TABLE OF CONTENT

Chapter 1: INDUSTRY PROFILE

1.1. Overview
Chapter 2: COMPANY PROFILE
2.1. Introduction
2.1.1. Vision Statement
2.2.2 Organization Structure
2.2. Value Added Services
2.3. How does it Work?
2.3.1. First Stage: Ideate
2.3.2. Second Stage: Optimize
2.3.3. Third Stage: Activate
2.4. Why has a Methodology?
2.5. Profile of the Directors
Chapter 3: ALTERNATE INVESTMENT FUND
3.1. Definition
3.2. Characteristics
3.3. Why regulation is required?
3.3.1. SEBI notifies regulation on ATF

1
Chapter 4: UNDERSTANDING PRIVATE EQUITY
4.1. Definition
4.2. What is Private Equity?
4.3. Classification
4.4. Investment patterns of Private Equity Fund
4.5. Taxation Issues
4.6. Benefits of Private Equity
4.7. The Private Equity Business Model
Chapter 5: PRIVATE EQUITY IN INDIA
5.1. Overview
5.2. History of Private Equity in India
5.3. The Current Scenario
5.3.1. Private Equity Investment in India in 2011
5.3.2. Number of Deals
5.3.3. The sector wise segregation of the Investment in India
5.3.4. Annual returns from various Sectors
5.3.5. The top Private Equity Investments in India
5.3.6. Exit Opportunity
5.3.7. Top Private Equity Fund Managers
5.4. Opportunities and Challenges
5.5. Recent deals that happened in India
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Chapter 6: COMAPARATIVE ANALYSIS OF EMERGNG
MARKET AND DEVELOPED MARKET
6.1. Overview
6.2. Emerging Market VS Developed Market
6.3. Characteristics those distinct Developed Countries from
Emerging market
6.4. Risk Associated with Emerging Markets
6.4.1. Measures to reduce the effect of risks
Chapter 7: FINDINGS
7.1. Introduction
Chapter 8: LEARNINGS
8.1. Introduction
Chapter 9: CONCLUSION
Chapter 10: BIBLOGRAPHY

3
 LISTS OF TABLE

Tables
1. Table 1: No. of Deals
2. Table 2: Top Private Equity Players
3. Table 3: Percentage of GDP growth
4. Table 4: Percentage of Political and Socio-economic factors

Figures

1. Figure 1: Working Model

2. Figure 2: Ax6 Model
3. Figure 3: Stages of Private Equity
4. Figure 4: Private Equity Business Model
5. Figure 5: Overview of Business Model
6. Figure 6: Private Equity Investments
7. Figure 7: Sector wise Investments
8. Figure 8: Exit opportunity
9. Figure 9: Number of Exits
10. Figure 10: Top Private Equity Fund Managers
11. Figure 11: Percentage Returns Received
12. Figure 12: Trend Chart of GDP Growth
13. Figure 13: Percentage Growth of Population
14. Figure 14: Private Equity Fund Raising

4
CHAPTER 1: INDUSTRY
PROFILE

5
 CHAPTER 1: INDUSTRY PROFILE

1.1. OVERVIEW
The practice of multiple parties conducting business through a partnership is an ancient one.
Among the earliest commercial partnerships were ones formed to raise money for seafaring
ventures. The investors who stayed back home deemed it appropriate for the people who actually
captained the ships to receive a disproportionate share of the spoils. In todays private equity
trade, the private equity firms can be thought of as the ships, and the general partners as the
captains who get a disproportionate share of profits
.
Private equity firms are groups of individuals who come together to pursue private equity
investments. While almost all private equity professionals invest a portion of their own money,
private equity firms today primarily deploy capital on behalf of others. These firms tend to be
partnerships, similar in form to other private professional services firms, like law firms, for
example. A private equity firm today might range in size from two people and a secretary to
hundreds of investment professionals.

The state of the industry as of August 2011 is as follows.

Private equity funds under management totaled $2.4 trillion at the end of 2010. Funds available
for investments totaled 40% of overall assets under management or some $1 trillion, a result of
high fund raising volumes between 2006 and 2008. It could take another three years to invest the
current volume of uninvested capital targeted for buyouts.

Nearly $180bn of private equity was invested globally in 2010, up 62% from the previous year.
Activity in the sector is likely to build on this recovery and top $200bn in 2011 as investor
sentiment continues to improve. The average cost of debt financing was still well up on pre-crisis
levels, while leverage is down and private equity firms are contributing a bigger proportion of
equity into their deals.

6
Exit activity totaled $232bn globally in 2010, a three year high. It continued to increase in 2011,
to reach an all-time quarterly record of $120bn in Q2 as fund managers took advantage of
relatively robust financial markets to exit investments made in years preceding the credit crisis.

The three years up to 2009 saw an unprecedented amount of fundraising activity, more than $1.4
trillion being raised. However the subsequent economic slowdown took a heavy toll and the
fundraising environment remained depressed afterwards, with only some $150bn in new funds
raised in 2010, slightly up on the total raised in the previous year, but around one-third of annual
funds rose in the years preceding the credit crisis. New funds raised in 2011 are likely to increase
to around $180bn.

The average time taken for funds to achieve a final close fell to 15.5 months in the first half of
2011, down from over 20 months in the previous year.

7
CHAPTER 2: COMPANY
PROFILE

8
 CHAPTER 2: COMPANY PROFILE

2.1. INTRODUCTION

Prequate Mindwork is a small customized Business Consultancy that was established in 2010 by
three Chartered Accountants, when they discovered the need to develop an organization that
could provide professional advice to SMEs when they lack the skills of surviving in the market.
They assist this small and medium size firm to sustain and expand in the economy. They also
assist SMEs in designing their business model and help them in building Financial Model. It
helps in adding value to small and medium businesses in the manner that large consulting firms
are able to add value to the large scale industries. The company operates in the consultancy
sector and has been in operations for 2 years.

Prequate aims to marry the ground realities of business carried on with the professional advice
arising from approaches and industry practises of consulting to provide action oriented plans to
clientele. This implies making execution plans more realistic, accurate and achievable
considering business conditions.

For an SME, this could make all the difference. By introducing planning tied to execution tied to
appraisal, Consulting services move to Execution services.

2.1.1. VISION OF THE ORGANIZATION

Prequate envisions a focused and goal oriented approach to planning and execution of
operations within the organization. This forms Prequates methodology as well as our approach
to client engagements for operations.

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 Their Vision statement is:

Based on the vision of the organization ( Aspire ), identifying ( Ascertain ), evaluating (

Analyse ) and establishing, Organic and Inorganic opportunities for businesses, so that they may,
as symbiotic organisations ( Associate ), achieve ( Adopt ) their inclusive growth potentials (
Ascend ).

2.1.2. ORGANISATIOANL STRUCTURE

It has a single level hierarchy and is solely owned and run by its three Directors:

1. Pradyumna Nag
2. Rakesh Bordia and
3. Rishabh Pahariya.

2.2. VALUE ADDED SERVICES

Prequate Consultants offers customized management. These aim to enhance the conceptual and
practical techniques of client organizations managers and staff.

They identify their clients skills development needs and provide solutions to meet their needs
that are aligned to National Qualification Framework, in this way adding value to its relevant
sector.

The association brings together experience and vantage in the fields of

Management consulting,

Management accounting,

Transaction accounting,

Risk management,

ERP Implementation,

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 Merger accounting,

Assurance and Taxation.

They have a team that is highly qualified and experienced. They have partnering agreements with
other organization allowing them to implement both small and large projects with ease. They
have a thorough understanding of their operational environment. Small enough to quickly adapt
to changes in this dynamic environment.

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2.3. HOW DOES IT WORK?

Prequate works with organizations right from the Ideation stage to help model the business to
the stage that they are established businesses to focus on optimizing operations and creating
value propositions.

OPTIMIZ ACTIVAT
IDEATE E E

Fig.1: Working Model

2.3.1. FIRST STAGE: IDEATE

1. It helps organizations develop a Scalable - Sustainable - Goal oriented business and
operations model.
2. It helps organizations to start up operations in the optimal manner.
3. It works to create value propositions that estimate and attract Interest & Funding.

Various services provided at this stage are:

a. They help in developing BUSINESS MODEL and MARKETING PLAN for the
organization.
b. They also formulate REVENUE MODEL and VALUE CREATION MODEL for their
client.
c. They also assist them in building INTERNATIONAL OPERATIONS MODELS and also
help their client in GOAL SETTING.
d. They also serve their client in fulfilling various LEGAL FORMALITIES.
e. They even do BUSINESS VALUATION and also help them in raising funds through
various sources.

2.3.2. SECOND STAGE: OPTIMIZE

1. It helps organizations measure their performance and find out where they are heading by
developing a Value measurement framework.

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 2. It develops lean structures and processes that help reduce process wastages and improve
efficiencies.

Various services provided at this stage are:

a. Performance Appraisal
b. Management Accounting
c. Costing
d. Organizational Structuring
e. Process Engineering
f. Budgeting and Forecasting
g. Risk Management
h. Funding Assistance

2.3.3. THIRD STAGE: ACTIVATE

1. It helps organizations measure their performance and find out where they are heading by
developing a Value measurement framework.
2. It develops lean structures and processes that help reduce process wastages and improve
efficiencies.

