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Private Equity & Venture Capital Alternative Financing Option Indian Association of Investment Professionals Shwetank Patni July 6, 2013

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  • Private Equity & Venture Capital Alternative Financing

    Option

    Indian Association of Investment Professionals

    Shwetank Patni

    July 6, 2013

  • 1

    Agenda

    I. Understanding Private Equity

    I. Types of Equity Funding

    II. Why PE Funding

    III. PE Funding Process

    II. PE Industry Current Status

    I. Industry Trends

    II. Current Challenges

    III. Recent Developments

    III. Annexures

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 2

    Agenda

    I. Understanding Private Equity

    I. Types of Equity Funding

    II. Why PE Funding

    III. PE Funding Process

    II. PE Industry Current Status

    I. Industry Trends

    II. Current Challenges

    III. Recent Developments

    III. Annexures

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Types of Equity Investors

    3

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Provide funds for incubation of companies Small deal size with active involvement

    Angel Investor/ Seed Funding

    Provide capital for initial expansion of business

    Prefer ideas which has tested markets though sometimes provide seed capital also

    Venture Capital (VC)

    Provide Growth Capital Invest in companies with operating history

    and established track record Minority Stakes

    Private Equity Fund

    Invest in mature businesses Provide exit to promoters and/ or acquire

    distress companies Majority Stake

    Buy Out Fund

  • Differentiating Venture Capital & Private Equity Funding

    4

    Venture Capital Private Equity

    Stage of Investment Early Stage Growth to late stage

    Size of Investment Comparatively Smaller ( 30% IRR of 25-30%

    Exit Options Strategic Sale, Sale to other investor

    IPO/ Secondary Sale/ Strategic sale

    Deal Examples Just Dial, Snap Deal, SKS Microfinance, Flip Kart

    Asian Genco, Bharti Airtel, Max Healthcare

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 5

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Investment Strategies and Key Players

    6

    Stage-independent / multi strategy firms Temasek, Carlyle, Blackstone, KKR, TPG, Citigroup,

    Actis, Chrys Capital, Warburg, ICICI Venture

    Large Deals (>$100 million) and Buyouts

    IL&FS, IDFC, Barings, Kotak, New Silk Route, India Equity Partners, Sequoia, Jacob Ballas

    Hedge Funds / pre-IPO investors such as Fidelity

    Mid-market Growth

    ($20-100 million)

    NEA, Draper Fisher, Sequoia, Helion, Ambit Pragma, BTS Advisors

    Some VCs also involved in late stage deals

    Venture / Early Stage / SME

    Infrastructure IDFC, SBI Macquarie Real Estate - Kotak Realty Fund, Red Fort Capital,

    Citigroup Property investors Sector Focused Funds

    DE Shaw, Avenue, Spinnaker etc Other Asset Classes: Hedge, Restructuring

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Select Deals

    7

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Company Investor

    Deal Size ($mn)

    Genpact Bain Capital 30% Stake 1,000

    Hero MotoCorp Bain Capital. GIC (

  • 8

    Increasing Proportion of VC Deals

    Source: E&Y report

  • 9

    Deal Profile Varies Across Geographies

  • 10

    Agenda

    I. Understanding Private Equity

    I. Types of Equity Funding

    II. Why PE Funding

    III. PE Funding Process

    II. PE Industry Current Status

    I. Industry Trends

    II. Current Challenges

    III. Recent Developments

    III. Annexures

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Why Venture Capital/ Private Equity

    11

    VC/ PE is More Than Just Money

    Value Addition Sets a Pricing Benchmark Establishes Credibility

    Only Possible Option in Specific Situations

    Early stage companies Leveraged and Promoter Funding Not

    Available

    Better Option than IPO

    Low regulatory compliances Possible even in Tough

    Market Conditions Faster process at lower cost

    Better Option than Debt

    No Security required No regular commitments Lesser Covenants

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Why Venture Capital/ Private Equity

    12

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Source: E&Y report

  • Primary Market Returns Abysmal

    13

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Source: NSE

    33 IPOs launched on NSE over last 2 years

    6 Withdrawn due to lack of Investor Interest

    Out of 27 IPOs subscribed, only 10 trading above IPO price

    4 IPOs trading>50% of their IPO price, 4 between 20-50%

    17 IPOs trading below their IPO Price within 2 years

    9 IPOs below 50% of their IPO Price

    6 Companies trading at 25-50% of the IPO price

  • Private Equity Value Addition Initiatives

    14

    Business Development

    Business introductions

    Cross selling among various portfolio companies

    Mergers & Acquisitions

    Facilitating identification, evaluation and financing for M&A

    Corporate Governance

    Introducing best corporate practices

    Facilitating setting up necessary systems and procedures

    Strengthening/Developing Management Team/Board

    Assisting companies in making senior level hires

    Inducting independent directors

    Strategy Formulation/ Refining

    Identification and evaluation of alternative growth options

    Leveraging PE funds experience across multiple investments and industries

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Private Equity Value Addition Initiatives

