Rasika Project

PRIVATE EQUITY FIRMS 2018
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CHAPTER 1
INTRODUCTION OF THE STUDY
CONTENTS:-
1.1 INTRODUCTION
1.2 HISTORY
1.3 DEFINITION
1.4 CHARACTERISTICS
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1.1 INTRODUCTION
The Private Equity sector is broadly defined as investing in a company through a negotiated
process. Investments typically involve a transformational, value-added, active management
strategy. Typical forms of private equity include venture capital, growth and mezzanine
capital, angel investing and private equity funds. Private equity investors seek to obtain a
substantial interest in a company in order to have an active role in firms‘ strategic decisions.
Their goal is to boost the value of a company and walk away with substantially more money
at the time of liquidating their investment.
Private equity consists of investors and funds that make investments directly into private
companies or conduct buyouts of public companies. Capital for private equity is raised from
institutional investors and can be used to fund new technologies, expand working capital
within an owned company, make acquisitions, or to strengthen a balance sheet.
The term "private equity" encompasses a range of techniques used to finance commercial
ventures in ways that do not involve the use of publicly tradable assets such as corporate
stock or bonds.
Private Equity Funds: Private equity funds are investment companies that, as a rule, do
not trade in publicly-traded securities. Instead, they normally seek equity stakes (that is,
partial ownership) in private companies. They may also invest in so-called private
placements of securities from public companies. Private equity buyers are extremely
focused on cash-flow and have a reputation as cost-cutters.
India has a very vibrant Venture Capital (VC) / Private Equity (PE) industry with USD 32.5
billion invested across more than 1500 VC/PE deals from January 2006 till date.
Economists estimate that India needs about USD 1 trillion of investment over the next five
years to sustain a GDP growth of above 9 percent. This translates to USD 60-100 billion of
VC/PE investments requirement over three years, against which industry estimates that PE
investments would be in the range of USD 9-10 billion in the year ending December 31,
2010.
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After a turbulent 2009, private equity investments in India displayed steady signs of
recovery in the first quarter of 2010. The latest quarter registered the highest value of deals
since 2009.
For the quarter ended March 2010, total announced deal value was $1,943 mn, a jump of
more than 185% from $675 mn in Q1 2009. Total deal count in Q1 2010 also increased by
35% to 88 deals, up from 65 in Q1 2009. Interestingly, despite the enormous growth in deal
value on a quarter-on-quarter basis, the deal count decreased by 11% to 88, down from 99
in Q4 2009.
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1.2 HISTORY
The early history of private equity relates to one of the major periods in
the history of private equity and venture capital. Within the broader private equity industry,
two distinct sub-industries, leveraged buyouts and venture capital experienced growth along
parallel although interrelated tracks.
The origins of the modern private equity industry trace back to 1946 with the formation of
the first venture capital firms. The thirty-five-year period from 1946 through the end of the
1970s was characterized by relatively small volumes of private equity investment,
rudimentary firm organizations and limited awareness of and familiarity with the private
equity industry.