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2.4. WHY HAS A METHODOLOGY?
1. It helps in laying down a blue print for their client. The documented process helps
management in their projects and also increases their as well as their employees
engagement in the project.

2. It lays down the workflow that Prequate uses to understand and deliver on a particular
engagement to their respective client.

3. It also helps them in ensuring that the requirements are clearly understood and the
communications are meaningful, resourceful and useful.

THE APPROACH FOLLOWED:

They use a very distinctive approach in dealing with their clients. This approach is known as
Prequates A x 6.

Opportunities | Expansion | Ascen

Market strategy d
Implementation |
Execution Adopt
Alliances | Associ
Synergies
Analyz ateAssess | Review
Ascert eMeasure | Benchmark
ainPlan | Goals | Model | Growth
Fig.2: Ax6
Aspire Path Model

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2.5. PROFILE OF THE DIRECTORS

After working with KPMG, one among the largest 4 Assurance and
Consulting firms in the world, he is now leveraging his experience of
how stuff works to provide guidance to small and medium businesses to
help them start-up, size up and scale up.
His experience has taken him through a wide range of businesses
Software, Consulting, NGO, Microfinance advisory, Merger Accounting,
ERP Implementation and Organisational training. His strengths are
PRADYUMNA mainly in the areas of Branding, Marketing, Organisational development
NAG and Strategy.
In the entrepreneurial past, he has been a founder of 2 start-ups which
have ranged in nature of business and operational models.

With his experience from one of Bangalores largest Assurance firms

Singhvi, Dev & Unnikrishnan, he brings into the plate hands on
experience of what ails small and medium businesses. With a developed
RAKESH BORDIA understanding of the issues that may come up in the planning and
implementation of consulting advice to medium size businesses, he filters
out what is capable from what is possible. His strength is in the area of
Costing, Financial analysis, Technical accounting and Taxation. His gift
is however, the ability to work effortlessly with numbers and give picture
to numerical figures. He handles the Execution and Delivery division of
Prequate.
Apart from this, he is also a National Level rank holder in the CA
Qualification examinations. He is also a Company Secretary by
qualification.

The ever optimist, Rishabh brings with him a solid foundation in Risk
management and advisory from one of the industry leaders in the field,

15
 Ernst & Young. A chartered accountant and a company secretary, he
RISHABH seamlessly merges the theoretical with the practical. His experience has
PAHARIYA taken him across the economy, from IT to Construction and from
Publishing to Security solution providers. His area of expertise, however,
is in solid straightforward execution. His strengths mainly lie in the areas
of Financial Analysis, Business modelling and Strategy. Once he is able
to look clearly at the objectives, he is hardwired to make it happen. This
makes him a valuable asset to every organization and to every
assignment which Prequate handles.

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CHAPTER 3: ALTERNATE
INVESTMENT FUND

17
 CHAPTER 3: ALTERNATIVE INVESTMENT FUND

3.1. DEFINITION

Any investment other than a stock, bond, or cash is known as Alternative Investment Fund.
Prominent examples include derivatives, hedge funds, real estate, and commodities. Most of the
time, institutional investors and high net-worth individuals are the main holders of alternative
investments. This is because they are subject to fewer regulations and are
consequently riskier than most other investments. Alternative investments are rarely required to
publish independently verifiable financial information. They also have particularly high
minimum investments, which discourage casual investors. Alternative investments are
controversial in many quarters. Because of the comparative lack of regulation and disclosure,
they are subject to scrutiny from politicians and economic analysts. However, they often have
high (sometimes very high) returns.

3.2. CHARACTERISTICS

Alternative investments are often used as a tool to reduce overall investment risk through
diversification in portfolio.

Some of the characteristics of alternative investments may include:

These funds are less correlation with traditional financial investments such as stocks and shares.
Alternative investments may be relatively illiquid.
It may be difficult to determine the current market value of the asset.
There may be limited historical risk and return data.
A high degree of investment analysis may be required before buying.
Costs of purchase and sale may be relatively high.

3.3. WHY REGULATION IS REQUIRED

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1. SEBI (Venture Capital Funds) Regulations were framed by SEBI in 1996 to encourage
funding of entrepreneurs earlystage companies. However, it has been found over the years that
VCFs are being used as a vehicle for many other funds such as:
(i) Private Equity (PE)
(ii) PIPE (Private Investment in Public Equity)
(iii) Real Estate
While investment objectives of these funds may have valid economic reasons yet this has
resulted in a neglect of the original aim of promoting early stage companies as envisaged under
VCF Regulations. Secondly, because the VCFs are populated by Private Equity, PIPE and Real
Estate Funds, it is not possible to give targeted concessions to VCFs to promote startup or early
stage companies as there is clear possibility that the advantages will be reaped by well
established listed companies or other mainstream players. At the same time the investment
restrictions on VCFs which operate in unlisted space, are such that PE and PIPE funds finds it
restrictive.
Further, there are some regulatory concessions needed by PE and PIPE funds and which may not
be appropriate for VCFs. For instance, there are requests that they should be allowed to invest in
secondary markets as well. Recently there have been requests by various PE Funds registered as
VCF to give them exemptions from Take over Regulations and Insider Trading Regulations. To
sum up, VCFs are being used as an omnibus investment fund which leaves most of the private
investment funds dissatisfied.

2. Registration of VCF is not mandatory under VCF Regulation. Not all players in the VCF or
PE industry are registered with SEBI. These unregistered entities are not subject to investment
restrictions which are applicable to registered VCFs. Thus registered VCFs seek to enjoy similar
opportunities which are exploited by unregistered funds. To avoid having regulatory gaps and to
have level playing field there is a need to have uniform norms for same type of fund or industry.

3. There remains a considerable need for longterm cost effective funding that can be sourced
from diverse parts of the privatesector capital markets or private pool of capital such as PE or
PIPE funds etc., and that can be translated into meaningful finance for start ups, small and

19
 medium business and infrastructure. It is felt that a more comprehensive legal framework is
necessary to promote the growth of this market in earnest.

4. There is a need to recognize Alternative Investment Funds (AIF) such as PE or VC etc., as a

distinct asset class apart from promoter holdings, creditors and public investors.

5. The patient source of active capital provided by PE or VC etc., plays a very important role in
the growth of the corporate sector and they bring a lot of governance and good quality money on
the table of investee company. However, recent financial difficulties in western countries have
underlined that many AIF strategies are vulnerable to some risks in relation to investors, other
market participants and markets and may also serve to spread or amplify risks through the
financial systems. The regulator needs to have overall picture of risks posed by such funds.
Therefore, it is necessary to establish a framework capable of addressing those concerns.

6. Investors in VCFs, PE etc., are sophisticated and well informed. SEBI acts more as a
facilitator with minimal regulation. However, with exponential growth of private fund industry
and their systemic importance for stability of financial market, globally private pools of capital
are now being subjected to regulation of different degree by various jurisdictions. The alternate
asset industry needs to be regulated for fair and efficient functioning of financial market.

3.3.1. SEBI NOTIFIES REGULATION ON ALTERNATIVE-INVESTMENT FUNDS

20
Regulations are needed to safeguard the interest of the citizen of the country. So, in order to
address the systemic risk posed by unregistered private pools of capital and to protect the interest
of the investors a regulation is necessary for alternative investment funds.

The entire objective of setting this Alternate Investment fund body was to protect the interest of
the investors and to bring down the financial costs and increasing access to mutual funds by new
distribution channels i.e. market development and market regulation.

In 2008 a suggestion by Mr. Mukherjee was sent to SEBI, to build a body for regulating the
interest of the investors in the world of alternate investments funds, because in the absence of
any such regulating body many hedge funds and PIPE funds remain as fence sitters and are
undecided on investing money in India. A proper regulatory framework for all shades of private
pool of capital will help them in deciding their investment strategy for India, according to capital
market observers.

SEBI had in its concept paper released in August 2011.

It contained rules and regulations like:

1. Stipulated that it would be mandatory for all types of private pools of capital or
investment funds to seek registration with the capital market regulator.

2. It was also specified that funds would have to be close-ended and they could be formed
as companies, trusts or body corporate including LLP structure.

3. The alternative investment funds should pool the money from high networth investors,
institutional investors or corporate through private placement and should not solicit
money from retail investors.

4. The investors may be locked in the fund for a minimum period of three years or more
depending on nature and tenure of fund.

21
CHAPTER 4: UNDERSTAND
PRIVATE EQUITY

22
 CHAPTER 4: UNDERSTANDING PRIVATE EQUITY

4.1. DEFINITION

Private equity is medium to long-term finance provided in return for an equity stake in
potentially high growth unquoted companies. Some commentators use the term private equity
to refer only to the buy-out and buy-in investment sector. Others, in Europe but not the USA, use
the term venture capital to cover all stages, i.e. synonymous with private equity. In the USA
venture capital refers only to investments in early stage and expanding companies. To avoid
confusion, the term private equity is used throughout this Guide to describe the industry as a
whole, encompassing both venture capital (the seed to expansion stages of investment) and
management buy-outs and buy-ins.

4.2. WHAT IS PRIVATE EQUITY?

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.

