black book

NAGINDAS KHADWALA COLLEGE OF COMMERECE

ARTS AND MANAGEMENT STUDIES

MALAD- WEST

PROJECT REPORT ON:

EMERGENCE OF DEPOSITORY SYSTEM IN INDIA

IN PARTIAL FULFILLMENT OF

T.Y.B.COM

(FINANCIAL MARKETS)

SEMESTER V

PRESENTED BY: KINJAL J. SHAH

PROJECT GUARD: PROF. POONAM SHAH.

UNIVERSITY OF MUMBAI

ACADEMIC YEAR 2014-2015

ACKNOWLEDGEMENT

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On the event of completion of my project “Private Equity in India”. I take the opportunity to express my deep sense of gratitude towards all those people without whose guidance, inspiration and timely help, this project would have never seen light of the day.

Any accomplishment requires the effort of many people and this is not different. I find great pleasure in expressing my deepest sense of gratitude towards my project guide Prof. Kavita Shah for her valuable guidance and encouragement in implementing the project. It is because of her efforts I was able to cover the manifold features of the project. She have supported and guided in every possible way during this project.

INDEX

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SR.NO CHAPTER PAGE

NO

1 Introduction 4

2 Private Equity in India 7

3 History of Private Equity 9

4 Categories of Private Equity Investment 11

5 Types and Functions of Private Equity 13

6 Advantage and Disadvantage of Private Equity 17

7 Stages and Process of Private Equity Investment 20

8 Various Roles of Private Equity in Indian Economy 22

9 Way of Entry and Exit in Private Equity 26

10 SEBI Guidelines 29

11 Reforms and Proposals Which Affect Private Equity 32

12 Risk in Private Equity 36

13 Difference Between Private Equity and Venture capital 39

14 Liquidity in The Private Equity Market 40

15 World’s Top 10 Private Equity Firms 43

16 Case Study on Private Equity Firms 44

17 Conclusion 51

Bibliography

Appendix

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CHAPTER 1: INTRODUCTION

EXECUTIVE SUMMARY

India has been witnessing dramatic shift in the size and composition of foreign investment

inflows over the couple of years. Institutional investors in developed countries, for their

portfolio diversification, are continuously seeking new destinations and innovative and

alternative asset class. The Private Equity is the best alternative for raise money from an

investment.

The Private Equity sector is broadly defined as investing in a company through a negotiated

process. Investments typically involve a transformational, value-added, active management

strategy. Typical forms of private equity include venture capital, growth and mezzanine

capital, angel investing and private equity funds.

The major PE investments influencing the deal values are Real Estate, IT/IT Services and

Energy sectors. The other sectors, which have significantly contributed to private equity deal

value, are Logistics and Telecom. The most active sectors in terms of deal volume were IT/IT

Services and Manufacturing. Other sectors contributing significantly to deal volume were

Banking, Finance and Insurance and Real estate.

The PE investment pattern follows various stages, which are: seed, start-up, expansion and

replacement stages. It also follows a definite process, which is Deal Origination (Deal

Sourcing), Due Diligence, Deal Negotiation, Deal Closing (Acquisition), Post Acquisition

Monitoring and Exit (IPO, Trade Sale or Buy back).

The Indian Private Equity sector consists of many historical deals so far. Among them

“Warburg Pincus – Bharti Tele Venture” deal was beginning of the PE era in India. By this

deal WP earned 450 % return on its investment which is the biggest earning by any PE fund

worldwide. On the other hand Bharti Tele Ventures Ltd. has result as huge growth in its

subscribers and became 2nd largest telecom company in India. After the deal with Warburg

Pincus, Bharti spread its business worldwide. Currently Bharti have its operations not only in

India, but also in Bangladesh, Sri Lanka and 15 countries in South Africa. Subsequently

Bharti became 5th largest telecom service provider all over the world.

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The project would deal with understanding the role of private equity in India, analysing their

investment strategies, their success in the Indian financial market, future of Private Equity in

India, regulatory norms in India and how it is beneficial of Indian companies. An attempt will

also be made to understand their investment patterns.

The project also includes the understanding of competitive profile of different players in

Private Equity in India and the different types of funding done by them in India like - seed

funding, expansion capital, and buyout financing, financing restructuring of companies and

providing mezzanine capital. These all types are discussed in “Major Private Equity Deals in

India.”

The project is consists of top PE firms in the world. According to Private Equity International

(PEI), the largest private equity firm in the world today is TPG, based on the amount of

private equity direct-investment capital. Some other players in this ranking are; Goldman

Sachs Capital Partners, The Carlyle Group, Kohlberg Kravis Roberts, The Blackstone Group

and Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and

analysing the reason for investments in selective sectors. With India becoming a preferred

investment destination, this heightened level of private equity activity is likely to continue for

some time to come.

OBJECTIVES

The objective of this project is to study the role of private equity in India, analysing their

investment strategies, their particular strategies, by studying their entry strategies into India

financial markets, regulatory norms in India and how it is beneficial of Indian companies. An

attempt will also be made to understand their investment patterns.

The project would also deal with some of the major deals in India, this would help to

understand the investment pattern and then the exit strategies of the PE firms.

The project would also help to understand us what could be the scenario of the private equity

investments in the near future, and comparison of the Indian scenario with rest of the world

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METHODOLOGY

Study would be mainly focused on the analysis and use of secondary data. Extensive use of

various journals, magazines and different online resources would be used to construct the

investment pattern. The entry strategies of the Private Equity firms with respect to the legal

structure will be understood. Various surveys and data sources would be used to figure out

the current investments in the economy.

Study would not be limited to the study only, but analysis of various deals and the pattern of

investment would also be done.

It would also include various regulatory norms for the private equity investment in India and

the benefits and hazards of PE over public equity.

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CHAPTER 2: PRIVATE EQUITY IN INDIA

MEANING

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.

The attraction is the potential for substantial long-term gains. The fund is generally set up as a limited partnership, with a private equity firm as the general partner and the investors as limited partners.

Private equity firms typically charge substantial fees for participating in the partnership and tend to specialize in a particular type of investment.

For example, venture capital firms may purchase private companies, fuel their growth, and

either sell them to other private investors or take them public. Corporate buyout firms buy

troubled public firms, take them private, restructure them, and either sell them privately or

take them public again.

Private equity provides long-term, committed share capital, to help unquoted companies grow

and succeed. If you are looking to start up, expand, buy into a business, buy out a division of

your parent company, turnaround or revitalize a company, private equity could help you to do

this. Obtaining private equity is very different from raising debt or a loan from a lender, such

as a bank. Lenders have a legal right to interest on a loan and repayment of the capital,

irrespective of your success or failure. Private equity is invested in exchange for a stake in

your company and, as shareholders; the investors’ returns are dependent on the growth and

profitability of your business.

The Private Equity sector is broadly defined as investing in a company through a negotiated

process. Investments typically involve a transformational, value- added, active management

strategy.

Private equity also means.

1. Ownership in a corporation that is not publicly-traded. That is, private equity involves

investing in privately held companies. Most of the time, private equity investors are

institutional investors and high net-worth individuals who have a large amount of capital to

commit to these investments. Private equity is usually held for a long period of time, and

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trading in it is useful when a company is in danger of bankruptcy, because it provides access

to a great deal of capital very quickly.

2. A company that trades in private equity. Often, private equity firms band together and buy

out publicly-traded companies, making them privately held.

Definitions

The Private Equity sector is broadly defined as investing in a company through a

negotiated process. Investments typically involve a transformational, value-added,

active management strategy. Typical forms of private equity include venture capital,

growth and mezzanine capital, angel investing and private equity funds. Private equity

investors seek to obtain a substantial interest in a company in order to have an active

role in firms’ strategic decisions. Their goal is to boost the value of a company and

walk away with substantially more money at the time of liquidating their investment.

Private equity consists of investors and funds that make investments directly into

private companies or conduct buyouts of public companies. Capital for private equity

is raised from institutional investors and can be used to fund new technologies,

expand working capital within an owned company, make acquisitions, or to

strengthen a balance sheet. The term "private equity" encompasses a range of

techniques used to finance commercial ventures in ways that do not involve the use of

publicly tradable assets such as corporate stock or bonds.

Equity capital that is not quoted on a public exchange. Private equity consists of

investors and funds that make investments directly into private companies or conduct

buyouts of public companies that result in a delisting of public equity. Capital for

private equity is raised from retail and institutional investors, and can be used to fund

new technologies, expand working capital within an owned company, make

acquisitions, or to strengthen a balance sheet.

The majority of private equity consists of institutional investors and accredited

investors who can commit large sums of money for long periods of time. Private

equity investments often demand long holding periods to allow for a turnaround of a

distressed company or a liquidity event such as an IPO or sale to a public company.

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CHAPTER 3: HISTORY OF PRIVATE EQUITY

Investors have been acquiring businesses and making minority investments in privately held companies since the dawn of the industrial revolution. Merchant bankers in London and Paris financed industrial concerns in the 1850s; most notably CréditMobilier, founded in 1854 by Jacob and Isaac Pereire, who together with New York based Jay Cooke financed the United States Transcontinental Railroad.

Andrew Carnegie sold his steel company to J.P. Morgan in 1901 in arguably the first true modern buyout

Later, J. Pierpont Morgan's J.P. Morgan & Co. would finance railroads and other industrial companies throughout the United States. In certain respects, J. Pierpont Morgan's 1901 acquisition of Carnegie Steel Company from Andrew Carnegie and Henry Phipps for $480 million represents the first true major buyout as they are thought of today.

