fund raising insights - ver 1 004

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A Note on Private Equity Investment

www.cbacademy.in www.cbresearch.in

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Agenda

Section 1 A Background

Section 2 What is Private Equity

Section 3 Private Equity Value Propositions

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Section 4 Case Studies

Section 5 The Roadmap


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Fund Raising initiatives

3www.cbacademy.in www.cbresearch.in

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Snapshot of various options

BACKGROUND

Public issue of Debt

Access to Institutional Investors:

Majority of players in the bond market

are institutions rather than retail

investors

Inadequate Market Breadth: The

Indian bond market is not yet mature

Leverage: Volume raised determined

by the company‟s ability to offer

tangible security & service the same

Size: Small companies not favoured

by the market

Private Equity (PE)

Market Image: Positive impact on

market perception

Strategic Inputs: Demonstrable

strategic contribution by PE partners

Systems & Processes: Access to

global best practices leading to IPO

readiness of the company

Flexibility: PE investment can be

structured in sync with the

requirements of the business

Fund Availability: Several tranches

can be availed from the PE fraternity

once the business proves to be PE

friendly

Long term commitment: PE funds

usually have an investment horizon of

3-5 years

Higher Accountability: PE investors,

being serious stakeholders, may

require more rigour in operations &

administration

IPO’s

Listing: Gives the company access to

a liquid market in securities

Coverage: Potentially more exposure

to research and higher visibility

Employee Motivation: An IPO can

provide a convenient route for

encashment of employee stock

Regulatory Compliance: Listed

companies are required to follow a

strict regulatory code (SEBI/SEs/MCA)

Lack of flexibility: Difficult to structure

the offering as per the financial

requirements/value expectation of

promoters

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PR

OS

CO

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What is Private Equity?


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Private Equity investors

generally

• Finance unlisted companies

or take exposure in stocks

that are illiquid

• Through acquisition of equity

or equity linked instruments in

investee companies

• Assist in the development of

new products or services and

exploring new markets

through a “mentoring” process

• Add value to the company

through active participation

• Take higher risks with the

expectation of higher rewards

and

• Have a long term orientation

Private EquityBasic Concepts

WHAT IS PRIVATE EQUITY?

In the strictest interpretation of the term, private equity limits itself to pure, unadulterated equity

investment in privately owned businesses.

Over time, a non-literal, but conceptually accurate definition of private equity has evolved that works

something like this:

Private = The investment is illiquid. The holding period is likely to be three, four, or five years, may

be even longer

Equity = The risk profile of the investment is equity-like, although the investment could be

structured as a quasi-equity/mezzanine instrument with a convertibility clause

Private equity is often described as „patient capital‟.

The usual investment horizon of a private equity investor is about 3-5 years

PE funds prefer to “grow” with the sponsors and partner with them in their strategic plans

PE investors can provide a number of value-added services including business „mentoring‟ and the

introduction to strategic alliances while staying in the background

Private equity investors generally take a minority stake in the company and do not seek day to

day control of a business

In the last few decades, PE funds have emerged as the preferred providers of capital to underserved

segments

Encouragement of new businesses and/or new sectors

Growth driver for capital starved businesses

Enabler of structural change

Introduction of fiscal discipline and corporate governance in line with global standards


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Private Equity (Cont‟d)Investment Parameters of Private Equity Investors


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PE investors primarily look at a “growth

story”

PE investors prefer businesses which

promise high growth, i.e. visible &

compounding cash flows, in the short-

medium term

There could be industry/business specific

preferences

Some PE funds are focused on a certain

set of industries, e.g. TMT, construction,

pharma/healthcare, biotechnology, etc.

Many large PE funds, however, are

industry neutral because they have

sufficient cross-sectoral expertise

Most private equity investors have a “size

preference” – i.e. a “sweet spot” in terms of

the volume of deals they do

Private equity investors usually tend to

focus on businesses that are relatively

independent of “business cycles”

Time …

We

alt

h C

rea

tio

n …

Pvt. Equity Funds would like

to enter here …

and preferably exit

hereGrowth Map of

the Company

Upside potential

PE investors do not seek

control on operational aspects

of the business

So, they would like to invest in

a company where the

operational management is

professional, transparent and

progressive

Quality of management is an

important parameter in guiding

PE funds in evaluation of

targets


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Private Equity (Cont‟d)The Opportunity Evaluation Paradigm


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• Each PE Fund has its own

opportunity evaluation criteria

and risk assessment

mechanism

• The issues that are examined

in detail in most cases are:-

• The Business of the

Company

• Financial Track Record

• The Growth Strategy

• Management Quality

• The Operating Environment

including the industry,

competition, etc.