4.2.1. 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 investments can be divided into the following categories:

Venture capital: an investment to create a new company, or expand a smaller company that has
undeveloped or developing revenues

23
 Buy-out: acquisition of a significant portion or a majority control in a more mature company.

The acquisition normally entails a change of ownership

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.

4.2.2. 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.

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.

24
 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.

4.3. CLASSIFICATION OF PRIVATE EQUITY

Private Equity investments can be classified into:

Seed stage Financing provided to research, assess and develop an initial concept before a
business has reached the start-up phase
Start-up stage Financing for product development and initial marketing.
Expansion stage Financing for growth and expansion of a company which is breaking
even or trading profitably.
Replacement capital Purchase of shares from another investor or to reduce gearing via
the refinancing of debt.

25
 The above stages can be explained by the diagram which is shown below -:

Fig.3: Stages of Private Equity, Source: private-equityonline.com

4.4. INVESTMENT PATTERNS OF PRIVATE EQUITY FUNDS

Private equity fundraising

Private equity fundraising refers to the action of private equity firms seeking capital from
investors for their funds. Typically an investor will invest in a specific fund managed by a firm,
becoming a limited partner in the fund, rather than an investor in the firm itself. As a result, an
investor will only benefit from investments made by a firm where the investment is made from
the specific fund that they have invested in.

The majority of investment into private equity funds comes from institutional investors. The
most prolific investors into private equity funds in 2006 were public pension funds and banks
and financial institutions, which together provided 40% of all commitments made globally
according to data from London-based Private Equity Intelligence Ltd.

26
Other prominent groups investing in private equity include corporate pension plans, insurance
companies, endowments, family offices, and foundations.

Another large investor group in private equity funds is so-called fund of funds, which are private
equity funds that invest in other private equity funds in order to provide investors with a lower
risk product through exposure to a large number of vehicles often of different type and regional
focus. Fund of funds accounted for 14% of global commitments made to private equity funds in
2006 according to Private Equity Intelligence Ltd.

As fundraising has grown over the past few years, so too has the number of investors in the
average fund. In 2004 there were 26 investors in the average private equity fund; this figure has
now grown to 42 according to Private Equity Intelligence Ltd.

It is also worth noting that the managers of private equity funds themselves will also invest in
their own vehicles, typically providing between 15% of the overall capital.

Often private equity fund managers will employ the services of external fundraising teams
known as placement agents in order to raise capital for their vehicles.

The use of placement agents has grown over the past few years, with 40% of funds closed in
2006 employing their services according to Private Equity Intelligence Ltd.

Placement agents will approach potential investors on behalf of the fund manager, and will
typically take a fee of around 1% of the commitments that they are able to garner.

The amount of time that a private equity firm spends raising capital varies depending on the level
of interest amongst investors for the fund, which is defined by current market conditions and also
the track record of previous funds raised by the firm in question. Firms can spend as little as one
or two months raising capital where they are able to reach the target that they set for their funds
relatively easily, often through gaining commitments from existing investors in their previous
funds, or where strong past performance leads to strong levels of investor interest.

Other managers may find fundraising taking considerably longer, with managers of less popular
fund types (such as European venture fund managers in the current climate) finding the
fundraising process more tough.

27
 It is not unheard of for funds to spend as long as two years on the road seeking capital, although
the majority of fund managers will complete fundraising within nine months to fifteen months.

Once a fund has reached its fundraising target, it will have a final close. After this point it is not
normally possible for a new investor to invest in the fund, unless they were to purchase an
interest in the fund on the secondary market.

4.5. TAXATION ISSUES

The most contentious issue is that of taxing these Private equity Funds.

Private equity funds and hedge funds are private investment vehicles used to pool investment
capital, generally for a small group of large institutional or wealthy individual investors. They
are subject to favorable regulatory treatment in the United States, which allows them to engage
in financial activities that are off-limits for more regulated companies. Both types of companies
also take advantage of generally applicable rules in the U.S. Internal Revenue Code to minimize
the tax burden on their investors, as well as on the fund managers. As media coverage increases
in the United States regarding the growing influence of hedge funds and private equity, these tax
rules are increasingly under scrutiny by members of Congress. Private equity and hedge funds
choose their structure depending on the individual circumstances of the investors the fund is
designed to attract, as discussed below:

Basic Structure: U.S. Domestic Fund

A private equity or hedge fund located in the United States will typically be structured as a
limited partnership, due to the lack of an entity-level tax on partnerships and other flow-through
entities under the U.S. tax system. The limited partners will be the institutional and individual
investors. The general partner will be an affiliate of the manager of the fund. Typically, the
manager of the hedge fund is compensated with a fee based on 2% of the gross assets of the
fund, and a profits interest entitling the manager (or, more typically, its affiliated general partner)
to 20% of the fund's return (subject to minimum guaranteed returns for the limited partners).

28
4.6. BENEFITS OF PRIVATE EQUITY
On Economy Growth

1. Small and mid-market PE firms fuel economic growth and job creation at the local, state
and regional level by providing companies with the capital necessary to strengthen and
expand their operations or, in some cases, acquire new businesses.

2. Private equity firms deliver deep expertise in the sector in which the investment is being
made; a performance culture that rewards entrepreneurialism and results; managerial and
functional capabilities (IT, for example); and an ownership structure that allows even the
toughest decisions to be made quickly.

On Employment

1. The benefits of improved performance are passed on to employees of private equity-

owned companies in the form of higher wages, competitive benefits and greater job
security and stability.
2. Private equity investment over time often slows or halts existing job losses and can drive
job growth in new facilities, according to a 2008 study of 5,000 transactions over 25
years commissioned by the World Economic Forum and led by Harvard Business School
Professor Josh Lerner.

Performance

1. Private equity investment makes companies stronger when they enter public equity
markets. The share price of companies owned by PE firms for a year or more that went
public between 1981 and 2003 outperformed the stock market as a whole over a three-to-
five year period.
2. Over time, private equity investments often slow or halt existing job losses and under
some conditions can drive significant job growth, according to a study commissioned by
the World Economic Forum.

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3. By 2008, the total net profit distributed to investors worldwide by private equity funds
raised through 2007 was $1.12 trillion, according to Private Equity Intelligence.

30
4.7. THE PRIVATE EQUITY- BUSINESS MODEL

Private equity is a vital source of capital investment in the U.S. and global economies. The
investment model is simple:
1. PE players buy company that has significant potential for growth.
2. They invest capital, time and effort for the period of 5-7 years, to improve their
performance and increase their value.
3. Once the tenure is over, they sell the improved companies, hopefully at a profit, and
undertake a new investment.

This is a very vibrant and diverse industry. There are more than a thousand players in this
industry and growth capital firms, many small and mid-sized, working in markets across
the country to invest, acquire and strengthen companies of all sizes and industry sectors.
The private equity business model involves different players (see image below) and can be
broken down into four main phases.

31
 Fig.4: The Private Equity Business Model, Source: EVCA Yearbook 2007

1. Creation of a fund and underwriting by professional investors

After obtaining the agreement of the controlling authorities, private equity firms (known as
private equity management companies or General Partners (GPs)), establish investment funds
that collect capital from investors (known as Limited Partners or LPs). The private equity firms
use this capital to buy high-potential companies (known as the portfolio or investee companies).

Thus, private equity fund managers invite institutional investors and individuals with particular
expertise or significant assets, to subscribe to an investment fund for a set period (on average ten
years), which will take equity stakes in high-potential companies following a clearly defined
investment strategy. This can be according to the size of the target companies, their sector, stage
of development and/or geographical location. These investors are often known as sophisticated
or professional investors, because they understand the risks inherent in this type of operation.

32
 The fundraising period lasts for six months to one year.

As investment funds are for the most part closed, institutional investors cannot leave those funds
before their term (or they will have great difficulty in doing so). This financial stability is one of
the clear advantages for the entrepreneur who seeks a private equity investment.

In exchange for the money they provide, investors receive a pre-negotiated stake in the equity of
the investment fund and they become fully-fledged shareholders, sharing in the risks associated
with the private equity firm.

The investors aim, through the fund, is not to take control of the portfolio company (with the
particular exception of majority shareholdings) but to help create value in order to realise a
capital gain shared with the owners on exit. This type of financing is often called patient
capital, as it seeks to profit from long-term capital gains rather than short-term regular
reimbursements.

2. Investing the Fund

Once the target amount of capital has been raised, the subscription is closed. The private equity
investment managers then seek high-growth companies to invest in, following the investment
strategy they proposed to the institutional investors.

In some cases (30% on average), private equity investment funds will come together and form a
financial syndicate to make an investment. This will happen if the risks are high or if the
amount of capital required in the operation is particularly substantial. One of the investment
funds will represent the group in the syndicates dealings with the entrepreneur. This
representative will follow a mandate negotiated with his partners. The average private equity
fund size in 2006 was 322 million, ranging from small seed capital funds of less than 10
million up to large buyout funds managing several billion Euros.

The private equity management team essentially makes investments in the first five years of the
fund.

33
3. Managing the Investment

The fund managers run their investment operations and prepare exit strategies depending on
market conditions, agreements drawn up in advance with the entrepreneurs and opportunities for
disposal.

Because the fund manager on behalf of the investors is concerned with creating value in the
company, he will follow his investment over the long term and will participate in any subsequent
rounds of financing required.