Due to structural restrictions imposed on American banks under the Glass–Steagall Act and other regulations in the 1930s, there was no private merchant banking industry in the United States, a situation that was quite exceptional in developed nations. As late as the 1980s, Lester Thurow, a noted economist, decried the inability of the financial regulation framework in the United States to support merchant banks. US investment banks were confined primarily to advisory businesses, handling mergers and acquisitions transactions and placements of equity and debt securities. Investment banks would later enter the space, however long after independent firms had become well established.

With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture capital.

Origins of modern private equity

It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation. (ARDC) and J.H. Whitney & Company.[1]

ARDC was founded by Georges Doriot, the "father of venture capitalism"[2] (founder of INSEAD and former dean of Harvard Business School), with Ralph Flanders and Karl Compton (former president of MIT), to encourage private sector investments in businesses run by soldiers who were returning from World War II. ARDC's significance was primarily that it was the first institutional private equity investment firm that raised capital from sources other than wealthy families although it had several notable investment successes as well.

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[3]ARDC is credited with the first major venture capital success story when its 1957 investment of $70,000 in Digital Equipment Corporation (DEC) would be valued at over $355 million after the company's initial public offering in 1968 (representing a return of over 500 times on its investment and an annualized rate of return of 101%).[4] Former employees of ARDC went on to found several prominent venture capital firms including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and Morgan, Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan).[5] ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged ARDC with Textron after having invested in over 150 companies.

J.H. Whitney & Company was founded by John Hay Whitney and his partner Benno Schmidt. Whitney had been investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney. By far, Whitney's most famous investment was in Florida Foods Corporation. The company, having developed an innovative method for delivering nutrition to American soldiers, later came to be known as Minute Maid orange juice and was sold to The Coca-Cola Company in 1960. J.H. Whitney & Company continues to make investments in leveraged buyout transactions and raised $750 million for its sixth institutionalprivate equity fund in 2005.

Before World War II, venture capital investments (originally known as "development capital") were primarily the domain of wealthy individuals and families. One of the first steps toward a professionally managed venture capital industry was the passage of the Small Business Investment Act of 1958. The 1958 Act officially allowed the U.S. Small Business Administration (SBA) to license private "Small Business Investment Companies" (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States. Passage of the Act addressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed in the capital markets for long-term funding for growth-oriented small businesses. Additionally, it was thought that fostering entrepreneurial companies would spur technological advances to compete against the Soviet Union. Facilitating the flow of capital through the economy up to the pioneering small concerns in order to stimulate the U.S. economy was and still is the main goal of the SBIC program today.[6] The 1958 Act provided venture capital firms structured either as SBICs or Minority Enterprise Small Business Investment Companies (MESBICs) access to federal funds which could be leveraged at a ratio of up to 4:1 against privately raised investment funds. The success of the Small Business Administration's efforts are viewed primarily in terms of the pool of professional private equity investors that the program developed as the rigid regulatory limitations imposed by the program minimized the role of SBICs. In 2005, the SBA significantly reduced its SBIC program, though SBICs continue to make private equity investments.

The real growth in Private Equity surged in 1984 to 1991 period when Institutional Investors, e.g. Pension Plans, Foundations and Endowment Funds such as the Shell Pension Plan, the Oregon State Pension Plan, the Ford Foundation and the Harvard Endowment Fund started investing a small part of their trillion dollars portfolios into Private Investments - particularly venture capital and Leverage Buyout Funds

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CHAPTER 4: CATEGORIES OF PRIVATE EQUITY INVESTMENT

1. Venture capital: an investment to create a new company, or expand a smaller company

that has undeveloped or developing revenues

2. Buy-out: acquisition of a significant portion or a majority control in a more mature

company. The acquisition normally entails a change of ownership

3. Special situation: investments in a distressed company, or a company where value can be

unlocked as a result of a one-time opportunity (Changing industry trends, government

regulations etc.)

Private equity firms generally receive a return on their investments through one of three

ways: an IPO, a sale or merger of the company they control, or a recapitalization. Unlisted

securities may be sold directly to investors by the company (called a private offering) or to a

private equity fund, which pools contributions from smaller investors to create a capital pool.

Considerations for investing in private equity funds relative to other forms of

investment include:

Substantial entry costs, with most private equity funds requiring significant initial

investment (usually upwards of $1,000,000) plus further investment for the first few

years of the fund.

Investments in limited partnership interests (which is the dominant legal form of

private equity investments) are referred to as "illiquid" investments which should earn

a premium over traditional securities, such as stocks and bonds. Once invested, it is

very difficult to gain access to your money as it is locked- up in long-term

investments which can last for as long as twelve years. Distributions are made only as

investments are converted to cash; limited partners typically have no right to demand

that sales be made.

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If a private equity firm can't find good investment opportunities, it will not draw on an

investor's commitment. Given the risks associated with private equity investments, an

investor can lose all of its investment if the fund invests in failing companies. The risk

of loss of capital is typically higher in venture capital funds, which invest in

companies during the earliest phases of their development, and lower in mezzanine

capital funds, which provide interim investments to companies which have already

proven their viability but have yet to raise money from public markets.

Consistent with the risks outlined above, private equity can provide high returns, with

the best private equity managers significantly outperforming the public markets.

For the above mentioned reasons, private equity fund investment is for those who can

afford to have their capital locked in for long periods of time and who are able to risk

losing significant amounts of money. This is balanced by the potential benefits of

annual returns which range up to 30% for successful funds.

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CHAPTER 5: TYPES AND FUNCTIONS OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories:

1. Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itself

committing all the capital required for the acquisition. To do this, the financial sponsor will

raise acquisition debt which ultimately looks to the cash flows of the acquisition target to

make interest and principal payments. Acquisition debt in an LBO is often non-recourse to

the financial sponsor and has no claim on other investment managed by the financial sponsor.

Therefore, an LBO transaction's financial structure is particularly attractive to a fund's limited

partners, allowing them the benefits of leverage but greatly limiting the degree of recourse of

that leverage.

2. Venture capital

Venture capital is a broad subcategory of private equity that refers to equity investments

made, typically in less mature companies, for the launch, early development, or expansion of

a business. Venture investment is most often found in the application of new technology, new

marketing concepts and new products that have yet to be proven. Venture capital is often sub-

divided by the stage of development of the company ranging from early stage capital used for

the launch of start-up companies to late stage and growth capital that is often used to fund

expansion of existing business that are generating revenue but may not yet be profitable or

generating cash flow to fund future growth. Entrepreneurs often develop products and ideas

that require substantial capital during the formative stages of their companies' life cycles.

Many entrepreneurs do not have sufficient funds to finance projects themselves, and they

prefer outside financing. To compensate the risk of failure, venture capitalist's seeks higher

return from these investments. Venture Capital is often most closely associated with fast-

growing technology and biotechnology fields.

3 .Growth capital

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Growth capital refers to equity investments, most often significant 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.

Companies that seek growth capital will often do so in order to finance a transformational

event in their life cycle. These companies are likely to be more mature than venture capital

funded companies, able to generate revenue and operating profits but unable to generate

sufficient cash to fund major expansions, acquisitions or other investments. The primary

owner of the company may not be willing to take the financial risk alone. By selling part of

the company to private equity, the owner can take out some value and share the risk of

growth with partners.

4 .Distressed and Special Situations

Distressed or Special Situations are a broad category referring to investments in equity or

debt securities of financially stressed companies. The "distressed" category encompasses two

broad sub-strategies including:

"Distressed-to-Control" or "Loan-to-Own" strategies where the investor acquires debt

securities in the hopes of emerging from a corporate restructuring in control of the

company's equity;

"Special Situations" or "Turnaround" strategies where an investor will provide debt

and equity investments, often "rescue financing" to companies undergoing operational

or financial challenges.

5 .Mezzanine capital

Mezzanine capital refers to subordinated debt or preferred equity securities that often

represent the most junior portion of a company's capital structure that is senior to the

company's common equity. This form of financing is often used by private equity investors to

reduce the amount of equity capital required to finance a leveraged buyout or major

expansion. Mezzanine capital, which is often used by smaller companies that are unable to

access the high yield market, allows such companies to borrow additional capital beyond the

levels that traditional lenders are willing to provide through bank loans. In compensation for

the increased risk, mezzanine debt holders require a higher return for their investment than

secured or other more senior lenders.

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6. Secondaries

Secondary investments refer to investments made in existing private equity assets. These

transactions can involve the sale of private equity fund interests or portfolios of direct

investments in privately held companies through the purchase of these investments from

existing institutional investors. By its nature, the private equity asset class is illiquid, intended

to be a long-term investment for buy-and-hold investors. Secondary investments provide

institutional investors with the ability to improve vintage diversification, particularly for

investors that are new to the asset class. Secondaries also typically experience a different cash

flow profile, diminishing the effect of investing in new private equity funds. Often

investments in secondaries are made through third party fund vehicle, structured similar to a

fund of funds although many large institutional investors have purchased private equity fund

interests through secondary transactions. Sellers of private equity fund investments sell not

only the investments in the fund but also their remaining unfunded commitments to the funds.

The Functions of Private Equity

Private equity is often discussed in the financial and business press. At times it is maligned; at other times, championed. Private equity has existed since capitalism began. Long before public stock markets existed, companies had to tap private individuals and businesses for the equity needed to start and grow their businesses. As this has morphed into more formal private equity and venture capital firms that seek out businesses to invest in or buy, the crucial functions still remain.

1 .Expansion Capital

Private equity and venture capital firms provide the funds that businesses need to finance growth. Often firms that have inconsistent operating cash flow due to operational issues or changing market conditions cannot qualify for enough bank financing. In addition, rapidly growing businesses often use up their operating cash flow in acquiring assets or personnel. Because their operating cash flow may turn negative due to these expenses, they also do not qualify for debt financing. In addition, if these companies obtained all the financing they needed in the form of debt, they may be unable to make the debt payments.

