Rights covered

CommentsClauses

Lock-in Period

Investor Director

• Lock-in for substantial sale of Promoter shareholding for minority investments by a PE investor

• Ability to appoint director(s) on the board of the Company

Anti-Dilution • Protection for an Investor from dilution resulting from later share issuance at a lower price than the originally investment

• Right to Investor to subscribe to the fresh issue of shares before the same are offered to any third party

• Obligation of seller to negotiate the sale of the shares with the ROFO right holder before offering them to third parties

• If the ROFO right holder is not interested in purchasing the shares or cannot reach an agreement with the seller, the seller has no further

obligation to the ROFO right holder and may sell the shares freely

Pre-emption Right

Right of First Offer (ROFO)

• Right but not the obligation to buy the shares being offered by another shareholder for sale after the seller has received offers from third

parties and the offeree shall be entitled to purchase such shares if he can match the price being offered by the third party

Right of First Refusal (ROFR)

• Right for minority shareholder to join the transaction and sell his stake in the Company in case the majority shareholder sells his stake in the

CompanyTag Along

• Right to force the other shareholders to sell their shares in the Company along with the right holderDrag Along

• Investor exit obligation on Company through (i) IPO (ii) Third Party Sale (iii) Strategic (iv) Company / Promoter Buy-backExit Options

• Right to receive preference over the shareholders in case of Liquidation Event

• Liquidation event is winding up of the company, a voluntary liquidation, a merger, acquisition, amalgamation, change in control, consolidation,

transfer in any manner of all or substantially all of the Company’s assets

Liquidation Preferences

19

Section 6

Industry Challenges

20

Challenges facing the Private Equity Industry

Challenges facing the PE Industry

Investments

Exits

Fundraising

• Investors are cautious with investments and

invest only after thorough reference checks

about the promoter and proper due diligence

• The deal closure time has increased

significantly

• Though the PE investment activity has shown

a healthy uptrend, the ability of the

investments to be converted into profitable

exits still remains difficult

– Volatility in Indian capital markets and

other economic challenges has made exits

difficult

• LPs are becoming more selective about the

funds in which they will choose to invest

– Their greater scrutiny makes it imperative

for PE funds to differentiate themselves in

their investment approach and portfolio

management skills

Potential areas of conflict between PE firms

and Investee companies

Investee Company

• Companies may find PE firms too intrusive in

their business affairs

• Bringing alignment amongst family members

can be challenging to implement changes

expected by PE firms

• The leadership team may find it challenging to

work in new ways

PE Funds

• Expect compliance with covenants

• Push for change in management style,

business model, cost structure etc.

• Set up strict management information and

performance evaluation system