    15

    Operations & Systems Improvement

    Improvement in MIS

    Cost optimization

    Fund Raising

    Identification and evaluation of alternative fund raising options

    Working with the company to provide necessary inputs to a potential investor

    IPO/ Listing Preparation

    Selection of bankers, lawyers and other intermediaries

    Support in preparation and review of offer documents

    Support in pre-IPO transaction, if any

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Private Equity Value Addition Initiatives

    16

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Source: India Private Equity Report 2013 by Bain & Company

  • Blackstone Intelenet*

    17

    Blackstone, along with Mr Susir Kumar, acquired Intelenet from Barclays in 2007

    $180 mn invested for 90% stake; Approximately 3 times revenues

    Investment was followed by Financial Crisis Timing?

    Partnership for growth:

    Blackstone was backing a team which was mature, risk-taking and yet humane

    Intelenet needed capital to expand as well as necessary business relationships

    At the time of investment

    Intelenet was operating in 1 country

    8 sales people to get global business with 1 delivery centre in India

    EBITDA margin was 14%

    Lack of focus on business growth

    Changed hands from TCS to Barclays to Blackstone

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide Source: Forbes

  • Blackstone Intelenet*

    18

    Initiatives Takes

    Strengthening top management team

    ESOPs to employees to align interest

    Introduction to global investee companies of Blackstone

    Expand sales team; Significant investment in improving sales network

    Cost rationalisation

    At the time of Exit

    Intelenet was operating in 7 countries

    25 percent of Intelenets revenues come from Blackstones portfolio companies

    Sales team expanded to 41 people

    EBITDA margin was 20%

    Blackstone exited Intelenet in 2011 Sale to Serco @ 3.0x Invested Capital

    Wealth creation for employees through ESOPs

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide Source: Forbes

  • 19

    Agenda

    I. Understanding Private Equity

    I. Types of Equity Funding

    II. Why PE Funding

    III.PE Funding Process

    II. PE Industry Current Status

    I. Industry Trends

    II. Current Challenges

    III. Recent Developments

    III. Annexures

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Investment Lifecycle

    20

    Preparing the Company for Investment

    Investment Process

    Monitoring

    Exit

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 21

    Readiness Assessment

    Determining the Capital Need and Funding Timeline

    Developing a Business Plan

    Management Team Maturity and Completeness

    Thoughts on Funding Level (Company/ SPV) and Dilution

    Establishing a Fund Raising Team

    Interacting with Intermediaries

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • What VC/ PE Funds Look For

    22

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Promoter and Management

    Industry Prospects

    Market Leadership and Competitive Positioning

    Financials Growth, Valuation, Return Scenarios

    Deal Structure

    Terms, Rights and Due Diligence Findings

    Exit Prospects

  • 23

    Private Equity Investment - Process

    Preparation of Information

    Memorandum

    Sharing Information

    with PE Funds

    Due Diligence (DD)

    Documentation & Closing

    Commercial Negotiations

    & Non-binding offer

    Investment Banker (IB) prepares IM and Financial Model in discussion with the Company

    IB shares teaser with PE funds to gauge interest

    Execute NDA with interested funds

    Share IM and model with interested funds

    PE investors solicit clarifications

    Management meetings and site visits

    Non binding term sheet

    Exclusivity agreement with select fund

    Financial/ legal/ business / promoter DD

    Addressing DD findings

    Final Negotiations

    Completing conditions precedent

    Executing definitive agreements

    Funds transfer and issue of shares

    T + 4 Weeks

    T +6Weeks

    T + 18 Weeks

    T + 20 Weeks

    T +10Weeks

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Monitoring

    24

    Operational Level mostly in case of VC Funding

    MIS Reports at Regular Interval

    Site Visits

    Participation in Board Meetings

    Strategic Discussions

    Budgeting & Planning

    Value Addition Initiatives

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Exit

    25

    Swap into Listed Parent Company/ Buy Back

    Residual Option Promoter or Company Buy Back

    Sale to Strategic Investor

    Possible if Promoter is Comfortable More Common in IT Companies

    Sale to Other PE Fund

    More Common for VC Investments Generally in Next Round of Funding

    Initial Public Offer

    Preferred Option Investor May Sell at IPO or Hold On

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 26

    Agenda

    I. Understanding Private Equity

    I. Types of Equity Funding

    II. Why PE Funding

    III. PE Funding Process

    II. PE Industry Current Status

    I. Industry Trends

    II. Current Challenges

    III. Recent Developments

    III. Annexures

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 27

    PE/ VC Activity In India Shows Cyclical Trends

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Source: India Private Equity Report 2013 by Bain & Company