• Overall, the idea would be to

establish whether an

investment in the Company is a

risk worth taking

Business

Management

Track Record

Growth Story

Environment

Private Equity Funds evaluate an investment opportunity on the basis of a

detailed due diligence – a process that requires complete sponsor commitment

and well developed systems and processes


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Private Equity (cont‟d)Common Covenants


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Board seats: PE Investors usually seek positions on the board of directors of the

company in which they invest. A board seat gives a PE Fund a means of direct

interface with the existing management

Exit Route: PE Investors would usually insist on a clearly charted roadmap for an IPO

(in case of unlisted companies) or liquidity enhancement processes (in case of listed

companies) in order to ensure a smooth and profitable exit

Drag-along rights: The right to compel the other shareholders to sell their shares to

an outside party

Tag-along rights: The right to “piggy-back” on the sale of shares by existing

shareholders

While PE Investors seek involvement in the management, they usually prefer

to retain a NON-INTERVENTIONIST role, unless they perceive a threat to their

interests. In most cases, the involvement of the PE Investor in the strategic &

functional matters lead to tangible gains for the company.


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Private Equity Value Propositions


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Education entrepreneurs feel that

regulatory and scalability related

issues can be addressed through

creative strategies and a flexible

approach – often facilitated and

encouraged by PE investors with

a global footprint and presence

across sectors

“Edu-preneurs” have benefited immensely from PE investmentPE Funds have been partners with some of the fastest growing education companies

VALUE PROPOSITIONS

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Growth

Acceleration

V. Ganesh Ram (MD of Veta) found that PE investment had

significantly enhanced the speed with which his company could

extend its network of company owned model centres

Leapfrogging

growth stages

S. Rajagopalan (Educational Initiatives) says that PE

partners can help entrepreneurs get into newer orbits of scale

and growth within a short span of time

Relationship

Network

V. Ganesh Ram (Veta) has benefited from wide contacts of PE

investors across various industries resulting in enhanced

business prospects

Best Practices

& Systems

Vinay Parischa (WLC College) maintains that PE Investors

establish good practices at the Board level and help the

company set up good systems

Introduction of

a World View

S. Rajagopalan (Educational Initiatives) argues that PE

Investors bring to the table their experience in similar sectors in

a variety of other global contexts and countries


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The USA is traditionally the

largest market for “for profit”

education and PE activity in the

US education sector has been

quite intense

Asian education markets in

South Korea, China and India

and the Middle East, are

emerging as attractive

destinations for PE investment

Europe, where education has

till recently been a largely state

driven initiative, is also

becoming a key market for PE

investments

PE Investment in Education – the global experienceSeveral leading education companies in the world have derived benefits from PE investments

VALUE PROPOSITIONS

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Company Sector Country PE/VC Partner

DeVry University University USA Frontenac Company

Strayer Education University USA New Mountain Partners,

DB Capital Partners

Megastudy Test-prep South Korea Cornerstone Equity

Partners

Bernesse Corp Correspondence

Courses

Japan Vestar Capital Partners

Anhanguera

Educational

University Brazil Patria Investimentos

Leading International Educational Companies that have partnered with PE firms


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Case Studies-Facts and Figures


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The Education Sector in India has attracted

considerable PE attention in recent times

Close to USD 150 Million of PE investments have been made in the Education Sector till May

2010 – more than the investment made during the entire year in 2009

CASE STUDIES

• Private Equity players have

demonstrated keen interest in

the education sector

• Private equity players have

been value creators for the

sector

• Education companies has

witnessed exponential growth

after accessing private equity

Year Month Investee Investor Investment ($ Million)

2010May Aspire Human Capital Management Foundation Capital 4.5

2010Apr Framboxx-IIFM

India Alternatives Investment

Advisors Private Limited 6.2

2010Apr Pathways World School

Reliance Equity Advisors (India)

Ltd (REAIL) 22.2

2010Apr Resonance Eduventures Pvt Ltd (REPL)