Investors have been acquiring businesses and making minority investments in privately held
companies since the dawn of the industrial revolution. Merchant bankers in London and
Paris financed industrial concerns in the 1850s; most notably Crédit Mobilier, founded in
1854 by Jacob and Isaac Pereire, who together with New York-based Jay Cooke financed
the United States Transcontinental Railroad. Jay Gould also acquired, merged, and
organized railroads and telegraph companies in the second half of the 19th century,
including Western Union, the Erie Railroad, Union Pacific and the Missouri Pacific
Railroad.
Later, J. Pierpont Morgan's J.P. Morgan & Co. would finance railroads and other industrial
companies throughout the United States. In certain respects, J. Pierpont Morgan's 1901
acquisition of Carnegie Steel Company from Andrew Carnegie and Henry Phipps for $480
million represents the first true major buyout as they are thought of today.
Due to structural restrictions imposed on American banks under the Glass–Steagall Act and
other regulations in the 1930s, there was no private merchant banking industry in the United
States, a situation that was quite exceptional in developed nations. As late as the
1980s, Lester Thurow, a noted economist, decried the inability of the financial
regulation framework in the United States to support merchant banks. US investment banks
were confined primarily to advisory businesses, handling mergers and
acquisitions transactions and placements of equity and debt securities. Investment banks
would later enter the space, however long after independent firms had become well
established.
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With few exceptions, private equity in the first half of the 20th century was the domain
of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers and Warburgs
were notable investors in private companies in the first half of the century. In
1938, Laurance S. Rockefellerhelped finance the creation of both Eastern Air Lines and
Douglas Aircraft and the Rockefeller family had vast holdings in a variety of
companies. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which would
become Warburg Pincus, with investments in leveraged buyouts and venture capital.
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1.3 DEFINITION
capital, angel investing and private equity funds. Private equity investors seek to obtain a
substantial interest in a company in order to have an active role in firms‘ strategic decisions.
Their goal is to boost the value of a company and walk away with substantially more money
Private equity consists of investors and funds that make investments directly into private
companies or conduct buyouts of public companies. Capital for private equity is raised from
institutional investors and can be used to fund new technologies, expand working capital
within an owned company, make acquisitions, or to strengthen a balance sheet.
The term "private equity" encompasses a range of techniques used to finance commercial
ventures in ways that do not involve the use of publicly tradable assets such as corporate
stock or bonds.
Private Equity Funds: Private equity funds are investment companies that, as a rule, do
not trade in publicly-traded securities. Instead, they normally seek equity stakes (that is,
partial ownership) in private companies. They may also invest in so-called private
placements of securities from public companies. Private equity buyers are extremely
focused on cash-flow and have a reputation as cost-cutters.
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1.4 CHARACTERISTICS
Indian investment banking industry has a heterogeneous structure. The bigger