  • 28

    Top PE Investments in 2012

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 29

    Changing Sector Preferences Flight to Safety

    Source: India Private Equity Report 2013 by Bain & Company

  • 30

    Exits Remain a Challenge

    Any fool can buy a company. You should be congratulated when you sell. Henry Kravis, Founder, KKR

    ICICI, HDFC, Kotak

    Mahindra

  • 31

    Agenda

    I. Understanding Private Equity

    I. Types of Equity Funding

    II. Why PE Funding

    III. PE Funding Process

    II. PE Industry Current Status

    I. Industry Trends

    II. Current Challenges

    III. Recent Developments

    III. Annexures

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 32

    So What Happened to India & Private Equity?

    India: from Breakout Nation to Blackout Nation

    India has moved from Boundless Optimism to Bottomless Pessimism*

    Concerns on governance and economic policies

    Economic Data not comforting

    Private Equity returns have plunged since 2006

    Fund-raising has hit a wall

    India received only $3.5 billion of the $320 billion funding raised globally in 2012; $6.9 billion committed in 2011

    Players such as 3i, Starwood Capital etc are exit India; Actis cuts its fund size by 2/3rd

    Negative sentiment swirling around

    Take a Pause

    Data Source: Economic times, Bain PE Report

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Verbatim from Economic Times

  • 33

    Views of Foreign Investors (GPs)

    Source: India Private Equity Report 2013 by Bain & Company

  • What Went Wrong with PE?

    34

    2006-08 Max deals @ peak valuation

    Too much money chasing too few deals - Auction

    Projected Business Plans impacted by Economic Turmoil

    Rush to Invest money Was due diligence compromised?

    Exits Far and Few

    Currency Depreciation has further propelled the pain

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 35

    Source: www.andertoons.com

    PE Investment

    Timing Issue!!!

  • 36

    Source: www.glasbergen.com

    Corporate Governance!!!

  • 37

    Is the Gloom Greatly Exaggerated?

  • Positives overshadowed by Negatives

    38

    India still one of the fastest growing economies

    Young Population with median age of 25 years

    Increasing VC deals indicate comfort in Indian Entrepreneurs

    VC deals in future culminate into PE deals

    Valuations are down and investment opportunities exist

    Just Dial, Dr Lal Pathlabs, Kotak Bank, Shriram Transport Finance, Paras healthcare etc Multi-baggers still exist

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Every Industry goes through a cycle; so is PE

    Industry expected to witness consolidation

    LPs to prefer Funds with track record and operating history; GPs need to differentiate

    Funds with wider mandate in terms of deal size, stage of investment etc expected to have better prospects

    Focus to shift from investment rush to profitable exits

  • 39

    Agenda

    I. Understanding Private Equity

    I. Types of Equity Funding

    II. Why PE Funding

    III. PE Funding Process

    II. PE Industry Current Status

    I. Industry Trends

    II. Current Challenges

    III.Recent Developments

    III. Annexures

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • Mezzanine Funding

    40

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Debt Instrument with Potential Equity Upside

    Instruments like Convertible Debentures, Preference Shares, Warrants, Options etc

    Provides regular returns to investor with equity conversion providing upside

    Can be secured by pledge of shares, promoter guarantee , corporate guarantee, escrow of cash flows etc

    Addresses 2 key concerns impacting PE Industry today

    Valuation Debt instrument so no equity valuation required

    Exit Redeemable, so no exit risks

    Can be structured to match the timing of cash flows

    Benefits promoters as

    No equity dilution

    Funding availability in specific situations like foreign acquisitions, promoter funding , restructuring/refinance , buyback, PE exit etc. wherein debt funding from traditional sources may not be easily available

    However, high cost debt and so strong cash flows are required to service it

    Key Players Indo Star (Everstone, Goldman Sach, Ashmore), KKR, ICICI Ventures, Blackstone, Prop desks of MNC banks such as Stan C, BOAML, CS

  • Online Funding Platforms

    41

    Venturesutra and India Venture Board are Pioneers

    Purpose To Connect Entrepreneurs to Investors

    Primarily Focused on VC Funds

    Entrepreneurs Located in Tier II and Tier III Cities Benefits

    Limited Access to VC Funds

    Entrepreneurs Post Business Plan Accessible to Funds

    Access to Intermediaries, Legal Counsels etc

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 42

    Annexure

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

    Data in annexure are as on a particular data. Some numbers would have changed, especially pertaining to

    market price of listed shares. Annexure is just to highlight specific instances for information purposes only.