Milestone Religare Investment

Advisors 13.3

2010Apr Resonance Eduventures

Milestone Religare Investment

Advisors 13.3

2010Feb Manipal Universal Learning Premji Invest 43.3

2010Feb Career Point Infosystems Ltd Nadathur Group 10.0

2010Jan

IL&FS Education and Technology

Services (IETS) India Equity Partners (IEP) 38.2

2009Dec Manipal Universal Learning Premji Invest 33.3

2009Nov i-Nurture Education Management GVFL $2.2-3.3

2009Sept IMS Learning Resources Milestone Religare 5.6

2009July FIITJEE Ltd Matrix Partners India 20.0

2009July LearningMate Solutions Pvt Ltd Helix Investments 10.0

2009June NIIT Ltd Elephant Capital 1.0

2009Apr Edutech Navis Capital Partners 30.0

2008Dec Prolific Systems & Technologies Al Tanmiya Holdings 2.2

2008Nov Educomp TreeLine Investment Managers 33.1

2008Aug Tree House Matrix Partners India 7.0

2008July Idenizen Smartware NEA-IndoUS Ventures 2.3

2008July TutorVista Sequoia, Lightspeed 10.0

2008May Everonn Systems

New Vernon, Blackstone,

Deutsche Securities 23.5

2008Jan StudyPlaces Inc KPCB, Sherpalo, InfoEdge 3.0


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ICA Infotech

CASE STUDIES

ICA Infotech Pvt. Ltd.

CEO and Promoter: Narendra Shyamsukha

Founded: 1999

Headquarters: Kolkata, India

Status: Private

SAIF Investment Date: $12.5M in September 2007

Amount of SAIF Investment:$12.5M for 33.3% fully-diluted ownership

COMPANY OVERVIEW

ICA Infotech Pvt. Ltd. is India’s largest provider of job-oriented vocational training to arts and commerce graduates. It offers courses in the currently vacant non-IT/software segment. ICA currently provides mainly accounting, finance and personality development courses across its ~300 centers in the country, and is experimenting with a few other relevant curricula, e.g. hardware & networking, retailing, etc. It also provides a “job guarantee” to its students, and has a dedicated placement department which co-ordinates with prospective employers to help place students.

FINANCIAL HIGHLIGHTS –EXPECTED (Source: Market Feedback)

FY ended March 31, 2010: INR 714.8M in revenue and (72.5M) in net loss

FY March 31, 2011 forecast: INR720M in revenue and 10M in net income

RECENT BUSINESS DEVELOPMENTS (PRIVATE EQUITY EFFORT)

The Company has scaled down unprofitable centers by converting them to franchisee centers. As a result, the number of centers owned and operated by ICA has been reduced 15 in June 2010.

The Company continued to be EBITDA break-even in June FY11 quarter.

With the improved operating cash flow, the Company is expected to be able to market more aggressively its program in alliance with an University for students to earn a University degree and vocational training simultaneously.

PRIVATE EQUITY PARTICIPATION

PE assisted the Company to scale down unprofitable businesses & centers

PE has been actively helping in identification and recruitment of senior management team, including the CFO


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Manipal Universal Learning

CASE STUDIES

Manipal Universal Learning

Chancellor :Dr Ramdas M Pai

Headquarters: Bangalore , India

Status: Private

IDFC & Capital International:$70.0M in May 2007

COMPANY OVERVIEW

Manipal Universal Learning (MUL) is the “for-profit” arm of the Manipal Education and Medical Group (MEMG)

The business configuration of MUL comprises Distance Education, Corporate Training, Professional Education and conducting International Courses in overseas campuses


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Mahesh Tutorials

CASE STUDIES

Mahesh Tutorials

Promoter:Mahesh Shetty

Headquarters: Maharashtra, India

Status:Private

Helix Investment:$12.0M in Aug 2007

COMPANY OVERVIEW

Over the last 2 decades Mahesh Tutorials – a brainchild of Mr. Mahesh Shetty– has transformed from a single centre in Mulund West to 172 centers spread across Maharashtra, Gujarat, Tamil Nadu, Karnataka & Dubai. With a teaching staff strength of over 1000 and support staff close to 1200, Mahesh Tutorials (MT) has over 60,000 student enrollments a year and an alumni of over 1,50,000 students


Expanded the division across the country, especially in highly competitive Mumbai and Delhi markets