2 .Discipline

Private equity often provides the discipline companies need. For public companies taken private through a private equity transaction, discipline is less of a function. These companies

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had to meet the standards and expectations of the public markets. However, for many private companies, those without external boards and oversight often operate the companies according to the owners’ whims. Owner-managers often have different criteria than those that are purely shareholders. Private equity generally demands that companies operate efficiently to drive an increase in shareholder value and put the personnel, systems and processes in place to ensure this.

3 .Management

Private equity provides management. Many companies that private equity firms invest in have thin layers of management. They often have the founder or founders in various roles and may have one or more vice presidents. Private equity provides not only the capital to hire more management, but also the expertise and resources to identify and screen management. Private equity also may replace some or all of the current management with outsiders skilled in a particular industry or market niche. In addition, private equity provides board members with varying perspectives and insights.

4 .Contacts

Private equity provides contacts and resources. Fast-growing technology firms can harness the know-how from a venture capitalist firm’s stable of past and current companies. These firms can connect with industry insiders who can help the company obtain contracts, partnerships and exposure that they would either not have had access to or would not have known about.

5 .Overall Function

The overall function of private equity is to drive an increase in shareholder value. A consequence of this is better capitalized, better managed, more resourceful and disciplined companies. Beneficiaries of private equity grow faster and stronger, use the services of more companies and employ more people. This creates a ripple effect, producing a significant positive impact on the U.S. economy.

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CHAPTER 6: ADVANTAGES AND DISADVANTAGES OF PRIVATE

EQUITY

ADVANTAGES

Investing in a private equity fund has a lot of advantages compared to other investment areas;

here are some advantages of private equity for not only investors but also the companies that

private equity firms acquire:

Advantages for Investors:

By definition, private equity firms work outside the public eye and do not have to

follow the same transparency standards that public firms and funds must adhere to.

This allows private equity firms to reform the companies without the constraint of

having to report quarterly to the SEBI, ROC or similar distractions.

Private equity firms generally perform very rigorous due diligence on potential I

investments. By utilizing a team of researchers the private equity firm is able to

identify most risks that would not otherwise be found.

The management receives carried interest, a portion of the profits, so managers and

their staff are motivated to produce good results to investors. Although carried interest

is often criticized for taking money from the investors, it is a very big incentive for

managers.

1. Economic Scenario- India is one of the fastest growing economies in the world, with

enormous growth potential in many industries. This means that capital requirements are high,

translating into an ideal hunting ground for PE funds.

2.Abundance Of Skilled Labour - India offers a huge advantage in the form of its highly

talented and skilled labor pool, which can lead to the success of the firms in which

investment is made through the private equity route. The funds are not just bullish about the

businesses in India but have also grabbed a fair share of highly rated managers like Vivek

Paul, Rajeev Gupta, Avnish Bajaj, Akhil Gupta, and Nikhil Khattau. PE funds are invariably

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on the lookout for high profile managers, not only to manage their own funds but also as their

representative on the board of companies in which they have invested.

3.Success of several sectors - India has firmly established itself as the world’s IT

superpower with almost all major software development companies having an Indian

development centre. It is also becoming the the hub of back office operations, and a leading

provider of BPO and KPO services. This has led to greater confidence in the future growth

potential of Indian companies.

4.Mature Financial markets - Capital markets have stabilized in the recent past with

regulators like SEBI keeping a firm watch on the market development. This means both

increased opportunities as well as an easier and painless exit route for PE funds. The

emergence of entrepreneurs in India who consider PE their full time occupation is also a

positive sign. Besides, there are well established corporate houses diversifying their surplus

investment, as a strategy for their assets allocation, through PE funds without involving

themselves directly in the operations of target companies.

5.Successful M&A’s- A recent spate of mergers and acquisitions has given rise to yet

another way of exiting from Indian companies for private equity investors.

6.Successful track record - The first generation of private equity players have realized

significant success in the last several years. For instance, Warburg Pincus earned huge returns

out from its investments in Indian companies like Bharti Telecom.

Advantages for Company:

Private equity managers are paid very well and so it is easy to attract high caliber,

experienced managers that tend to perform very well. The same goes for lower level

employees at private equity firms, they tend to be the top young business school graduates.

This helps the company to utilize best talent in the industry without shelling out even a single

penny from its pocket.

PE helps a company to prepare for stock market listing (IPO) as the exit route of investment.

It opens up enormous opportunities for companies to raise funds. The continuous scrutiny by

stock market participants, SEBI & ROC facilitates efficiency improvement and proper

strategic decisions.

PE helps those companies which cannot raise money from the market. By private equity

company get money from the investors, which help in the growth of the company.

DISADVANTAGES OF PRIVATE EQUITY

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DISADVANTAGES FOR INVESTORS:

Difficult to access for small & medium investors- private equity Limited Partnership funds

may only be marketed to institutions and very wealthy individuals; in addition the minimum

investment accepted is usually more than £1mn.

1. Relative illiquidity –Private Equity funds normally invest in a unlisted space and they find

it difficult to exit the investment at their wish, since it require concentrated efforts to find a

suitable investor for unlisted company. Even in the listed space, the impact cost remains very

high due to sheer magnitude of scale.

A long term investment perspective is necessary to achieve gains for a private equity

investment programme because the investment programme depends on the company growth.

It depends on the gap between entry and exit of the investor.

2.Political condition - India, being divided into a number of states, causes an investment

decision to be affected by politics. Changes in regulation and infrastructure development are

often sidelined due to friction and conflict between the state and the federal government.

3.Competition from China - China is a direct competitor of India and most of the private

equity investors, eyeing the Asian region, draw a comparison across both the countries to

decide where their money should be parked. The new state-of- the-art airports in China bear a

stark contrast to the abysmal conditions of the terminals in India’s main cities.

4.High costs - private equity managers charge relatively high fees for managing capital

committed by external investors (generally around 2%) and, if the fund performs well, take a

sizeable proportion (generally 20%) of realised returns in excess of investment hurdle rates.

Disadvantages for Company:

It is a lengthy process since private equity managers conduct detailed market, financial, legal,

environmental and management due diligence, which could take several months before they

make final decisions on investing.

Entrepreneurs have to give up some of their company’s shares to a private equity investor, i.e.

control. Because investor have some control over the company, so it is not easy for the

entrepreneur to take decision independently. He have to take advice of the investor to take

decision and it causes delay in the process.

The private equity managers have control over the timing of a sale of (a part of) the business.

Lack of promotion in investment across sectors - PE funds are being channelized into only a

few sectors like IT, infrastructure & real estate and telecommunications, to the exclusion of

the remaining industries, desperately in need of funds for growth.

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CHAPTER 7:

STAGES AND PROCESS OF PRIVATE EQUITY INVESTMENT

1. Seed stage

Financing provided to research, assess and develop an initial concept before a business has

reached the start-up phase.

2. Start-up stage

Financing for product development and initial marketing.

3. Expansion stage

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CONCEPT STAGEseed/start upDEVELOPMENT STAGEfollow on venture financingLATER STAGEexpansion capitalbridge/mezzanineREENGINEERING RESTRUCTURINGliquidity eventbuyouts

Financing for growth and expansion of a company which is breaking even or trading

profitably.

4. Replacement capital

Purchase of shares from another investor or to reduce gearing via the refinancing of debt.

PROCESS OF PRIVATE EQUITY INVESTMENT

The Private Equity Process in 6 Steps:

1. Deal Origination (Deal Sourcing)

Deal Origination or as some call it ‘Deal Sourcing’ is how Deal Makers get their deals, a

potential deal can either come through a company owner approaching them or from an

intermediary who will try to bring both parties (Company and Deal Maker) to make the deal.

In some cases, they may just approach companies who are expanding fast and wish to grow

further. In a year, Deal Makers come across hundreds of potential deals - but only a few are

selected.

2. Due Diligence

Due Diligence is what you could call ‘doing your homework’. Before starting detailed

negotiations, investor try to make sure everything is fair and secure. Although Auditors and

Consultants are appointed to conduct the Financial, Tax, Legal and Technical Due Diligence

- they also work side by side to understand the target company and its industry better. All the

information collected at this time, is then used during negotiation.

3. Deal Negotiation

At the Deal Negotiation phase, investor set out the terms and conditions (covenants,

representations and warranties) and other deal terms that defines (or makes the deal).

Contracts such as Investment Agreement, Share Purchase Agreement, Management

Agreement, Advisory Agreement etc are drafted to include all items that put the deal

together.

4. Deal Closing (Acquisition)

Deal Closing is probably the easiest part but also contains an element of risk. It’s the

conclusion of the deal, the signing of all Agreements and transferring funds from the buyer to

seller, conducting other administrative functions (usually done by a separate entity) like

updating any articles of association etc.

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5. Post Acquisition Monitoring AND Exit (IPO, Trade Sale or Buy back)

Post Acquisition Monitoring requires the Deal Team (those who have worked on putting the

deal together) to closely monitor the company, both from an operational and financial point

of view against the expansion plan and budgets that were setup earlier by the company.

Improvements to business, from Corporate Governance, Financial Reporting, and

Information Flow to Strategy are made at each level through either the company’s

management or its board.

As the company matures (usually after 2 - 4 years) with the presence of the Deal Team,

investor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger party, multi-

national or conglomerate) or in rare cases a Buy Back by the owners. By this time, the

company will have grown quite a bit with still plenty of room to grow further. (There’s a

saying, in a deal - always leave something extra for the person buying - it makes everyone

happy.)

And once investor have exited the company, they return their money with the profit they

gained for company after taking their fees for all the effort put in the above process.