4. Redistribution

When fund managers decide to exit their investment, the capital recovered from the exit is
redistributed to the original investors on a pro-rata basis depending on the size of their initial
investment. These reimbursements, along with the capital gains, allow the institutional investors
to honor their insurance contracts, pensions or savings deposits.

Institutional investors are looking for significant profit from their investment to compensate for
the fact that their capital is tied up for long and to ensure that they can reimburse the money
allocated to them by their clients (the savers and pensioners).

When all the capital collected from the investors has been invested and when certain investments
have already been exited, the fund managers may launch a second fund. Their credibility in
attracting new investors depends on their historical performance because they will be in
competition with other managers in the asset management market.

34
CHAPTER 5: PRIVATE
EQUITY IN INDIA

35
 CHAPTER 5: PRIVATE EQUITY IN INDIA

5.1. OVERVIEW

The Private Equity Industry has been drastically changing in this dynamic world. Despite of
these changes and uncertainty, emerging markets continue to be of interest to Private Equity. In
2002, funds raised by Private Equity from emerging markets was less than 10% in 2002 as
compared to USA & UK, whereas, the funds rose to more than 60% in the year 2011. Most of
this money is moving east into Asia-Pacific. However, it is not only China attracting interesting;
there are opportunities across the whole region. Australia, India, Japan, Vietnam and Taiwan are
all attractive markets for Private Equity, and will be for some time. Even a larger share is being
contributed towards Latin America and Africa.

Private equity (PE) has established firm roots in India over the past decade, drawn by the
nations phenomenal growth, dynamic entrepreneurs and hunger for capital to finance
opportunities in nearly every business sector. As its role increased in significance over the past
decade, PE has shaped itself to the contours of the Indian economy and unique business culture.
Yet, while this quintessentially adaptable industry has taken on many distinctive traits in Indias
hothouse growth environment led principally by domestic consumption, it is important to bear in
mind that PE and venture capital (VC) are chiefly influenced by the overall health of the global
economy and investment climate. That is because PE and VC fund investors are still
predominantly based outside of India.

36
 5.2. HISTORY OF PRIVATE EQUITY IN INDIA

22 2 2 00 0 0 0 11 0 1 01 10 1 : :
8T : 0 h : t 8 e o
2rt2 rT tT e 00 e c o h h n o 00 e e d v
9e t 2r r r: ey 0e c n o
Pt ad 0v E k e 9 re y: s
hh Pt o i a tl E k d s e
a hs i t
pp sh ll o aa a l tt d
e p a l u a
t e a
u
Fig.5: Overview of History

1. 2008 to 2009: PE hits a plateau

The first leg of Indias PE journey came to an end in late 2008 with the bursting of the US
housing bubble and the ensuing financial meltdown that crippled credit markets across the US
and Europe. The abrupt end of the mid-2000s boom in the developed markets also led Indias
economic growth rate to slow. The resulting drop in PE activity has shown that Indian PE is
cyclical, although the rebound has been much quicker in India than in the developed markets.
The global downturns second big effect was to shift global PE investors focus from the
developed economies to markets in India and the other emerging markets of Asia.

While recession and adverse credit conditions continued to curtail investment activity in the US
and Europe, continued GDP growth across Asia barely took a pause. Indias economy slowed
only modestly to 6.7 per cent in early 2009 from its pace of between 8 per cent and 9 per cent
across the peak years of the business cycle. However, Indias rebound was as quick as its
reflexive downward slide, and the economy regained its torrid momentum. By the second half of
37
 2009, growth rates between the slumping developed economies and the robust emerging markets
had diverged sharply. With Indias GDP climbing again, PE deal flow picked up in its wake.

2. 2010: The recovery takes hold

As economies and credit markets in the US and Europe stabilized in 2010, PE investors returned
to deal making with cautious optimism and took advantage of rebounding public equity markets
to sell mature portfolio holdings to lock in gains. But the recovery of PE activity in the West did
not come at the expense of PE investors continued interest in India, China or any other large
emerging economies. In sharp contrast to 2009 when Indian deal value saw the regions biggest
decline, India saw the largest increase in deal activity among the big Asia-Pacific markets. Total
deal value more than doubled, in 2010, to US$9.5 billion, and the number of deals rose to 380.
Nearly every major sector of the Indian economy participated in the strong deal-making
recovery, with the energy sector attracting the most capital. Yet for all the indicators pointing to
private equitys renewed strength in 2010, PE deal activity still remained well below what it had
been during the boom years of 2007 and 2008.

3. 2011: The trend

Despite some short-term nervousness in the capital markets as 2011 began, the fundamentals
look auspicious for PE in India to continue to grow and evolve. An imbalance in supply and
demand is creating inflationary pressures, leading to rising interest rates and increased pressure
on corporate earnings. However, investment opportunities were attractive both in the near term
and over the longer run. Consumer spending continues to increase on the back of rising
disposable household incomes. The government remains committed to its goal to close Indias
infrastructure gap and pursue its growth and reform agenda in key sectors like financial services
and energy, among others. At the current rate of GDP growth, the total value of goods and
services produced by Indias economy should approach US$1.3 trillion by the end of the year.

38
5.3. THE CURRENT SCENARIO

1. India still expected to witness growth higher than most of the economies and has also
being estimated to surpass China.
2. European and American economies are facing recession.
3. Expected increase in consumerism i.e. (the changing lifestyle of the consumers, increase
overall per capita income, more distribution of funds in the economy) gives India an
upside growth of various business with the help of Private Equity investing in India.
4. There has been Increase in the outbound M&A activities by blue chip companies would
require significant fund inflows.
5. The bars of economic stability have been going up which results in Trade-to-GDP ratio
more than doubled over the past fifteen years.

39
5.3.1. PRIVATE EQUITY INVESTMENTS IN INDIA IN 2011

Value US $ Billion
16
13.89
14
12 10.66 10.2
10
8.19
8
Investments (US $ Billion)
6
4.05
4
2
0
2007 2008 2009 2010 2011

Years

Fig.6: Private Equity Investment, source: www.ventureintelligence.in,2011

In Fig. 6, it states that the fund invested by Private Equity players in 2007 (before recession)
were huge as India had lot of potential in the market, but it was brought down to 10.66 in 2008
from 13.89 in 2007. The reason of this downfall was the effect of the sub-prime crisis that
strokes the entire global economy. Then there was a tremendous downfall to 4.05 in the year
2009. But, with the regain of the economy it started growing again but with a less growth rate
because after the downfall investors became very cautious about investing their money. But, its
always useful to invest during the recession time, as it is expected to extract maximum return in
the future.

40
5.3.2. NUMBER OF DEALS

YEAR NO. OF DEALS

2007 499
2008 481
2009 280
2010 365
2011 460
Table1: No. of Deals, source: www.ventureintelligence.in,2011

Table 1, illustrates that the number of deals that happened in India, from 2007 to 2011. In 2008,
impact of recession was felt by the investors, so there was a minor drop down in the deals by
3.6%. in 2009, there was drastic fall down in the Indian economy(from 9.2% to 6.3%), so the
downfall in the no. of deals was by 41%. But later, investors became cautious about the
investments so there was a minor increase in the no. of deals.

41
5.3.3. THE SECTOR WISE SEGREGATION OF THE INVESTMENTS IN INDIA

SECTORS
IT & ITES (18) Engg & Construction (17) Media & Entertainment (1)

11 18
Textile & Garmets (1) Other Services (1) Food & Beverages (3)
16

17
1
16 1
Education (2) Financial Services (10)
4 2 3 Healthcare & Life Sciences(4)
10 1

Manufacturing (16) Energy (16) BFSI (11)

Fig 7: Sector wise Investments, source: www.ventureintelligence.in,2011

As being stated in the above chart (fig.7), IT & ITES sector as well as Real Estate &
Constructions is the strength of the economy as they attract maximum no. of Private equity in the
country. It helps in generating the maximum no. of revenues for the economy, followed by
Energy & Manufacturing. Even sectors like BFSI and Other Financial servives has a strong
contribution towards bringing in funds in the economy.

42
 5.3.4.

ANNUAL RETURNS FROM MEDIA

IT AND ITES (7.9) VARIOUS SECTORS
& ENTERTAINMENT (26.4)

HEALTHCARE & LIFE SCIENCES (-6.1) Energy (25.3)

10.4 7.9
11.2 26.4
18.8
ENGINEERING & CONSTRUCTION (20) TEXTILES
6.1 & GARMENTS (-9.8)
18.3 25.3
9.8 20
FOOD & BEVERAGES (18.3) OTHER FINANCIAL SERVICES (18.8)

BFSI (-11.2) MANUFACTURING (10.4)

ANNUAL RETURNS FROM VARIOUS SECTORS

Fig 8: Annual Returns from different sectors, source: www.prowess.cmie.in,2011

The return is the major key that attracts Investment in the economy. It has been observed in fig.
8, that Real estate is one of the most attractive sectors these days, as it extracts returns up to 20%
and provides lot of opportunity for the investors. But, Media and Entertainment gives a return
around 26.4%, the investment opportunity decreases in this sector because of heavy competition
and Mount of risks involved in this sector. Investors feel it is more profitable to invest in the
public sectors like power and energy because they are more secured and gives huge return.