  • 43

    IPO Exits

    Bharti Airtel

    Raised $260 million between Sep 1999 and July 2001 from Warburg Pincus, New York Life Intl India

    Fund, IFC and AIF Capital; Bharti had 1.5 lakh subscribers in 1999

    The Company now has about 150 million subscribers and a market cap of >$32 billion

    Funds made returns raging from 3x 5x depending on time of exit

    VA Tech Wabag

    ICICI Ventures invested INR 500 600 mn in VA Tech Wabag in 2006

    Company focused on water and waste water management solutions

    Buy Out deal with ICICI Ventures buying the stake from Australian Parent

    Exited in 2010-11, making returns of 6x 8x

    Punj Lloyd

    Punj Lloyd raised $50 million from New York Life Investment Management India Fund II, Standard

    Chartered PE and Temasek Holdings in 2004; Punj Lloyd had revenue of INR 16.2 billion in 2003-04

    The Company launched its IPO in 2005. Presently has a revenue of INR 81.6 billion

    NYLIM Jacob Ballas exited, making a return of >4.5x

    High Return on Capital Deals*

    *Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 44

    IPO Exits

    Pipavav Defence

    Pipavav Shipyard raised about $60 million from New York Life Investment Management India

    Fund II, Indus Capital and Trinity Capital in early 2007, followed by approximately $150.0 million from

    other investors to set up the largest shipbuilding yard in India

    The Company launched its IPO in Sep 2009 and now has a market cap of >$ 1.3 billion

    At Market Price of around INR 75, at 3.0x NYLIM Investment price

    Jubilant Foodworks

    JP Morgan and India Private Equity Fund invested in Jubilant Foodworks over a period of 1999-2003

    Total investment approximately INR 500 million

    Exited at IPO in 2010, returns >4x

    Shriram Transport

    Chrys Capital invested approximately INR 1,000 1,200 million in Shriram Transport in 2004-

    05

    Exited in tranches, making a complete exit by 2009

    Returns > 10x

    *Source: Various newspaper articles

    High Return on Capital Deals*

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 45

    Strategic Sale/ Sale to Another PE Fund

    Excelsoft

    UTI Ventures invested INR 25 million in 2001 in the e-learning firm for a 35% stake

    In early 2008, D.E. Shaw bought UTI Ventures stake for INR 1,250 million, representing a 50x return

    Paras Pharma

    Actis and Sequoia invested in Paras Pharma between 2006-2008

    Exited in 2010 through sales to Reckitt Benckiser Returns of >3x

    MphasiS BFL

    In 1998, Baring Private Equity invested $11.4 million in the loss making BFL software. It later merged the

    company with another portfolio company, Mphasis

    Revenue growth from INR 1.8 billion in FY 2001 to INR 50.3 billion in FY2010. The Company has a

    market cap of >$1.6 billion

    In June 2006, Baring sold its entire stake in MphasiS BFL to EDS, making a return of over 16x

    Dr Lal Pathlabs

    Sequoia capital invested in Dr Lal Pathlabs in 2006

    Exited in 2011 through sale to TA Associates. Returns expected to be >6x

    High Return on Capital Deals*

    *Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 46

    Vaibhav Gems

    Warburg Pincus invested INR 2,470 million in Vaibhav Gems in 2004-05

    Sold the stake to HNIs at INR 184 million in 2011

    Value lost 92.5%

    Amtek India

    Warburg Pincus invested INR 1,500 2,000 million in 2006

    Sold part stake in November 2010

    Value lost 63%

    KS Oil

    New Silk Route (INR 135 cr) and CVCI & Barings (INR 49 cr each) in KS Oil @ approx INR 48 INR 57

    per share in 2009

    Current share price of INR 2.0 per share

    Value lost >90% (These are notional losses as these fund may still be holding the shares)

    Fame India

    Taemasek invested $ 7.5 million in Fame India in 2005

    Sold stake in 2009. Value Lost > 50%

    Return of Capital!!!*

    *Source: Various newspaper articles Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 47

    Venture Intelligence

    VC Circle

    The Fourth Wheel Report on PE from Grant Thornton

    Economic Times and other News Articles

    Deal Curry

    Bain & Company report on PE Industry in India, 2012

    EY report on PE industry

    References

    Presentation only for reference purposes. Not to be reproduced anywhere. Please see disclaimer on disclaimer slide

  • 48

    THANK YOU

    Shwetank Patni Jacob Ballas Capital

    [email protected] +91 99109 98766

    mailto:[email protected]

  • 49

    Disclaimer

    The presentation represents the personal views of the author and not his organization. No claim is made for its accuracy or otherwise and users should do their own research in arriving at investment decisions. The data has been sourced from various public sources and may not be completely accurate. The data is used more for representation purposes and should not be reproduced anywhere with reference to this presentation. The data mentioned should not be used to judge/ comment on the performance of any fund. Data has been picked up randomly for specific cases and does not reflect an opinion on any fund. The presentation should not be used or reproduced without the consent of the author.