Although this may seem like a linear process - it isn’t exactly so, primarily because investors

deal with a number of companies and each one is at a different stage in the private equity

process.

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CHAPTER 8: VARIOUS ROLES OF PRIVATE EQUITY IN INDIAN ECONOMY

Since 2004, India has witnessed a tremendous rise in Private Equity financing. Indian

companies are creating partnerships with PE firms on a scale that has not been witnessed

before. Is this good for the Indian economy? What kind of value does this relatively new

form of financing offer to Indian entrepreneurs?

Private Equity boosts the Indian economy

According to the Private Equity Impact study and research findings - A quantitative

comparison of Private Equity- and Venture Capital-backed companies against their non

Private Equity-backed peers and relevant market indices, in terms of key economic

parameters like Sales, Profitability, Exports, Wages and Research & Development. In

accordance with the research reports and findings from the study:

PE-backed companies grew at a significantly higher rate compared to non Private

Equity backed companies as well as market indices like the Nifty and CNX Midcap.

Wages at Private Equity-backed companies grew at a significantly higher rate

compared to their peers who are not PE-backed.

About 96% of top executives at Private Equity-backed companies believe that without

Private Equity financing, their companies would not have existed or would have

developed slower.

More than 60% of top executives at Private Equity-backed companies said that the

number of employees at their companies had increased after the PE investment.

ROLES PLAYED BY PRIVATE EQUITY IN THE GROWTH OF INDIAN

ECONOMY

PEs not only provides resources of funds to the new ventures but also focuses on

identifying and upgrading both product/process innovation and management functions

in accordance to the global economy.

PEs plays a critical rule in the innovation process, not only as a source of finance to

innovation but through other functions that lie at the core of high tech Development.

PEs Bridge between sources of finance, entrepreneurs, scientists, suppliers, and

customers by providing not only the required sources of funds but also an added value

of technologies and requirements.

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PEs typically also adds value to their portfolio companies through assistance in

strategic decisions in the day to day management of the firms.

PE capitalists with technology & entrepreneurial background generate more value

added than PEs with financial background

SOME OTHER IMPORTANT ROLES ARE

1.) Intermediation and Market Building

The enhanced access to business and advisory/consultancy services and to

knowledge/technology that PE provide will contribute to the emergence of new markets in

the global economy. Moreover PEs help enterprises global product and global capital

markets. This is particularly important for SMEs and clusters wanting to expand the range of

markets in which they would like to operate e.g new markets for intermediate inputs which

the Globalization process is opening.

2.) Source of External Capabilities

PEs complement the capabilities of innovative SMEs, sometimes in those areas were

entrepreneurs are less likely to be knowledgeable and capable e.g. export marketing; know

whom, management, etc.

3.) Facilitating Complex Contracting

This is particularly so in relation to marketing agreements, alliances, strategic partnerships,

M&A, etc—many of these critical for fast access to global product markets. A central

condition for success in many of these is prior experience which entrepreneurs frequently do

not have. A PE sector may eventually have such capabilities and thereby have a strong impact

on innovative enterprises quest to rapidly build global market share.

4.) Promoting International Links

It provides promotion and global links to the enterprise thus increasing the industry visibility

of the firms to go for global expansion with the right partner.

5.) Supporting of the Global Expansion of Promising Innovative SMEs

The value roles of PE is to provide equity based (generally private) finance and support

organizations could play important roles in promoting innovative SMEs and clusters in

industrializing economies PE could become a pillar of the Knowledge Economy—by

facilitating the provision of services to Innovative SME’s; by being a node of three

overlapping networks; and because its capabilities are largely based on tacit knowledge.

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Moreover, by promoting SME they are promoting invention (and indirectly innovation and

diffusion), self-organization and creation of new teams & tacit knowledge, and the

continuous building of new markets. Interactive learning lies at the basis of these processes.

6.) Facilitate the Transition to a Learning Economy

Since the PE are learned and qualified investors, this could provide enterprise a new learning

environment that constitute a key sector in the creation, diffusion and adaptation of tacit

knowledge, codified knowledge and technology.

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CHAPTER 9: WAYS OF ENTRY AND EXIT IN PRIVATE EQUITY

WAYS OF ENTRY OR INVESTMENT

There are two types of listed private equity investment companies - those which invest

directly in companies and those that invest in funds which invest in companies (fund of

funds). Some private equity investment companies invest in both direct investments and

funds offering a hybrid of the two approaches set out below. Direct investors The

investment company has a private equity team who invest directly in companies, subject to

the stated objective of the company. The managers’ aim is to help these companies develop

and progress, and sometimes restructure, in order to increase the long-term value of the

companies so these companies can be sold at a profit. Fund of funds investors In a fund of

funds, the investment company invests in a portfolio of private equity funds which invest in

companies. Funds of funds aim to diversify across a range of investment strategies and

different sectors providing access to a range of managers.

Investing in PE Funds

Direct Investment Top 10 Private Equity Deals

• The top 10 private equity deals accounted for more than 36% of total private equity deals in

2009. In 2008, top 10 deals accounted for about 40% of total deal value for the year

• The largest deal by value was KKR’s $255 mn buyout of Aricent, followed by Siva

Ventures investment in S Tel Ltd. and TPG’s $200 mn investment in Indiabulls Real Estate.

• Top deals occurred across various sectors, with 3 of the top 10 deals in Real Estate.

WAYS OF EXIT

There are different ways in which a private equity investor can exit from an investment:

A. Trade sale A trade sale, also referred to as M&A (Mergers & Acquisitions), of privately

held company equity is the most popular type of exit strategy and refers to the sale of

company shares to industrial investors. The trade sale is agreed in private and makes both the

buyer and the seller less vulnerable to the external pressures of a stock market flotation. It is

often advisable to keep the transaction a closely guarded secret because clients, suppliers and

employees may interpret a trade sale negatively. These negative signals become even

stronger if the negotiations fail.

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B. Entrepreneur or Management Buy-Out The Buy-Out of the funds stake by its management

team is becoming more and more successful as an exit strategy. It is a very attractive exit for

both the investment manager and the company’s management team if the company can

guarantee regular cash flows and can mobilize sufficient loans. The accounting and financial

aspects of this exit need to be studied very carefully.

C. Sale of the investment to another financial purchaser (called a secondary market investor)

One financial investor may sell his equity stake to another one when the company has

reached the stage of development or when the current development of the company no longer

corresponds to the investment criteria of the original fund. This can also occur if the financial

support required maintaining the company’s development has exceeded the capacity of the

fund. This strategy has the advantage of enabling an exit when the team does not want a trade

sale or a stock market flotation.

D. IPO (Initial Public Offering): flotation on a public stock market A stock market flotation

may be the most spectacular exit, but it is far from being the most widely used, even in stock

market booms.

A stock market flotation should correspond with a genuine wish to make the company more

dynamic over the long term and to profit from the growth possibilities offered by a stock

market. Therefore, the equity share placed on the market (the float) must be sufficiently large

to ensure liquidity – the reward for appealing to the market. A flotation is not an end in itself

but the beginning of a long process of development. A stock market flotation always leaves

company open to the risk of an unwanted bid whereas equity held by an investor that

company has chosen can be better managed. If company decides to opt for this route, it must

be minutely prepared over a long period.

E.Liquidation is obviously the least favourable option and occurs when the efforts of the head

of the company and the investors to save the company have not succeeded.

REASONS FOR PRIVATE EQUITY PLAYERS ENTERING INTO INDIA

The strong interest in India has resulted in very bullish stock market conditions, with trading

volumes increasing substantially. This has eased exit possibilities, with most of the early

domestic and foreign entrants such as Actis Partners, Warburg Pincus, Citigroup Venture

Capital, Barings and West Bridge Capital reaping significant multiples on their investments.

It is little wonder that other global private equity players such as 3i, Blackstone and Goldman

Sachs have been setting up shop in India, each with deep pockets.

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The most of the private firms in India is still in the need of capital to expand them, in spite of

having the required technology, labour and knowledge they are not able to become

productive to the economy. Thus the advent of private equity players has provided an

opportunity for these firms to grow with the economy.

Private Equity players have came to India with a research back up and thus they know the

potential of these firms and thus there has been reduction in the corpus amount invested in

China than in India, which definitely gives a hunch where the Indian economy is booming.

RESPONSE TO PRIVATE EQUITY IPOS

The initial public offering completed by Blackstone intensified the level of attention directed toward the private equity industry overall as media commentators focused on the large payout received by the firm's CEO Steve Schwarzman. Schwarzman received a severe backlash from both critics of the private equity industry and fellow investors in private equity. An ill-timed birthday event around the time of the IPO led various commentators to draw comparisons to the excesses of notorious executives including Bernie Ebbers (WorldCom) and Dennis Kozlowski (Tyco International). David Rubenstein, the founder of Carlyle Group remarked, "We have all wanted to be private – at least until now. When Steve Schwarzman's biography with all the dollar signs is posted on the web site none of us will like the furor that results – and that's even if you like Rod Stewart."

Meanwhile, other private equity investors would also seek to realize a portion of the value locked into their firms. In September 2007, the Carlyle Group sold a 7.5% interest in its management company to Mubadala Development Company, which is owned by the Abu Dhabi Investment Authority (ADIA) for $1.35 billion, which valued Carlyle at approximately $20 billion. Similarly, in January 2008, Silver Lake Partners sold a 9.9% stake in its management company to CalPERS for $275 million.