5.3.5. THE TOP PRIVATE EQUITY INVESTMENTS IN INDIA

43
Top PE Investment

COMPANY SECTOR AMOUNT INVESTORS DATE

(US$M)

Hero Automobiles
Investments (Two-wheelers) 828 Bain Capital, Jun- 11
GIC

Welspun Corp Manufacturing 474 Apollo Mgmt Jun- 11

(Diversified)

IGate IT Services 375 Apax Partners Jan- 11

SKS Power Projects 261 Blackstone Aug- 11

Chhattisgarh (Thermal)
Power

ReNew Wind Renewable 204 Goldman Sachs Sep- 11

Power Power
Table2: Top Private Equity Players, source: www.ventureintelligence.in,2011

Table 2, discuss about the top private equity investors in India in the year 2011, it also shows the
various sectors in which they invest along with their ticket amount that they invest in the
companies. The table also shows the trend in the investment pattern of the industry. It has seen
that outside investors are more keen towards Real Estates and Energy sources, which is the most
attractive market for the investors.

5.3.6. EXIT OPPORTUNITY

PEs preferred mode of exit includes:

44
PFSIE n i
ritex i a
onrcli t
maoPO u
ontbp l i
tcedp
eigaOo f
raire r i
Blcynt g
uSu
yaSn
-lai t
Bely
ae
c
k

Initial Public Offering (IPO)

Secondary Sale
Strategic Sale
Financial Sale
Promoter Buy-back

45
 No. of Exits
140 133
120
100
80 60
55
60 43
40 No. of Exits
No. of exits 15
20
0

Mode of Exit

Fig 9: No. of Exits, source: Source: 325 exits from IFC invested funds, International Finance Corporation , 2011

The internal rate of return (IRR) is generally maximized in the IPO route and it is no surprise that
IPO is the preferred exit alternative. However presently, the IPO route is not sought after due to
unattractive stock markets and hence secondary sales option to a great extent and promoter buy-
back option to a marginal extent are likely to be prevalent.
Financial Services sector has dominated IPO offerings too. In 2009, there was a revival of
utilities IPOs and 2010 saw the dominance of Energy based IPOs. However, an interesting trend
noted is the parallel between 2008 and 2011. With IPOs being virtually non-existent, and with
high costs of debt, if the promoters look at capital expenditure over the next 2-3 quarters they
have to seriously consider the PE Option.

46
5.3.7. TOP PRIVATE EQUITY FUND MANAGERS

The Overall
summary

Fig 10: Top Private Equity Fund Managers, source: www.ventureintelligence.in,2011

The above diagram (Fig. 10), depicts the various parameters which are one of the most important
for setting the criteria for the investors to invest in any particular project. For E.g. Size of the
investments as well as the exit strategies are very important for them to deal in. these are some of
the parameters which makes investment market highly attractive for investors to invest in. they
consider all these factors while taking up any deal in any country.

47
5.4. OPPORTUNITIES AND CHALLENGES

GENERIC OPPORTUNITY

1. It has very attractive and cheap buying markets, which widens the gap of opportunity for
the investors in our nation.
2. There are many different sectors to invest in. But, India opens new sectoral investment
option- real estate, power & infrastructure, life sciences, textiles, media, microfinance,
Etc.
3. It helps in increasing potential of mid level companies in the country.
4. It also provides opportunity in entrepreneurship

CHALLENGES

The Value of Private Equity

1. Important to be an active investor to understand the value add from PE

2. Must trade-off value
3. Analyzing the relative merits of a potential non-PE investments
4. No relevant experience to guide

Exit Strategy

1. Market and business tolerance for public offerings

2. Inevitability of an IPO
3. Family business reluctant to relinquish control

Understanding Market Condition

1. Developing business plan and best practices for privately held and family run Indian
firms
2. Questions of global competiveness
3. Discarding what is relevant and possibly damaging for Indian companies

Other Challenges

1. Increased regulations
2. Lower IRR on existing PE portfolio

48
49
5.5. RECENT DEALS THAT HAPPENED IN INDIA ARE

1. Morgan Stanleys infra PE fund in talks to buy Lancos road assets

Private equity (PE) players, who burnt their fingers following big-ticket deals in Indias power
sector, are now showing interest in less risky road projects. Morgan Stanley Infrastructure
Partners, a $4-billion global infrastructure fund, is in early discussions with infrastructure
company Lanco Infratech to buy its 401 km of highway projects, in various stages of
construction, which are up for sale. A few other infra-focused PE firms are also engaged in due
diligence for Lancos road assets. The valuation was in the range of Rs 1,000-1,200 crore, said
sources. Ernst & Young was the advisor to Lanco in the sale, the sources added.
Gautam Bhandari, managing director of Morgan Stanley Infra-structure Partners, declined to
comment on his companys interest in Lanco. A Lanco Infratech spokesperson also declined to
comment.
Morgan Stanley Infrastructure Partners entered into a joint venture with Spanish company Isolux
Corsn to invest in road projects in India last year, with a plan to contribute $200 million each to
the joint venture. Experts widely believe Indias highways sector is ripe for private-equity
funding. There are close to $10-billion worth of completed road assets in the market for sale
and most of these assets (on build-operate-transfer mode) are post-2006 vintage, which have
been picked up in aggressive bidding with low returns (IRR), said Deepesh Garg, managing
director, O3 Capital, an investment bank. Since 2009, about 15 deals worth $1 billion have taken
place in Indian road projects. The largest size of investment, at $693 million, took place in 2011,
said data from VCC edge. In early 2012, PE firm 3i invested Rs 300 crore ($61 million) for a 49
per cent stake in the portfolio of road BOT projects of Supreme Infrastructure India Ltd.
Valuation, though, remained a concern for buyers, said Garg of O3 Capital. Companies are
expecting 1.5 2x book value on the completed assets, whereas buyers today may not be willing
to pay that price, given the low return expectations. Even in some cases, traffic has been over
estimated also, he said. According to Bhavik Damodar, head of infrastructure transaction
services at KPMG India, the presence of the National Highways Authority of India, or NHAI,
makes road projects a less risky investment as compared to other sectors such as power and
ports.

50
 Also, consolidation among small and mid-sized road projects will provide an exit route for PE
investors, said Damodar.

Source: Business Standard, June 6

2. Warburg leads $32 mn Quickr investment

US private equity firm Warburg Pincus along with existing investors have pumped $32 million in
fresh funds into India n online classifieds firm Quickr, the e-commerce company said on
Tuesday.
Quickr, which aims to use the cash to expand across online and mobile platforms, said existing
investors that participated in this round include online retail giant eBay Inc, private equity Matrix
Partners India and global venture capital firm Norwest Venture Partners. Rising incomes and
aspirations to own big brands at discounted rates are pushing middle-class India ns to shop from
the comfort of their homes, giving a boost to the countrys fledgling $10 billion online commerce
market.
With the business set to pick up India n media group Network 18 is moving towards a US listing
of its wholly owned online retail arm, HomeShop18, that could raise about $100 million, sources
said recently.
Private equity funds invested $10.58 billion across 501 deals in 2011 in India , up more than a
fifth from $8.47 billion across 416 deals in 2010, according to data from industry tracker
VCCircle.com.
Source: Indian Express, May 29

3. India Value Fund Advisors eyes Rs 500 crore stake in Manipal

India Value Fund Advisors (IVFA) may invest up to Rs 500 crore ($100 million ) in Manipal
Hospitals, the third-largest domestic healthcare service provider, as the latter holds talks with
private equity (PE) firms to accelerate expansion plans.

IVFA, with $1.4 billion in assets under management, is bullish on healthcare and has pursued
deals, including buyout opportunities, in the sector. The PE firm may back Manipal to chase

51
buyouts in an industry where many smaller chains and standalone hospitals are open to deal
making.

Ranjan Pai-led Manipal Hospitals is expected to finalise a fund raising move within three weeks,
with IVFA seen as a front runner, said three separate sources briefed on the matter. They are in
active discussions with three funds, including IVFA and an agreement may be reached soon. The
initial deal may fall anywhere between Rs 250 and Rs 500 crore, added one of the sources
mentioned earlier.
Manipal may fetch about Rs 1,500 crore valuations, giving the new investor a fairly large
minority stake.

Kotak Private Equity has around 15% stake in the company and could sell a part of it. But this
could not be confirmed.

A top Manipal official declined to comment, when contacted. IVFA cold not be reached
immediately.

Manipal has over 4,400 beds across 17 hospitals and serviced 1.8 million patients last year.

The chain owns 11 hospitals while the rest are on management contract. Manipals annualised
revenue is estimated at Rs 580 crore with Rs 85 crore in Ebitda.

Last year, both IVFA and Manipal were in the fray to buy Ahmedabad-based Sterling Hospitals.
UK private equity Actis, which owned a majority in Sterling, has put the regional hospital chain
on the block even though a deal is not concluded.

IVFA also holds a small stake in Dubai-based DM Healthcare, founded by doctor-turned-

entrepreneur Azad Moopen, which is now expanding in India. Private equity firms like Apax
Partners as well as Singapore (GIC) and Malaysian (Khazanah ) sovereign wealth funds have
struck investment deals in Indias healthcare industry, where Apollo Hospitals and Fortis
Healthcare are the leaders.