MT has become India’s largest chain of K12 tutoring centers

Expanded into related segments in the education services industry including engineering test preparation, medical test preparation, aptitude test preparation and vocational skills training

Expansion outside India with network in Dubai as well


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Pathways World School

CASE STUDIES

Pathways World School

Chairman:Pramod K. Jain

Headquarters: Haryana, India

Status:Private

Reliance Equity$22.2M in Apr 2010

COMPANY OVERVIEW

Pathways world school is located at Aravali, Noida and Gurgaon. PWS pioneer approaches to teaching and learning which are well-tried elsewhere but new to India. While preserving the best in traditional Indian and International education and culture, they have opted for a student-centred system with ample opportunities for project work and discovery learning, guided by a well-qualified international teaching faculty with generous access to quality in service training both in India and abroad. The school applies the Multiple Intelligences approach, developed by Dr. Howard Gardner from Harvard University.


PE has been actively helping in identification and recruitment of senior management team

More expansion plan lined up for next level of growth


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Career Launcher

CASE STUDIES

Career Launcher

CEO:Satya R

Headquarters: Haryana, India

Status:Private

Gaja Capital$8.3 M in Oct 2007

COMPANY OVERVIEW

Career Launcher provides test preparatory and vocational training services to over 60,000 students across 130 locations in India and overseas. The firm was founded in 1995 by a group of IIM students who left corporate positions to pursue their passion in entrepreneurship and education. Career Launcher initially helped students prepare for the CAT entrance exam, but quickly expanding its product offerings to school and college students seeking admission to a broad range of professional courses.


Career Launcher is also an emerging leader in the K12, Higher Education, and Vocational Training markets

More expansion plan lined up for next level of growth

Expanded to overseas location as well


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PE investment – a precursor to a successful capital

market entry

CASE STUDIES

• Private equity is the stepping

stone for IPO

• Private equity paves the wayf

for a benchmark valuation for a

company‟s IPO

• Private Equity provides the

necessary enablers to the

investee company to become

“IPO Ready” through

• An understanding of

transparency and disclosure

requirements

• Strengthening corporate

governance and developing

the requisite decision

support systems

• Improved sector networking

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Company Name PE Name PE Investment Year IPO Year

Educomp Carlyle June 2000 Dec 2005

Career Point Infosystems Franklin Templeton July 2009 Filed DRHP

Hindustan Media Ventures Citigroup Dec 2004 Jul 2010

Parabolic Drugs BTS India Private Equity May 2008 Jul 2010

Jaypee Infratech Bennett Coleman and

Company Limited.

Jan 2009 May 2010

Nitesh Estates Siachen Capital Jan 2006 May 2010

Talwalkars Better Value

Fitness

Pantaloon Retails Oct 2006 May 2010

Shree Ganesh Jewellery

House

Credit Suisse Mar 2008 Apr 2010

Persistent Systems Norwest Partner Dec 2005 Apr 2010

DQ Entertainment

(International)

International Finance

Corporation

Jan 2008 Mar 2010


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Proposed Roadmap


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Investment Process – Way AheadInvestment Process

PROPOSED ROADMAP

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Typically, PE investors are quite proactive

in responding to approaches

The investment process of a typical PE

fund would include a thorough analysis of

the company, its position in its industry and

the proposed transaction.

While transactions can be structured to

meet the financing requirements and cash

flow characteristics of the company, there

could be fund specific priorities relating to

type of instrument, duration, covenants,

etc.

To expedite the analysis of an investment

opportunity by a PE fund, a comprehensive

information docket comprising an

Information Memorandum, company

profile, annual accounts of the company,

etc. is necessary

Once the potential investee appears

acceptable, the transaction must be

structured to the satisfaction of both PE

fund and the company in which

investments are being made

Regulatory, tax and compliance issues

need to be adequately addressed

Submit Information

Docket including IM

Furnish other Information

as required

Discuss & Finalize

Structure

Due Diligence & Price

Fixation

Documentation

Deal Closure

Typically, a PE

exercise takes about

4-6 months. But, the

calendar would

depend on deal

specific issues

Initiate Contact &

Make Presentation

Issue of Term Sheet

The PE investment process, if

managed and administered in a

disciplined manner, can be

successfully completed within

4-6 months


fund raising insights - ver 1 004

Documents

private equity limits

acquisition of equity

longer equity

pe investment

private equitysection

pe investors

pe fraternity

usual investment horizon