Additionally, Apollo Management completed a private placement of shares in its management company in July 2007. By pursuing a private placement rather than a public offering, Apollo would be able to avoid much of the public scrutiny applied to Blackstone and KKR. In April 2008, Apollo filed with the SEC to permit some holders of its privately traded stock to sell their shares on the New York Stock Exchange. In April 2004, Apollo raised $930 million for a listed business development company, Apollo Investment Corporation NASDAQ: AINV, to invest primarily in middle-market companies in the form of mezzanine debt and senior secured loans, as well as by making direct equity investments in companies. The Company also invests in the securities of public companies.

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CHAPTER 10: 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 Indocean Chase), originally set up by George Soros and Chemical Bank

in October 1994, was the first such overseas private equity fund.

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.

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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 Chandra

shekhar 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 Rs 500,000, and each fund must have

at least Rs50 mn 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

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reflect the strong commitment of the Indian Government to support the provision of long-

term equity finance to domestic entrepreneurial companies

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CHAPTER 11: Reform or proposals which affect private equity

The anticipation of a new government after the elections in 2014 is expected to trigger new vigour

and fresh eagerness among investors in India. Subsequently, the PE/VCFs expect increased activity in

both the listed and unlisted markets.

COMPANIES ACT 2013

The New Companies Act was enacted on 29 August 2013 and most sections have been

notified as of 1 April 2014, along with the rules.

The new legislation mandates increased transparency, through greater checks on financial

reporting and auditing, regulatory oversights and corporate governance, and mitigates

corporate fraud, thereby empowering PE/VCFs further. Some of the key reforms that affect

PE/VCFs are as follows:

PE funds in a public company will now be able to contractually agree to restrictions

on the free transferability of shares in the company, such as the right to first refusal,

right of first offer and tag along rights.

A new entrenchment provision, introduced into the articles of association of

companies, allows for specific articles to be amended only after certain conditions and

procedures are complied with (that are more restrictive than those for a special

resolution under the Companies Act). This in turn protects the governance rights of

the PE investors. This will enable better enforcement of the veto and other governance

rights of PE investors.

PE/VC funds holding more than a 20% shareholding in the investee company will be

deemed to be “associate companies“. PE/VC funds holding less than 20% may also be

deemed associate companies if they hold veto rights in connection with business

decisions of the investee company. Certain disclosures in relation to the associate

companies will need to be made by an investee company in its balance sheets. If the

PE/VC fund has been incorporated as a company, then financial statements of the

fund will have to be prepared on a consolidated basis and include details of the

associate companies.

An extensive definition of the term promoter to include:

Any person named as a promoter in the annual returns of the company;

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Any person who has control over the affairs of the company, directly or

indirectly, whether as a shareholder, director or otherwise; or

A person in accordance with whose advice, directions or instructions the board

of directors of the company is accustomed to act. As a result, PE firms

exerting control (including negative control) in certain cases may be construed

as a promoter.

1. Several compliances have been extended to private companies that previously only applied to

public companies. For example, a preferential allotment of shares, as well as an issue of

debentures, is not permitted without shareholders' approval, even for investment in a private

company.

2. The corporate governance framework has been made much more strict. For example,

restrictions are now imposed on directors entering into forward contracts in relation to the

company's securities. Common law duties of directors have now been codified and breach of

such duties can attract monetary penalties.

3. The scope of listed companies has been extended to include private companies whose

securities (for example debentures) have been listed. Therefore, certain governance

provisions applicable to listed companies may also apply to private companies with listed

debt securities. These include certification of the annual return, reporting changes in promoter

shareholding or the shareholding of the top ten shareholders, auditor appointment provisions,

and so on.

4. Restriction on a company making investments through more than two layers of investment

companies.

5. Members and depositors of a company are entitled to bring class action suits, if they believe

the management or affairs of a company are being carried out in a manner prejudicial to the

interests of the company, or of the members. This may give rise to additional vexatious

litigation by shareholders in a public company/minority shareholders in a company.

PUT AND CALL OPTIONS

SEBI, on 3 October 2013, the Securities Exchange Board of India (SEBI) issued a

notification (SEBI Notification) validating option contracts, subject to the terms and

conditions set out in the SEBI Notification. The SEBI Notification was issued in furtherance

of the powers vested in it under the Securities Contract Regulation Act 1956 (SCRA). Under

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the SEBI Notification, SEBI has stipulated that option contracts are valid, provided that all

the following apply:

The title and ownership of the underlying securities is held continuously by the selling party

for a minimum period of one year from the date of entering into the contract.

The price or consideration payable for the sale or purchase of the underlying securities

pursuant to the exercise of any option is in compliance with all the applicable laws.

The contract is settled by way of actual delivery of the underlying securities.

The SEBI Notification specifically excludes from its scope any contract entered into before

the date of the SEBI Notification. Therefore, the SEBI Notification does not protect option

agreements made before 3 October 2013 from enforceability challenges.

In 2013, the Supreme Court of India clarified that the SCRA and the rules, regulations and

notifications issued under it also apply to unlisted public companies (see Bhagwati

Developers Private Limited v. Peerless General Finance and Investment Company (2013) 9

SCC 584)). Accordingly, the SEBI Notification also applies to an option contract of an

unlisted public company.

RBI, on 30 December 2013, the Foreign Exchange Management (Transfer or Issue of

Security by a Person Resident outside India) (Seventeenth Amendment) Regulations 2013

(Seventeenth Amendment) were issued. Further, on 9 January 2014, the Reserve Bank of

India (RBI) issued a circular (Circular) dealing with the pricing of optionality clauses.

In terms of the Seventeenth Amendment read with the Circular, shares or convertible

debentures containing an optionality clause, but without any assured exit price, can be issued

by an Indian company to a person resident outside India under the FDI route. The pricing

guidelines applicable to such options, as well as a lock-in period of one year from the date of

allotment of such instruments, have also been specified. The pricing differs on the basis of

the instrument in question (that is, equity shares or preference shares and debentures).

The Circular clarifies that existing contracts will have to comply with conditions of the

Circular to comply with the existing Indian foreign exchange laws. Therefore, parties to the

contract are modifying their contract (to the extent necessary) to comply with the Circular

and the Seventeenth Amendment. The applicability of this Circular to Foreign Venture

Capital Investors (FVCI) is not clear and clarity is awaited on this point.

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GENERAL ANTI-AVOIDANCE RULES (GAAR)

The government proposes to introduce GAAR, a law against tax avoidance through foreign

investments. GAAR was first envisaged under the Direct Tax Code proposed in 2010, and

was introduced in the Finance Act 2012. The Finance Act 2012 proposed GAAR to apply

from 1 April 2013.

The GAAR, as incorporated in the Finance Act 2012, was harsh and drew criticism.

Therefore the Prime Minister appointed a committee headed by Dr Shome, to examine the

draft GAAR proposed under the Finance Act 2012 and to recommend suitable changes.

Certain rules that provide for monitoring of the GAAR were notified in 2013 and are to come

into effect on 1 April 2016.

DIRECT TAX CODEThe Direct Tax Code was first proposed in 2008 to consolidate and amend the law relating to direct taxes. The draft Direct Tax Code is currently being considered by the government. The announcement of the implementation of the DTC is yet to be made.

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CHAPTER 12: RISK IN PRIVATE EQUITY

A.Funding risk: Private equity investors raise funds from big institutional investors such as pension funds, sovereign funds, wealth funds, university endowments, insurance companies, fund of funds, etc. Each fund raising – investing – fund close cycle is of about 10 years duration.

There are times, when private equity funds find it difficult to raise capital for new funds. Such a situation may arise due to adverse economic conditions like the one being witnessed currently or due to factors specific to the fund.

The ease of fund raising depends on a number of factors like the size of the fund, reputation of the fund sponsor, past returns and the team of general partners managing it.

Managing funding risk:

• A number of private equity firms maintain a group of preferred set of limited partners of the fund, those which are more predictable than others.

• Firms prefer raising large funds during better economic conditions and draw capital in form of capital calls, during the life of the fund rather than raising smaller sized funds.

• Many firms tweak their compensation structure during down cycles, making it attractive for limited partners of the fund. From the regular 2% management fee and 20% carry, firms are seen to reduce the fixed management fee to 1 – 1.5% keeping the carry same or increasing it slightly.

• Many big firms maintain a level of overhang, or raised but not invested capital. This gives them a competitive advantage of investing in difficult times, when there is not much capital around and valuations are low.

B. Risks of adverse economic cycles and exit environment

The major source of this risk comes from the fact that an economy goes through cycles, and valuations of the same cash flows may differ considerably. Control premium paid by private equity investors are much higher during boom times, than times of recession. This is largely because of investing activity gains high momentum during formation of bubbles.

Mitigation of risk of funding cycles:

To mitigate this risk of economic cycles, the following practices are adopted by private equity groups:

• Invest uniformly across economic cycles. They do not invest in spurts.

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• Invest based on valuations of future cash flows of the company and not just on comparables and multiples as market comparables may sometimes be misleading.

• Avoid competitive bidding; co-invest in deals of large magnitude.

• Have concrete exit plans in place, with key milestones and targets for the portfolio.

C. Risks originating from the industry segments:

There are a number of private equity firms which specialize in a particular industry, or an industry segment or even a particular product category. This is mostly to leverage their understanding of that particular segment. It has been shown that this strategy is better compared to a diversified investment strategy, as it is easy for investors to diversify their portfolio at their level. But being too specific brings risks associated with that particular segment.

Companies that specialize in certain industries carry additional risks of facing downturns in that particular industry. For instance, many PE firms invested only in high-technology companies during the dot com bubble of 2001 when valuations were at their peak. After the bubble burst there was little value left in their portfolio and many tech focused VC and PE firms shut down. An evidence of this can be shown from the vintage year ratio chart; investments of the 1999 - 2001 vintage have resulted in distributions less than those of the invested capital.