Source: Times of India, May 15

52
4. Margs Karaikal Port raises Rs 200 cr from PE funds
Karaikal Port, a private port developed by Chennai-based Marg, has secured its third private
equity infusion to part-fund its expansion plans. Private equity firm Jacob Ballas India, backed
by New York Life International, has invested Rs 200 crore in Karaikal Port to pick up a minority
stake.

Jacob Ballas India has made the investment of Rs 200 crore (by way of primary and secondary
investments) from its NYLIM Jacob Ballas India Fund III, which has a corpus of $440 million.
Karaikal Port has already raised Rs 150 crore from IDFC Project Equity and Rs 200 crore from
Ascent Capital.

The funds raised now will be used for its proposed expansion plan of increasing the port capacity
to 28 MMTPA.

Karaikal Port had already attracted private equity investments by India Infrastructure Fund and
Ascent Capital Advisors. With the present investment by NYLIM-JB Fund, Marg Karaikal Port
has three institutional investors adding value by their infrastructure exposure & expertise to
augment and fuel the ambitious growth plans of Karaikal Port, GRK Reddy, chairman and
managing director, MARG said in a statement.

We see Karaikal Port emerging as a port of choice on the southeastern coast of India, with
efficient operations backed by world class infrastructure. NYLIM-JB Fund is delighted to partner
with Marg in this exciting venture, Partner of Jacob Ballas Capital India, Sunil Chawla, who
will be joining the Board of Karaikal Port, said.

Total cargo handled at the port stood at 6.01 million tonnes in 2011-12 when compared with 4.75
million tonnes in the previous financial year. The major growth driver was higher volume of
fertiliser cargo whose volumes almost doubled during the fiscal.

Marg Karaikal Port, located in the union territory of Puducherry, is the only all weather, deep
water, multi-commodity port between Chennai port and Tuticorin port. With its strategic location
and excellent connectivity, is well positioned to cater to the agricultural and industrial belts of

53
 central Tamil Nadu. It at present operates three multi-purpose berths and two berths dedicated to
coal cargo.

The Port is being developed over III phases and is envisaged to have a total of nine berths
capable of handling up to 47 MMTPA by 2017.

Source: My Digital FC, May 5

5. Navis Capital in talks to buy stake in Twilight Litaka

The Indian pharmaceutical market continues to attract private equity (PE) investors. Following
the recent investment of Rs 300 crore by ChrysCapital in Intas Pharma, another deal is expected
to be announced soon. Malaysia-based Navis Capital Partners is in talks with Twilight Litaka
Pharma Ltd for a possible investment of about Rs 150 crore in the company. The percentage of
stake in question is not clear. Navis is known for buying a controlling stake in portfolio
companies. Last year, it took a majority stake in automotive graphic firm Classic Stripes for
almost $100 million. In 2008, the PE fund acquired about 60 per cent stake in Sah Petroelum, a
lubricants maker listed on the Bombay Stock Exchange. When asked, Gopal Ramourti, managing
director of Twilight Litaka, confirmed the development. He said, We have obtained approval
from the shareholders for raising up to $30 mn through issue of additional equity shares.
Accordingly, the company has discussed with various investors, including Navis Capital, as part
of the fund raising plan. Presently, we are at an advanced stage of finalisation. He refused to
share further details due tothe sensitive nature of the information. Richard Foyston, founder
partner and chairman of Navis, said, As a matter of policy, we do not confirm any deals that we
are considering or not considering. The promoters have only 5.09 per cent stake in Twilight.
The remaining stake is with other investors, including ICICI Bank, which holds a little more than
six per cent in the company. Navis has also invested in India Hospitality Corporation, Nirulas
and Mars Restaurant. Its other investments in India include Edutech, the ITM Group of
institutions, and Andromeda, an India-focused business process outsourcing company. It has
invested about $3 billion in various companies across Asia.In the recent past, the pharma
industry has seen investments from many leading PE firms. Apart from the ChrysCapital deal,
Kotak Private Equity, an arm of private sector lender Kotak Mahindra Bank, had acquired 3.4 per
cent stake in Hyderabad-based Natco Pharma, by investing Rs23.7 crore last December.

54
 According to a recent PricewaterhouseCoopers report, the domestic pharma market is expected
to grow at a compounded annual rate of 15-20 per cent to reach a value anywhere between $50
bn and $74 bn by 2020.Last month, Tano Capital invested about Rs 8 crore in listed company
Shilpa Medicare Ltd, acquiring a 1.5 per cent stake. In 2010, about 10 deals worth $120 million
were struck in the Indian pharma space. In 2011, the number of deals went down to six, worth
$51 million, and till date in 2012, four deals worth $82 million have been done.
Source: Business Standard, May 4

6. KKR, Goldman Sachs to invest Rs 269 crore in TVS Logistics

Private equity firm Kohlberg Kravis Roberts & Co (KKR) and Goldman Sachs will invest Rs
269 crore in TVS Logistics Services to help it expand business, the three companies said on
Thursday.

KKR and its affiliates would invest Rs 242 crore in the unlisted third-party logistics operator
while Goldman Sachs will pour in the remaining Rs 27 crore, the companies said.

The additional investment will allow TVS Logistics to continue expansion, both through
acquisitions and organic growth, said R. Dinesh, managing director of TVS Logistics Services.

The logistics firm plans to focus on Indias automobiles and discrete manufacturing sectors that
are seeing rapid growth and have relatively low third-party logistics penetration, executive
director S. Ravichandran said.

Private-equity firms invested about $1.9 billion in Indian companies during the quarter ended
March 2012, down about 30% from last year, due to crowded markets and higher valuations,
industry tracker VCCircle.com data showed.

KKR has so far invested more than $1 billion in India and holds stakes in companies including
Aricent, Avantha Power and Infrastructure, Bharti Infratel, Cafe Coffee Day and Magma
Fincorp.

Goldman Sachs, which made its first investment in TVS Logistics four years ago, has disbursed
over $2 billion in Indian companies since 2006.

55
 Kotak Mahindra Capital Co. acted as the sole adviser to TVS Logistics while JM Financial
advised KKR.

Source: NDTV Profit, April 23

7. Carlyle, Sequoia in talks with JSM for stake

Private-equity funds including Carlyle Group and Sequoia Capital are in separate talks to invest
about $40 million to $50 million in JSM Corp, which operates the Indian franchises of Hard
Rock Cafe and California Pizza Kitchen, two sources with knowledge of the matter said.
JSM Corp, which runs 12 outlets across different brands, is looking to raise capital to expand its
networks and operations, said the sources, who declined to be named as the discussions are not
yet public.
Premji Invest, the venture capital arm of Indian software services exporter Wipro, and New Silk
Route, an Asia-focused private-equity firm, are also in talks to buy a significant minority
holding in the company, said the sources. JSM Corp, Premji Invest and Carlyle did not respond
to emails seeking comment. Sequoia and New Silk Route declined to comment.
The company plans to set up 60-80 outlets of California Pizza Kitchen in the next three-four
years, and is also looking to expand the other brands, the sources said.
Private-equity firms invested about $1.9 billion in Indian companies during the quarter ended
March 2012, down about 30% from last year, according industry tracker, VCCircle.com due to
crowded markets and higher valuations. Private-equity funds are betting big on restaurant chains
in the country to capitalise on the rising spending power of the countrys increasingly wealthy
new generation. Kohlberg Kravis Roberts and Co, Standard Chartered Private Equity and New
Silk Route invested in the Cafe Coffee Day chain in 2010, while ICICI Venture, the private-
equity arm of lender ICICI Bank invested $33 million in Devyani International, which runs Pizza
Hut, Costa Coffee and KFC in India, last year.

Source: Livemint, April 17

56
8. Marico to sell 4.8% stake to raise Rs 500 crore
Marico plans to sell 4.8% stake to Singapores sovereign wealth fund GIC and Baring Private
Equity India to raise Rs 500 crore.

Indivest Pte Ltd, an investment arm of GIC, will invest Rs 375 crore to subscribe over 2.2 crore
shares while Baring India Private Equity Fund would be allotted 73.5 lakh shares for Rs 125
crore, both at Rs 170 per share on a preferential allotment basis.

This is to fund Paras acquisition as well as to use it for other capital expenditure, said Harsh
Mariwala, chairman and managing director, Marico.

Two months ago, Marico bought personal care brands such as Setwet, Livon, Zatak among
others from Reckitt Benckiser which, in-turn, had acquired these brands from Paras
Pharmaceuticals last year. The deal involved demerging the personal care business of Paras into a
separate company, Halite Personal Care India, in which Marico will acquire 100% stake.

Marico had then said that it will fund the acquisition through a mix of internal accruals, equity
and debt in a deal that involved transfer of all key assets, including intellectual property rights,
supply agreements and third-party manufacturing agreements.

Over the past five years, the company has been aggressively growing through inorganic route
and has acquired over a dozen companies and brands globally.

Instead of debt, the company has raised funds through equity both not just for Paras buy but
also to build a war chest for future acquisitions, said Gautam Duggad, research analyst at
brokerage firm Prabhudas Lilladher.