investment banks have several group entities in which the core and non-core business
segments are distributed. It has its own characteristic structure over the years both due
to business realities and the regulatory regime. This is because
On the regulatory front: Indian regulatory regime does not allow all investment
banking functions to be performed under one legal entity for two reasons
 To prevent excessive exposure to business risk under one entity

 To prescribe and monitor capital adequacy and risk mitigation mechanisms.
In addition, the capital adequacy requirements and leveraging capability for each
business line have been prescribed differently under relevant provisions of law. On the
same analogy, commercial banks in India have to follow the provisions of the Banking
Regulation Act and the RBI regulations, which prohibit them from exposing themselves
to stock market investments and lending against stocks beyond specified limits.
Indian investment banks follow a conglomerate structure by keeping their business

segments in different corporate entities to meet regulatory norms. Merchant banking
business has to be in a separate company as it requires a separate merchant banking
licence from SEBI. Merchant bankers other than banks and financial institutions are
also prohibited from undertaking any business other than that in the securities market.
However, since banks are subject to the Banking Regulation Act, they cannot perform
investment banking to a large extent on the same balance sheet. Asset management
business in the form of a mutual fund requires a three-tier structure under the SEBI
regulations. Securities business has to be separated into a different
company as it requires a stock exchange membership apart from SEBI registration.
Business realities: The financial services industry in India till the early 1980s was
driven largely by debt services in the form of term financing from financial institutions
and working capital financing by commercial banks and non-banking financial
companies (NBFCs).
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Capital market services were mostly restricted to stock broking activity which was
driven by a non-corporate unorganized industry. Merchant banking and asset
management services came up in a big way only with the opening up of the capital
markets in the early nineties. Due to the primary market boom during that period, many
financial business houses such as financial institutions, banks and NBFCs entered the
merchant banking, underwriting and advisory business. While most institutions and
commercial banks floated merchant banking divisions and subsidiaries, NBFCs
combined their existing business with that of merchant banking.
Over the years, two developments have taken place. Firstly, with the downturn in the
capital markets in the later phase, the merchant banking industry saw a tremendous
shake out and only about 10% of the larger firms remained in serious business. The
other development is that due to the gradual regulatory developments in the capital
markets, investment banking activities came under regulations which required separate
registration, licensing and capital controls.
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CHAPTER 2
RESEARCH METHODOLOGY
CONTENT
2.1 OBJECTIVES OF THE STUDY
2.2 HYPOTHESIS
2.3 SCOPE OF THE STUDY
2.4 LIMITATIONS OF THE STUDY
2.5 SIGNIFICANCE OF THE STUDY
2.6 METHOD OF COLLECTION OF DATA
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2.1OBJECTIVES OF THE STUDY
1) The objective of this project is to study the role of private equity in India,
2) To analyzing their investment strategies, their particular strategies, by studying their
entry strategies into India financial markets, regulatory norms in India and how it is
beneficial of Indian companies.
3) An attempt will also be made to understand their investment patterns.
4) The project would also deal with some of the major deals in India, this would help to
understand the investment pattern and than the exit strategies of the PE firms.
5) The project would also help to understand us what could be the scenario of the private
equity investments in the near future, and comparison of the Indian scenario with rest of the
world.
Private equity firms generally receive a return on their investments through one of three
ways: an IPO, a sale or merger of the company they control, or a recapitalization. Unlisted
securities may be sold directly to investors by the company (called a private offering) or to a
private equity fund, which pools contributions from smaller investors to create a capital
pool.
Considerations for investing in private equity funds relative to other forms of investment
include:
•Substantial entry costs, with most private equity funds requiring significant initial
investment (usually upwards of $1,000,000) plus further investment for the first few years
of the fund.
•Investments in limited partnership interests (which is the dominant legal form of private
equity investments) are referred to as "illiquid" investments which should earn a premium
over traditional securities, such as stocks and bonds. Once invested, it is very difficult to
gain access to your money as it is locked-up in long-term investments which can last for as
long as twelve years. Distributions are made only as investments are converted to cash;
limited partners typically have no right to demand that sales be made.
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•If a private equity firm can't find good investment opportunities, it will not draw on an
investor's commitment. Given the risks associated with private equity investments, an
investor can lose all of its investment if the fund invests in failing companies. The risk of
loss of capital is typically higher in venture capital funds, which invest in companies during
the earliest phases of their development, and lower in mezzanine capital funds, which
provide interim investments to companies which have already proven their viability but
have yet to raise money from public markets.
•Consistent with the risks outlined above, private equity can provide high returns, with the
best private equity managers significantly outperforming the public markets.
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2.2 HYPOTHESIS
Private equity is considered to be a form of alternative investing, meaning that it contrasts

traditional investing in bonds and stocks (Metrick, 2006). More specifically, private equity
is a term that refers to any type of equity investment in an asset in which the equity is not
freely tradable on a public stock market. Private equities are generally less liquid than
publicly traded stocks and are thought of as a long-term investment (IFSL Research, 2008).
The past two decades this asset class has grown enormously (Kaplan and Schoar, 2005;
IFSL Research, 2008). Estimates show that a record $686bn of private equity was invested
globally in 2007. Moreover, private equity fund raising also surpassed prior years in 2007
with $494bn being raised globally (Graph 1; IFSL Research, 2008).
Graph 1: Global private equity market in US$1
Source: IFSL estimates based on PEREP_Analytics, AVCJ,