Mitigation risk from investing in industry segments:

• While investing in a particular industry segment, private equity firms invest uniformly across economic cycles. • Diversify within the industry segment.

• Invest across seed, early and late stage companies in that particular segment.

D. Risks originating from portfolio companies

A number of risks may emerge from inside of the investee companies.

These risks include:

Technology Risk – Risk of the technology not seeing light of the day or not being commercially viable.

Mitigating portfolio risks: The way a firm deals with these risks defines its portfolio management philosophy and helps it create a difference. Some of the best practices while dealing with the above risks are:

Technology risks: Invest in technologies which they understand, or get opinion from external experts. Stage investments in parts and set milestones for the management team. Invest in competing technologies with smaller ticket sizes. Invest in developing

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an ecosystem. Invest across different stages in their lifecycle seed, early, late and mature stage companies.

Marketrisks: Work closely with the management team, help it develop prototypes and get feedback from key customer samples. Help the investee develop a sustaining business model, leveraging on its industry experience.

Company risks: Private equity partners invest a lot of time and effort with each of their portfolio companies managing unique risks faced by them, with respect to management and technical team, capital structure, cost and revenue management, etc. Incentives of management team are often re-aligned with those of the investors, usually by way of granting equity options as part of their compensation. Performance based milestones are often set for the management team to achieve.

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CAPTER 13:

DIFFERENCE BETWEEN PRIVATE EQUITY AND VENTURE CAPITAL

Venture capital can be viewed as a segment of private equity, from an academic point of view. But for the purpose of making investment decisions, their respective characteristics are sufficiently distinctive that we should treat them as separate asset classes. Those characteristics include target companies, risk-reward profiles, minimum capital contributions, deal structures, liquidity, tax benefits, control vs. minority share acquired, investor expertise, and others. (See comparison chart below.)

In simplest terms, private equity is capital that is invested in private companies. By private companies, I mean companies whose ownership shares or units are not traded publicly, because the owners want to restrict the number and/or kinds of people who can invest in them. Private equity investors tend to target fairly mature companies, which may be under-performing or under-valued, with the goal of improving their profitability and selling them for a return on their investment (capital gain) — or in some cases, splitting them apart and selling their assets at a profit. Venture investors, on the other hand, target early-stage and expanding companies (often pre-revenue) with fast-growth potential, with the objective of nurturing and growing them quickly, then selling them in M&A deals or taking them public.

Comparison Chart for Investors: PE and VCPrivate Equity Venture Capital

Target companies

Mature companies, often under-performing or under-valued

Start ups, early-stage companies, usually pre-revenue

Target industries

All industries, usually with established marketplace for the product or service

High-growth industries like high-tech, biomedical, alternative energy

ROI expectation*

Depends on inherent risk of specific firm and industry. Target can be 20%/yr over five years, more likely 10%/yr or less

Many failures, some solid returns, a few spectacular successes. Expectations must reflect the risks.

Investment size ($)

100 million to 10′s of billions for big PE funds; 10+ million for small funds &indiv.

Less than 10 million

Liquidity horizon

6 to 10 years 4 to 7 years

Share acquired by investor/fund

Control (often 100%) of company Usually minority stake in company

Funding structure

Equity and debt Often equity only, but can be structured to fit needs of both parties**

Investor active?

Investors may be passive with respect to management, unless purpose of acquisition is to

Investors provide advice, connections, distribution; monitor cash burn; etc.

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improve company performance

* ROI = return on investment** Often a convertible instrument is used and triggered by pre-defined milestones.[All entries in the comparison chart are estimates and generalizations.]

CHAPTER 14: LIQUIDITY IN THE PRIVATE EQUITY MARKET

Diagram of a simple secondary market transfer of a limited partnership fund interest. The buyer exchanges a single cash payment to the seller for both the investments in the fund plus any unfunded commitments to the fund.Main article: Private equity secondary market

The private equity secondary market (also often called private equity secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast majority of private equity investments, there is no listed public market; however, there is a robust and maturing secondary market available for sellers of private equity assets.

Increasingly, secondaries are considered a distinct asset class with a cash flow profile that is not correlated with other private equity investments. As a result, investors are allocating capital to secondary investments to diversify their private equity programs. Driven by strong

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http://en.wikipedia.org/wiki/File:SecondaryDiagram.png

http://en.wikipedia.org/wiki/File:SecondaryDiagram.png

demand for private equity exposure, a significant amount of capital has been committed to secondary investments from investors looking to increase and diversify their private equity exposure.

Investors seeking access to private equity have been restricted to investments with structural impediments such as long lock-up periods, lack of transparency, unlimited leverage, concentrated holdings of illiquid securities and high investment minimums.

Secondary transactions can be generally split into two basic categories:

Sale of Limited Partnership Interests – The most common secondary transaction, this category includes the sale of an investor's interest in a private equity fund or portfolio of interests in various funds through the transfer of the investor's limited partnership interest in the fund(s). Nearly all types of private equity funds (e.g., including buyout, growth equity, venture capital, mezzanine, distressed and real estate) can be sold in the secondary market. The transfer of the limited partnership interest typically will allow the investor to receive some liquidity for the funded investments as well as a release from any remaining unfunded obligations to the fund.

Sale of Direct Interests – Secondary Directs or Synthetic secondaries, this category refers to the sale of portfolios of direct investments in operating companies, rather than limited partnership interests in investment funds. These portfolios historically have originated from either corporate development programs or large financial institutions

INVESTMENTS IN PRIVATE EQUITY

Diagram of the structure of a generic private equity fund

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http://en.wikipedia.org/wiki/File:Private_Equity_Fund_Diagram.png

Although the capital for private equity originally came from individual investors or corporations, in the 1970s, private equity became an asset class in which various institutional investors allocated capital in the hopes of achieving risk adjusted returns that exceed those possible in the public equity markets. In the 1980s, insurers were major private equity investors. Later, public pension funds and university and other endowments became more significant sources of capital.[80] For most institutional investors, private equity investments are made as part of a broad asset allocation that includes traditional assets (e.g., public equity and bonds) and other alternative assets (e.g., hedge funds, real estate, commodities).

Investor categories

US, Canadian and European public and private pension schemes have invested in the asset class since the early 1980s to diversify away from their core holdings (public equity and fixed income).[81] Today pension investment in private equity accounts for more than a third of all monies allocated to the asset class, ahead of other institutional investors such as insurance companies, endowments, and sovereign wealth funds.

Direct vs. indirect investment

Most institutional investors do not invest directly in privately held companies, lacking the expertise and resources necessary to structure and monitor the investment. Instead, institutional investors will invest indirectly through a private equity fund. Certain institutional investors have the scale necessary to develop a diversified portfolio of private equity funds themselves, while others will invest through a fund of funds to allow a portfolio more diversified than one a single investor could construct.

Investment timescales

Returns on private equity investments are created through one or a combination of three factors that include: debt repayment or cash accumulation through cash flows from operations, operational improvements that increase earnings over the life of the investment and multiple expansion, selling the business for a higher multiple of earnings than was originally paid. A key component of private equity as an asset class for institutional investors is that investments are typically realized after some period of time, which will vary depending on the investment strategy. Private equity investments are typically realized through one of the following avenues:

an initial public offering (IPO) – shares of the company are offered to the public, typically providing a partial immediate realization to the financial sponsor as well as a public market into which it can later sell additional shares;

a merger or acquisition – the company is sold for either cash or shares in another company;

a recapitalization – cash is distributed to the shareholders (in this case the financial sponsor) and its private equity funds either from cash flow generated by the company or through raising debt or other securities to fund the distribution.

Large institutional asset owners such as pension funds (with typically long-dated liabilities), insurance companies, sovereign wealth and national reserve funds have a generally low likelihood of facing liquidity shocks in the medium term, and thus can afford the required long holding periods characteristic of private equity investment.

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CHAPTER 15:WORLD’S TOP 10 PRIVATE EQUITY FIRMS

According to an updated 2009 ranking created by industry magazine Private Equity

International the largest private equity firm in the world today is TPG, based on the amount

of private equity direct-investment capital raised over a five-year window. As ranked by the

PEI 300, the 10 largest private equity firms in the world are:

RANKS PRIVATE HEADQUARTER FUNDS

1 TPG Fort Worth $ 52352

2 Goldman sachs Principal investment area New York $ 48993

3 The Carlyle Group Washington DC $ 47732

4 Kohlberg Kravis Roberts New York $ 40460

5 Apollo Golbal management New York $ 35183

6 Brain Capital Boston $ 34949

7 CVC Capital Partners London $ 33726

8 The blackstone Group New York $ 30800

9 Warburg pincus New York $ 23000

10 Apax partners London $ 21336

Because private equity firms are continuously in the process of raising, investing and

distributing their private capital rose can often be the easiest to measure. Other metrics can

include the total value of companies purchased by a firm or an estimate of the size of a firm's

active portfolio plus capital available for new investments. As with any list that focuses on

size, the list does not provide any indication as to relative investment performance of these

funds or managers.

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Additionally, Preqin (formerly known as Private Equity Intelligence) an independent data

provider, ranks the 25 largest private equity investment managers. Among the larger firms in

that ranking were Alp Invest Partners, AXA Private Equity, AIG Investments, Goldman

Sachs Private Equity Group and Pantheon. The European Private Equity and Venture Capital

Association ("EVCA") publishes a yearbook which analyses industry trends derived from

data disclosed by over 1, 300 European private equity funds.