Maricos board has also decided to alter the authorised share capital of the company by
cancelling 5 crore unissued preference shares of Rs 10 each of the company and creating 50
crore equity shares of Rs 1 each, Marico said in a statement.

Source: Economic Times, April 8

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58
CHAPTER 6: COMPARATIVE
ANALYSIS OF EMERGING
MARKET AND DEVELOPED
MARKET

59
CHAPTER 6: COMPARATIVE ANALYSIS OF PRIVATE EQUITY
IN EMERGING MARKET AND DEVELOPED MARKET

6.1. OVERVIEW

Emerging markets private equity investments are increasingly being considered by many
investors. Profitable and worthwhile opportunities in emerging markets private equity can be
pursued, which are differentiated from public markets investments. These funding are looking to
increase their exposure to emerging markets.

Private equity in emerging markets offers a salutary type of investment resource to countries on
the path of growth and development. Private equity capital is stable, long-term and high quality,
and has been demonstrated globally to add value to companies and economies at large. At the
same time, it compensates investors with the prospect of earning financial returns fully
commensurate with the risks involved. Furthermore, robust investment in private equity has
often been an important contributing factor to domestic capital market development from which
it, in turn, derives value. This occurs as the greater liquidity afforded by broader and deeper
financial markets leads to more efficient and favorable exits for private equity investors.

According to a survey conducted by the Emerging Market Private Equity Association, only 23
per cent of the investors are interested in investing in the developed countries. The total private
equity investment in emerging markets in 2010 reached USD $28.8 billion (13% of the global
total) compared to only USD $2.0billion in 2002 (2.5% of the global total). Theres a real race
going on, with tons of competition for the best deals in the hottest private equity
markets: China, Brazil and India.

According to the Emerging Markets Private Equity Association (EMPEA), the annualized returns
(pooled end-to-end) of Private Equity Investors from emerging markets as well as Developed
Nation.

60
 30%
26.60%
25%

19.90%
20%

15%
% Returns Received
11.00% Emerging Markets
9.70%
10% 8.80% Developed Nations
7.30%
5.60%
5% 2.80%

0%
2008 2009 2010 2011

Years

Fig. 11: Percentage of Returns Received

There are several benefits that helps in creating a tremendous opportunities for the Private equity
investor to invest in the emerging market. The three benefits are:
1. Evidence of sufficiently strong relative returns (when compared with relevant
benchmarks) in support of claims that the additional risks involved have been covered.
2. Evidence of the continued strong diversification benefits which emerging markets private
equity investment has to offer, at a time when global convergence among markets and

61
 asset classes poses additional challenges through tight coupling to portfolio managers
search for effective diversification.
3. Additional scope for customizing attractive risk-adjusted returns by way of private equity
fund manager best practice.

62
6.2. EMERGING MARKETS VS DEVELOPED MARKETS
They are various factors that Private Equity investors consider while considering emerging
markets over developed markets for making their investments. Various factors are:

1. ECONOMIC GROWTH
Many institutional investors find investing in emerging markets private equity attractive. Not
only have private equity investments in emerging markets been known to yield high returns, but
when investors hold private equity investments in emerging markets as part of a broader
investment portfolio with multiple asset classes, they:
Can expect to benefit from growth-based private equity investments in emerging and
developing countries, the economies of which are expected to continue to grow for the
foreseeable future at rates greater than those of advanced economies.

Table3: Percentage of GDP Growth

63
 100

14.2 BRAZIL
10 9.8 9.6 9.2
9.1 10.4 9.2
% Growth in GDP 8.8 8.5 CHINA
7.5
6.1
5.2
4.9 INDIA
3.5 3.7
3 USA
2.7
1.9 2.1 UK

1
2007 2008 2009 2010 2011

Years

Fig.12: Trend Chart of GDP Growth

Fig. 12 shows the GDP growth of various economies, as the growth of any economy
states the opportunity present in that respective economy.
Have access to opportunities for early participation in sectors and markets poised to take
off in large emerging economies, which are experiencing the rapid expansion of a middle
class with newly-acquired purchasing power.
Can be fairly confident of robust financial returns from private equity since many
emerging-market countries are producers of natural resources, which are essential to the
on-going global economic recovery. Such markets are currently experiencing strong and
sustained international demand with higher prices. This benefits both the economies of
these countries generally, as well as the many companies positioned to take advantage of
the broader economic growth that this commodity revenue is generating.
Have access to opportunities through private equity in emerging markets to participate in
a steady stream of promising new investments in related companies such as supply-chain
partners (customers and suppliers), often with synergies and further diversification
benefits in relation to the initial portfolio company investments.
Are able to avail themselves of high-quality diversification benefits which are more
difficult to find among other asset classes as international financial markets become
increasingly interconnected and thus correlated.

64
POPULATION GROWTH

Emerging markets are home to 80% of the worlds population, 46% of retail sales and
they consume over 50% of most major commodities. So that is why many PE investors prefer to
invest in China than in the US emerging markets have the majority of the worlds population
and will account for the majority of its growth going forward.

Population Growth for Yr 2011

2.0%
1.58%
1.5%
1.17%
0.96%
1.0%
0.59% 0.56% Population Growth for Yr
% of Population Grwoth 0.5% 2011

0.0%

Countries

Fig.13: Percentage Growth of Population

Entrepreneurial activity is improving and the number of growth companies is increasing.

Accompanying the rise of the middle-class consumer, many countries have moved to

65
 market-based economic policies thereby attracting entrepreneurs, including Diaspora
returning home who are leading companys growth in their local markets and/or
expanding abroad.
Higher returns are realized from production for local markets due to more likely growth
in demand from domestic consumers rather than from exports. The middle-class
consumer boost is supporting impressive expected future GDP growth (two to three times
faster than developed nations, according to IMF April 2010 estimates).
Emerging Countries i.e. BRICs have added to the global consumption more than
developed countries. Like, China has already overtaken Japan as the worlds second
largest economy. As a result, economic growth has led to greater prosperity and an
increased standard of living, which has in turn boosted domestic consumption throughout
emerging markets.

2. SOCIOECONOMIC AND POLITICAL FACTORS

The most attractive markets for investors are determined not just by their economic size, as
measured by GDP, but also by the relative sophistication of their socioeconomic environments,
including their regulatory and legal systems.

PE investors also consider other factors apart from economic factors that hold a strong
impact on the economic condition of the respective countries. Although China will
continue to shape the private-equity landscape, other countries that may be off many
investors radar will have a surprising influence.

Table 4:
No. of
Table 4: Percentage of Political and Socio-economic Factors

Greater attention is being paid to both:

(1) The rule of law, including efforts to curb crime and corruption and enforce
contracts.

66
 (2) The introduction of appropriate laws, regulations and institutional arrangements to
help foster sustainable business activity, all of which were recently accelerated as a result
of the global financial crisis.
Lack of infrastructure facilities attract more investors, as it increase the scope of
improving the existing conditions of the economy by investing funds in the real estate or
infrastructure. Like, in India many Private Equity players are seeking for the opportunity
to invest in the Infrastructure as it holds lots of potential to grow in the future.
The corrupted economy is generally avoided by the investors because it leads to lot of
rules and regulations which increases their overall investments in the project.
3. PRIVATE EQUITY FUNDRAISING

PRIVATE EQUITY FUNDRAISING

Year 2011

DEVELOPED COUNTRIES; 33%

CHINA; 46%

INDIA; 4%
BRAZIL; 17%

Fig. 14: Private Equity Fundraising

Emerging markets as shown in Fig. 14, funds continue to capture a larger slice of the global
private equity (PE) fundraising pool. Major share is owned by China and Brazil. The fundraising
for emerging markets PE in 2011 grew by 64% year on year, reaching a 3-year high of US$38.6
billion. In the same year, 876 private equity and venture capital deals valued at US$26.9 billion
were completed in the emerging markets.

67
Asias Continuing Dominance

Emerging Asia, and within it, China, continue to dominate private equity beyond the developed
markets. In 2011, China drew its largest share of global PE fundraising to date, with 43% of
capital raised or US$16.6 billion.

68
6.3. CHARACTERISTICS THAT DISTINCT DEVELOPED COUNTRIES FROM
EMERGING MARKETS

Some of the characteristics that distinct private equity in emerging markets from developed
countries:

1. IMPROVING OPERATIONAL EFFICIENCY:

PE investors in emerging markets are looking for growth, most of the funds are growth
capital funds in other words, they dont focus as much on financial engineering
(adding leverage to deals to attain high returns) but instead focus on finding great
companies that need capital to expand.
2. DRIVING THE COMPANIES TOWARDS ADVANCE EXCELLENCE:
Companies in emerging markets value the ability to leap-frog into a more advanced stage
of development by working with growth equity investors who add value by
professionalizing their operations, increasing their efficiencies, improving governance
and transparency, linking into global markets, and taking advantage of the growing
interest of investors.
3. CROSS BORDER EXPANDSION:
Different levels of development are discernible across emerging markets, but what they
have in common, particularly in the smaller countries, is a private equity culture that
understands issues of building scale and an increasing focus on regional (cross-border)
expansions.
4. LONGER INVESTMENT CYCLE FOR IMPROVEMENT:
A longer investment cycle can be expected, given the degree of improvement possible in
emerging markets and the lower base from which growth can take off, but the rewards to
patient strategic investors can be substantial.

69
6.4. RISK ASSOCIATED WITH EMERGING MARKETS
All investment involves risk; investment in emerging markets private equity is no exception.
Those aspects of emerging markets private equity risk which are usually seen to distinguish it
from the investment risk encountered in developed countries can be usefully examined in terms
of three main investment risk categories:

1. EXTERNAL RISK FACTORS (including political and institutional framework risk)

The external business environment in emerging-market countries is often seen to
involve a higher level of political risk than in developed countries. This occurs not only
in the extreme cases of civil unrest and hostilities among states, but also through the less
than transparent influence that concentrations of political power can exert in the business
sphere. Moreover, economic distortions and procedural deficiencies involving the local
institutional and regulatory framework can create both impediments to business as well as
the false security of profit-making opportunities based mainly on regulatory arbitrage. In
such cases, the associated investments are particularly vulnerable to future policy and
institutional change.

2. MARKET RISK FACTORS (including liquidity risk)

The market risk in emerging markets most commonly takes the form of illiquidity risk,
which hampers effective investment exits. This is most obvious in countries that lack
breadth and depth to their financial systems (for example, by not having well-developed
stock and commodity exchanges and a functioning debt market, along with inadequacies
in the financial rules and institutional infrastructure needed to afford the exchanges
efficacy). However, it also becomes manifest in countries in which trading in financial
instruments and access to affordable credit is heavily concentrated in only a few
companies. It also occurs where the rules governing capital repatriation are especially
onerous. And it extends to the additional systemic risk involved when shallow and
unstable local markets magnify the adverse impact of unfavorable news events, giving
rise to pronounced price volatility and contagion.

70
 3. COMPANY RISK FACTORS
Companylevel risk particular to emerging-market countries stems from deficiencies in
corporate governance, distortions associated with financial reporting (particularly where
local accounting rules tend to obscure the true financial state of enterprises), as well as
country- and sector-specific sources of operational risk.

6.4.1. MEASURES TO REDUCE THE EFFECT OF RISKS

These risks can manage effectively through various conventions like:
1. Ensuring the carefully screening of the company.
2. Undertaking the due-diligence, that ensures that fund management adheres to similar
prudent practices in this connection.
3. A careful screening with respect to the sustainability of profitable business operations
free of policy- based distortion. This is to imply that sensitivity testing is conducted to
make sure that core business would be sufficiently resilient and sustainable in the event
that subsidies and other distortion benefits were removed.
4. Regularly reviewing and changing the investment portfolios, to achieve appropriate
diversification benefit within the framework of fund.
5. Working with fund manager in order to protect the interest of the investor through
investment design features like cost effective hedging strategies where practicable.

71
CHAPTER 7: FINDINGS

72
 CHAPTER 7: FINDINGS

7.1. INTRODUCTION
An analysis is always incomplete without its results. Similarly, based on my understanding and
learning of comparative analysis of emerging markets and developed market and even the trend
of investments in India, following are my findings:

1. Emerging markets now play a key role in the world and drive global growth. They attract
investors because of the incredible economic growth and development taking place there,
which should translate into higher returns. Their economy grows at 2-3 times faster than
developed economies.

2. In an increasingly globalized world, the dominance of the US over the global economy is
declining. According to a report by Morgan Stanley, in the past six years the U.S. share of
total global market capitalization has fallen from an average of 57% in 2003, to 49%
currently. Much of this weight has swung to the BRIC countries, which now account for
about 7.6% of world market cap.

3. Her Higher risks results into higher return. Similarly, emerging markets provides a big
pool of opportunity which involves huge risk, so the expected returns from emerging
markets are 68.75% more than developed nations.

4. Emerging markets are growing faster and account for a larger portion of the global GDP,
their market capitalization has not grown proportionately. Emerging countries contribute
about 33% of the worlds total economic output.

5. The economies of emerging markets are growing at an average rate of 7.64% whereas the
average growth rate of developed nations is .58%. The investors are most attracted
towards opportunities which seek them higher returns. Developed nations have more of
mature market with less attractive investment opportunities.
6. Population of the economy plays a very important role in deciding the economic growth
of the Economy. Emerging markets have a large and young population, with an
increasing number joining the middle class every year. They are well-educated consumers
are advancing into higher income bands. The massive young populations across many

73
 emerging markets as well as the pattern of consumer demand for products and services
are changing.
7. The income level increases drive savings and consumption, which creates
great opportunities in the consumer and financial services industries. New products
become affordable -- electric appliances before cars and consumer durables typically
ahead of luxury goods -- and the timing of these investment opportunities will vary by
country. The recent steady decline in dependency of the young as significant numbers
join the labor force, with the result that the total dependency ratio levels off and only
starts to rise gradually.

8. In addition, emerging markets are home to 80% of the worlds population, account
for 80% of mobile phone subscriptions and 46% of retail sales, and they consume over
50% of most major commodities.
9. There are several other factors which a PE investor would consider while investing in the
project. These factors like Rule of Law, Corruption, Inflation, etc. As overall GDP growth
is low in developed countries as compared to other emerging countries and the business
environment is not very attractive due to higher rate of corruption, bureaucracy and weak
rule of law.
With respect to India
1. India being an one of the most attractive nation, it was found that Investors are really
attracted towards it which was seen in the initial two years i.e. 2007 and 2008 but because
of the impact of recession on the economy, it dropped downed drastically, but later it
started increasing but with a minor increase because investors became highly cautious
after the global turndown.
2. It was also found out that investors were more interested in investing in the public sector
as it was highly secured and gave higher returns to the investors.
3. The study also shows that Real Estate and Energy remain the highly attractive sector.
4. The return is the major factor that highly influences the behavior of the investors, but the
opportunity and other risk factors also plays an important role for investors to choose the
sector to invest in.
5. IPO is the most attractive mode of exit as it promises higher IRR for the investors so,
maximum of the investors prefer to choose this mode.

74
75
CHAPTER 8: LEARNINGS

76
 CHAPTER 8: LEARNINGS

8.1. INTRODUCTION

In this era of globalization, it is very necessary to keep yourself updated with in and
around the world. Being a finance student one should be very alert about the
opportunities coming our way. During my Summer Internship project I got a
wonderful opportunity to work on the project of my interest and based on my study
and my understanding following are my learnings:

1. I got a clear and a wider picture of the working of the investment that takes place
in the economy.

2. I even learnt how the business model of private equity works and what is the
criteria that an investor keeps in mind while taking up any project in the future.

3. Even this project gives an idea how important is the countrys not only GDP but
also the Socio-economic factors that attract outside investors to invest in an
economy.

4. It was also very interesting to learn how to approach various Private Equity
players, so that they can provide you with sufficient funds to invest in your
organization.

5. Even I was fortunate enough to be on call with one of the biggest Private Equity
player (BAIN CAPITAL, who holds maximum investments in the world). During
the deal, it was found that they are looking for an investment in the Real estate in
India as it provides higher returns on the investment.

6. It was also interesting to know how the government of a country formulates

various rules and regulation considering the overall growth of the economy as
well as keeping in mind the welfare of its citizens.

77
78
CHAPTER 9: CONCLUSION

79
 CHAPTER 9: CONCLUSION

Investors can benefit from the extraordinary opportunity offered by private equity in emerging
markets. Carefully selected well-performing funds, managed by experienced fund management
teams. Most emerging economies are doing better than developed economies and look like they
will for some time. But investor success depends on picking the right manager, regardless of the
macro environment demonstrable past performance, would provide an investment opportunity to
take advantage of the growth and diversity found in emerging markets. A well-constructed
emerging markets private equity portfolio is expected to provide financial investors with outsized
returns, balanced risks and appropriate exposure to the most promising companies across diverse
regions, industries and vintage years.

Private equity (PE) has emerged as a major investor class in India in a decade and investments
under this category have grown significantly in the last few years. India ranked among the three
private equity destinations in emerging economies and the activity has picked up significantly in
2010-11.

The last five years saw private equity investments to the tune of $37 billion, which were more
than one-third of total foreign direct investment. Private Equity played a major part during this
period emerging as a bigger source than the capital market. In the last five years, more than
1,500 deals took place covering industries such as telecommunications, infrastructure, real estate,
financial services, consumer products, healthcare, education, information technology and IT-
enabled services.

80
 CHAPTER 10:
BIBLOGRAPHY

81
 CHAPTER 10: BIBLOGRAPHY

http://www.indiape.com/2012/03/

http://www.thehindubusinessline.com/markets/article3223392.ece

http://www.thehindubusinessline.com/markets/stock-markets/article3332838.ece

www.microsec.com

www.financialexpress.com

www.investopedia.com

www.nasdaq.com

www.gt-india.com

www.bvca.co.uk

www.sebi.gov.com

www.business-standard.com

www.moneycontrol.com

www.nseindia.com

www.bseindia.com

http://www.deloitte.com/view/en_IN/in/services/financial-
advisory/256566d10a668210VgnVCM100000ba42f00aRCRD.htm
http://www.bcg.com/expertise_impact/PublicationDetails.aspx?id=tcm:12-64912
http://www.doingbusiness.org/reports/doing-business/doing-business-2011

82