CHAPTER 16: CASE STUDY ON PRIVATE EQUITY FIRMS

1).Dalmia Cement - KKR About KKR

Founded in 1976 and led by Henry Kravis and George Roberts, KKR is a leading global

alternative asset manager with $52.2 billion in assets under management as of December 31,

2009. With over 600 people and 14 offices around the world, KKR manages assets through a

variety of investment funds and accounts covering multiple asset classes. KKR seeks to

create value by bringing operational expertise to its portfolio companies and through active

oversight and monitoring of its investments. KKR complements its investment expertise and

strengthens interactions with investors through its client relationships and capital markets

platforms. KKR is publicly traded through KKR & Co. (Guernsey) L.P. (Euro next

Amsterdam: KKR).

KKR has invested more than over $1.1 billion in India since 2006, which includes

investments in Aricent, a global innovation, technology and services company; Bharti

Infratel, a telecom infrastructure provider and Coffee Day Resorts, operator of the Café

Coffee Day chain of cafes in India.

About Dalmia Cement (Bharat) Ltd

DCBL has business interests in two major segments, Cement and Sugar. It has cement plants

in southern states of Tamil Nadu (Dalmiapuram&Ariyalur) and Andhra Pradesh (Kadapa),

with a capacity of 9MTPA. A leader in cement manufacturing since 1939, DCBL is a multi

spectrum cement player with double digit market share and a pioneer in super specialty

cements used for Oil wells, Railway sleepers and Air strips. The company also produces

around 160 MW of Power through thermal and renewable energy with an aim to increase the

power generation from non-conventional methods.

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Over the past 7 decades, the company has earned the trust of the employees, distribution

chain as well as all its stakeholders. DCBL’s vision has been acknowledged by the existing

Private Equity investor, Actis who has been on the Board and adding valuable insights for the

organisational growth. The company is looked upon and respected for being a value-based

organization. DCBL has been recognized and awarded Hewitt’s Best employer for the year

2009. It has been ranked among the Top Ten in the Manufacturing industry. DCBL is Head

Quartered in New Delhi. It has employee strength of more than 3,500 people.

PE Impact on DCBL

Dalmia Cement (Bharat) Ltd. (DCBL), and Kohlberg Kravis Roberts & Co. L.P. (together

with its affiliates, “KKR”) announced the signing of a definitive agreement under which

KKR has agreed to invest up to Rs 7,500 mn in DCBL’s wholly owned unlisted subsidiary

(“Company”) which will house post restructuring DCBL’s 9MTPA cement manufacturing

capacity, DCBL’s stake in OCL India Limited (5.3MTPA capacity) along with the upcoming

green field projects of 10MTPA across the country. The use of proceeds will be for both

organic/inorganic growth and de-leveraging.

“When we realigned our businesses in March, 2010, one of our goals was to create separate

pure play entities that could thrive on their own and have flexibility to raise capital. This

transaction with KKR is not just about capital but the foundation of a long term relationship.

It will enable us to enhance our capacity and market share through organic as well as

inorganic routes, while benefiting from KKR’s global network and proven value creation

capabilities,” said Mr. PuneetDalmia, MD of Dalmia Cement (Bharat) Limited.

“We are excited to be working with a dynamic and entrepreneurial family with a successful

execution track record in India. While the cement industry by nature is cyclical, this is a long-

term investment in a great family business, its management team and in India’s economy.

This is a way to invest behind and contribute to the continued development of India’s

residential, commercial, and public sector infrastructure,” said Mr. Sanjay Nayar, CEO of

KKR India.

2). Paras Pharmaceuticals-ActisParas Pharmaceuticals is one of India’s leading OTC healthcare and personal care companies,

with a track record of introducing successful branded products. Its two leading brands,

MOOV (a pain relieving ointment) and D’Cold (a cough syrup) are both in the top 10 OTC

brands in India. Personal care products are among the fastest growing consumer segments

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with a growth rate in recent years at 14 percent. Paras have grown faster and expect to grow

by 25 percent in FY 2010-2011.

Actis, a PE firm, invested USD 42 mn in 2006 for a minority stake, raising it to a majority

shareholding in 2008, which they continue to hold. Actis’ rationale for the initial investment

was based on Paras’ ability to create strong brands in niche, fast-growing areas. They were

impressed with the company’s ability to compete effectively against global organizations

with innovative products; for example, the success of MOOV in a market dominated by

market leader Iodex (a Glaxo brand).

Actis’ view of Paras noted above is shared by its promoters. As a key company insider

commented: “A company goes through three stages: incubation, implementing the initial

vision and professionalization.” At the second stage, the team needs to be willing to take risks

and follow the founder’s vision. Professionals are likely to be too risk- averse to do so as

failure would hurt their long-term career prospects. At the third stage, once the vision has

been implemented, professionals need to take charge.

It was at that third stage that Paras sought Actis as a PE investor to enable the transformation

to a professionally-run company. In fact, the money was the minor part of the transaction in a

sense, since it was used primarily to buy out the promoter’s holding rather than to be infused

into the company (the company was already cash rich). Paras required the PE firm to possess

a deep understanding of the industry as well as understand the company, both of which Actis

possessed. As a company insider notes: “PE is expensive money: it should only be used if it

comes with other benefits.”

PE backing provided the company credibility as a professionally run-organization and there

was an influx of younger, highly trained talent that replaced family recruits. Paras’

recruitment of the best quality professionals led to positive impacts on operational

management with a greater focus on efficiency, tighter financial controls, brand leveraging

and an improved marketing and distribution strategy.

The transformation of Paras from a family run to professional company faced the challenges

of cultural transformation and was not a simple task but accomplished by focusing on these

key areas and showed clear results. EBITDA margins rose from 20 percent prior to PE

funding to about 30 percent afterwards. Subsequent to the Actis investment, the company has

also expanded internationally, especially in the Middle East and North Africa.

Impact of PE on Paras

As is evident from the above, Actis’ impact was transformative in the sense of changing how

the company was run, while being supportive of a quality that was already ingrained, that of

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conceptualizing and developing a range of high-margin products that could successfully

compete with large players, many of which are global organizations. Actis achieved its

transformation by getting to know the company, and then bringing in talent in selected areas

that were critical for raising margins and enabling the efficient introduction of new products,

while retaining the innovative core intact. Among the many positive effects was a change in

practice in procurement, governance and reporting, thus enabling a stronger brand being

built? As a result, revenue growth rates rose to 40 percent and gross margins rose by 10

percent. Actis also supported the strategic shift in sales and distribution networks; as well as

international expansion. Critically, Actis was able to bring in a sophisticated board support

through a domain expert and bring on board a prominent business leader (who is their

advisor) as an advisor to the company.

Impact of PE on the industry

The investment shows that a domestic company can succeed while competing with global

organizations. Although there are other successful examples, such as Dabur, Paras is a special

case of achieving this through professionalizing a family-run firm in a credible way, with a

majority of non-family ownership, while retaining the benefits of incorporating the initial

promoters into the core management structure.

3.Air Deccan - ICICI Ventures & Capital International Air Deccan was established in 2003 with the objective of setting up a budget airline, the first

of its kind in India. Price sensitivity and the aspirations of the typical Indian consumer were

cited to be the main reasons for a budget airline. Initially, the company’s operations

revolved around the founder, Captain G. R. Gopinath. Modeled on Southwest Airlines in the

U.S. and Ryan Air in Britain, Air Deccan positioned itself as an airline for the masses.

Seeking capital for growth, Air Deccan obtained PE investment from ICICI Ventures, which

invested USD 30 mn in 2004 for a 19 percent equity share. Air Deccan also received PE

investment from Capital International, an American PE firm, which, it hoped, would provide

a global presence and learning from the operations of similar airlines in other countries.

Both ICICI and Capital International played an active role in formulating strategy. With the

PE firms’ assistance, Air Deccan appointed a person from Ryan Air to run the business.

The funds were intended to build capacity in a phased manner. Accessing PE funds was

critical for being able to raise the much needed debt and to guarantee leases, without which

project implementation would have been difficult.

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The funds were also used to enhance plane capacity quickly by ordering 60 airbuses on

purchase and leased bases. By 2007, Air Deccan flew into 68 cities, as compared with the

incumbent, Government owned Indian Airlines coverage of 45 cities.

The high capacity was both an advantage (as it became an attractive acquisition target for

Kingfisher) and a disadvantage (as it adversely impacted the company financially due to the

economic slowdown and unforeseen spike in fuel cost).

The airline industry began to face significant changes in its operating environment from

2005. Large rises in fuel prices and competition from other budget airlines like Spice Jet,

Indigo and Go Air adversely affected Air Deccan’s profitability. With ICICI Ventures’

assistance, some of the aircraft that had been purchased were re-contracted on a lease basis,

thereby improving cash flows.

In 2006, Air Deccan offloaded 25 percent of its equity in an IPO. The IPO took place during

a very difficult time for Indian equity markets. Fortunately, with ICICI’s support in the form

of stepped up funding as well as marketing to other investors, the issue was completed at the

offer price. At its peak, the market capitalization of Air Deccan reached USD 1.1 billion.

By late 2007, the ongoing pressure of competition and lower than expected growth forced Air

Deccan into significant losses. In 2008, the company was merged into Kingfisher Airlines, a

premium domestic airline. Kingfisher was attracted by Air Deccan’s large fleet that enabled

Kingfisher to rapidly scale up its operations. Although the initial understanding was that Air

Deccan would be the budget brand of Kingfisher, it was later rebranded with the Kingfisher

name.

Impact of PE on Air Deccan

The PE investment in Air Deccan brought both operational and fiscal discipline. PE firms

helped setup a proper organization structure and created a formal business plan. The

financing enabled Air Deccan to pursue its aggressive business model of running a budget

airline.


Air Deccan had a big impact on the industry. Its no-frills flights focus on second-tier cities,

and aggressive pricing led to aggressive growth and spurred the entry of comparable budget

airlines. Its practices were imitated by established competitors and became part of industry

practice. The result was a fall in the average cost of air travel in India. To a significant extent,

these new business approaches were enabled by the initial round of funding and the models

that were introduced by PE financiers seeking to imitate the success of budget airlines in

other countries. Thus, we may conclude that PE significantly impacted the industry.

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4).Shriram Transport Finance-TPG Shriram Transport Finance (STF), India’s largest commercial vehicle finance company, was

established in 1979. As of March 2010, the company runs 479 branches and service centers

offering finance for purchasing commercial vehicles, including trucks, three- wheelers and

tractors. The company also offers ancillary services, including working capital and a

cobranded credit card. The company has been consistently profitable for several years. For

the financial year ended March 2009, STF’s revenue was INR 36.9 billion and PBT was INR

2.9 billion. It employed 12,500 persons. The company has been quoted on the stock

exchanges for several decades. As of March 2010, its market capitalization was INR 91.6

billion.

The truck financing business at the time, and even as of 2010, was fragmented and high- cost

due to the risks and transactions costs of lending to unorganized, single-truck owners. STF

catered to this market but was also beginning to access the organized borrowers that were

coming into play as the trucking business became more organized in India. These factors had

enabled STF to perform well in a regulatory environment that was significantly more

favorable to banks than to NBFCs. However, the company was undercapitalized at the time

of receiving the PE investment.

The company subsequently received multiple rounds of PE investment. In 2005, PE firm

Chrys Capital invested USD 30 mn for a 17 percent holding in STF. It exited in 2008-09.

Global PE major TPG invested USD 100 mn in 2006 and, as of 2010, remains an active

investor. TPG was interested in the financial sector in India, but the banking regulations

prevented it from buying a large holding in a regulated bank. TPG was attracted by STF’s

stability in terms of customers and credit-ratings, in the midst of the NBFC meltdown at the

time. STF further attracted TPG because of its reputation of integrity, efficient management

and customer loyalty.

The first PE funds were used by STF to integrate its regional operations and control them

from its home base in Tamil Nadu, as well as to consider international expansion. The second

round of investing, from TPG, brought in high standards of credit evaluation and corporate

governance. TPG’s portfolio of Asian finance firms, such as First Bank, Korea, provided it

with the experience to establish these stronger standards. These were needed as the

management was largely promoter dominated, which made credit rating agencies and

investors somewhat cautious. Also, their securitization business was relatively undeveloped.

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Helped by better practices, STF’s portfolio, which was at USD 1 billion in assets when TPG

invested, had risen to USD 6.5 billion by 2010.

Impact of PE on STF

PE initially enabled a national strategy, when Chrys Capital invested in STF. Till then, STF’s

four regional entities operated independently. Thus, in the words of a company insider:

“Chrys Capital provided capital during the growth phase of STF.”

TPG’s investment transformed the company through better internal management practices

and corporate governance. The same insider notes that, where Chrys Capital enabled growth,

TPG “added value”. TPG helped in improving the credit rating of the company and

developing the company’s securitization business. TPG, therefore, is an example of a PE

investor with deep pockets and experience in running financial firms in Asia and elsewhere

bringing these advantages to STF.


STF is the country’s largest player in commercial vehicle finance. The primary impact of the

PE investment on the industry was to begin the transformation of the business from a

fragmented, money-lender dependent business to a more organized business.

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CONCLUSION:With its solid performance during the study period of 2010 to 2014, the Indian PE has re-

emerged in good shape from testing times of the global credit melt down and subsequent

economic problems. While the period ahead looks bright, It remains to be seen whether

current condition will prove to be a strong platform for sustain growth. Certainly, the Indian

growth story remains on track and continue to attract PE interest. New opportunities several

underpenetrated sectors like infrastructure, financial services, health care and manufacturing

are waiting to be tapped and appear to be generating and increased level of PE engagement.

The PE industry itself is demonstrating interesting signs of growth and evolution. The

number of domestic funds continue to expand, With the experience gained in the global PE

funds are spinning out new breakout funds and promoters are warming up to the idea that PE

partners are more than just another source of capital and can help them achieve exceptional

growth, way beyond what the promoters can achieve alone

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BIBLIOGRAPHY:

Books and Magazine:

An Introduction to Investment bank ,Hedge fund and Private equity.

Business Knowledge and IT in Private Equity.

Financial Economics.

The Economic time.

The Times of India.

Websites:

www.monetcontrol.com

www.sebi.gov.in

www.privateequityinfo.com

www.rbi.org.in

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http://www.rbi.org.in/

http://www.privateequityinfo.com/

http://www.sebi.gov.in/

http://www.monetcontrol.com/

APPENDIX1 .The Economic Times Aug 25, 2014.

SAIF, Aditya Birla Private Equity invest Rs 80 crore in Manpasand Beverages

MUMBAI: South Asia-focused private equity firm SAIF Partners is increasing its stake in Gujarat basedManpasand Beverages ahead of the company's plannedinitial public offering (IPO), three people with direct knowledge of the development said. SAIF Partners, along with Aditya Birla Private Equity, is investing Rs 70-80 crore in a pre-IPO round of fund raising by the company in a transaction that values Manpasand Beverages at Rs 1,000 crore."The company has raised Rs 80 crore ahead of its proposed IPO.

The company will come out with the issue by next financial year," an investment banker with knowledge of the development said.

Vishal Sood, managing director of SAIF, confirmed the investment. "We have invested just over Rs 70 crore along with Aditya Birla PE.

Post the investment, SAIF holds just under 30% stake in the company."

Manpasand Beverages manufactures the Sip brand of fruit juices in mango, apple and other flavours.

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SAIF Partners, which manages more than $3 billion in the South Asian markets, had invested $10 million in Manpasand in 2011 for a significant minority stake.

"The fund is very keen on retaining some stake post the public issue and hence, has increased its stake ahead of the IPO," another person involved in the deal said.

The company has appointed investment banks Kotak Mahindra Capital and India Infoline to manage the IPO.

Aditya Birla Private Equity will roughly own a stake of around 5% in the company after the transaction. "The company plans to raiseRs 250 crore through its public offering. SAIF will partly exit its stake in the company."

Bharat Banka, the chief executive of Aditya Birla PE, could not be reached for comment.Manpasand manufactures mango juices mainly at plants in Vadodara, Varanasi and Dehradun.

The company is looking at raising capital through the IPO for further capacity expansion. It is planning to set up more factories and expand the Varanasi facility.

The new plants will be located at Vadodara, Bangalore and the Bengal-Bihar border.

Manpasand Beverages has a total capacity of 75,000 cases per day, which the company is looking to double in three years.

"We had initially focused on tier-II and tier-III markets, which were our target markets. There is still a great supply gap in those markets," Dhirendra Singh, the company's managing director and founder, told ETin an interview in May.

Manpasand is expected to earn revenue of around Rs 500 crore in FY15, up from about Rs 300 crore in the previous year. The firm has been able to build a strong network in small towns and rural markets, where the majority of its revenue comes from.

With the equity capital markets booming, private equity-backed companies will be looking to tap the markets through public issue.

2 .The Times Of India Aug 04, 2014.

L&T Infrastructure Finance looks to raise $1 billion in a private equity fund

MUMBAI: L&T Infrastructure Finance is looking to raise roughly $1 billion in a private equity (PE) fund focused on investing in power, roads, ports and other projects, three people with direct knowledge of the matter said, with the sector set to pick up as the new government gets cracking on improving India's creaking facilities.

The infrastructure finance arm of engineering giant Larsen & Toubro resumed the fund-raising exercise after the general election and aims to finish by next year. The money is expected to be raised from domestic and foreign institutional investors. A senior executive at a global secondaries fund, a direct investor in such PE funds, confirmed that it was one of those approached.

"Some of the global pension funds, sovereign wealth funds and family offices have (also) been approached for the fund raising," the executive said. There is renewed interest in infrastructure with the Narendra Modi government keen to ensure that projects stuck for

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years get going again so that the country can take advantage of an economic turnaround that's looking increasingly likely, given the economic and industrial data.

Delays in execution, mostly due to lack of government approval, and high-debt levels have plagued infrastructure companies over the past few years. Investor confidence has been dented, leading to a slump in capital expenditure. This meant that the L&T Infra PE fund had met with muted investor demand when it was launched last year.

"The change in government has helped revive the mood. However, only when positive policy measures are undertaken will investors come back to India," said a limited partner (LP) who was approached by L&T Infra. "The fund size could come down due to the lack of investor appetite for infra at this point of time." Limited partners contribute money to PE funds.

An L&T Infra Finance spokesperson said by email: "We had a first closing of approximately Rs 500 crore from domestic investors. We are assessing the interest of international investors given the change in their outlook towards India and will begin the formal process after completing the first-level assessment." India holds opportunity for PE funds in the sector, according to Global consulting firm Deloitte.

"Private equity represents a modest share of the $1-trillion to be spent on infrastructure in 2012-17, about half of which would come from private sector funds, compared with a target of one-third in the previous five years," it had said in a report.

Betting on a massive need for electricity, roads, ports, irrigation, water supply and sanitation projects, other PE companies such as IDFC Alternatives, ICICI Venture and IL&FS have either recently raised funds or are in the process of doing so. But investors won't be jumping back in with their eyes closed. "The investor is selective with capital this time around.

We will not see the kind of euphoria we saw in the previous cycle," said a managing director at an infrastructure-focused PE fund. The subdued sentiment is also because existing infrastructure-focused funds have failed to deliver. "The returns are nowhere in sight and the report card for most funds is in the red," the fund manager said. "Unless we get a strong push from the government, the infra story will not play out."

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