EVCA/Thomson Reuters/PwC, NVCA, Ernst & Young data
Types of Private Equity

Private equity investing can be divided into four types: Venture capital, Mezzanine, Buyout
and Distress investing (also named Special situations) (Metrick, 2006). Figure 1 exhibits the
overlapping structure of the four categories and the intersection with another category of
alternative investments, hedge funds. The largest rectangle in figure 1 contains all
alternative investments, of which private equity and hedge funds are only two of the
categories. Note that the circles and rectangles by no means match the size of the investing
types, they rather serve to show overlap between the different categories.
Figure 1: Private equity investment strategies and Hedge funds
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Source: Metrick (2006)
Venture capital
Venture capital on the far left, represents primarily investments in young, unquoted
companies that have capacity for rapid growth. Frequently, these investments are in high-
technology companies (Metrick, 2006; Wright and Robbie, 1998). Illustrations of early
investments made by venture capital are recent successes Google and YouTube.
In 2007, global venture capital investments amounted $51.6bn (IFSL Research, 2008),
representing 11 percent of the total amount invested in private equity globally. The United
States is the world leader in venture capital accounting for approximately 60 percent of the
global investments (IFSL Research, 2008).
Venture capital investments have traditionally been concentrated in two sectors:
information technology and healthcare (Metrick, 2006; Zarutskie, 2008). The former sector
includes the communication, semiconductor, software and hardware industries, the latter
sector includes life sciences, medical equipment and other healthcare services. Table 1
exhibits the percentages of dollar value invested in these two sectors in the US for the year
2007. In line with Metrick‘s (2006) findings, one can conclude that information technology
and healthcare remain to be the primary sectors in which venture capital is invested.
Table 1:US Venture Capital Investments in 2007
Sector % share
Information Technology 53.2
Medical/ Health/ Life Science 31.4
Non-High Technology 15.4
Source: The 2008 NVCA Yearbook
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This concentration does not come as a surprise because venture capital is generally invested
in small companies with the potential to grow large quickly. Hence, venture capital
investors search for businesses with large addressable markets. To realize headway in such
markets, a company needs a technological advantage of some kind-therefore the venture
capital focus on the high-tech industries within the sectors information technology and
healthcare (Metrick, 2006).
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2.3 SCOPE OF THE STUDY
PE investment professionals manage the funds by making investments in companies of

various stages in the company life cycle. The main phases of the life cycle can be
categorized into the initial phase, the growth phase, the maturity phase and the declining
phase. All phases differ in needs in relation to the specific conditions of each phase (Andrén
et al., 2003). As explained by EVCA (2007), the companies in the initial phase are either in
the seed, startup or post-creation stages.
These forms of stages refer to the financing of the business idea, the development of the
business or the commercialization of the business. Further, in the growth phase, the
companies are in the expansion stage where the financing is used to develop the business,
increase sales and production capacity and/or acquire other companies suitable for the
business plan (Ibid). Several rounds of financing in order to make the companies grow often
characterize this phase.
In the maturity phase, established companies with positive and/or predictable cash flows
might go through changes such as management retirement, disposal of a business unit or
exit from some of the investors from previous phases in the life cycle (Ibid). This action
allows a company to carry on with the business and the role of the PE firms is both as a
financial provider and a supporter in operational matters. The declining phase of a company
is ultimately characterized by decreased revenue streams and a diminishing market (Ibid),
and this phase is naturally not attractive to PE firms and will not be considered further in
this study.
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2.4 LIMITATIONS OF THE STUDY
 80% of a fund's total value must comprise more than one private equity investment
(Article 19, Private Equity Investment Funds Communiqué III No:52.4). If a private equity
fund's investment amount in SMEs exceeds 10% of the total fund value, the maximum
investment must be 51% of the total fund.
 Restraints on private equity investment funds' investment strategies (Article 23, Private
Equity Investment Funds Communiqué III No:52.4):
 private equity funds must not invest in commodities and gold (or forwards that is, a
derivative contract that is similar to a future that are based on these materials);
 short selling is not permitted to prevent insider trading operations and manipulation of
stock markets;
 private equity investment funds can take advantage of derivatives for the purpose of
hedging the currency and interest rate risks. This is limited to 20% of the total fund amount;
 security transactions on credit are not possible for private equity funds;
 a fund information document is binding for managing the fund's other assets that are
not connected to private equity investments.
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2.5 SIGNIFICANCE OF THE STUDY
Significance of the study will be broader and investigates the influence on Venture
Capital Industry, investment patterns comparisons across industries & exit strategies. The
study will cover up VC/PE market in terms of VC funds participation and investment as
well as focuses on patterns in different industries and the dotcom influence. Dot-com has a
significant influence on time taken by a firm from its first funding to get exit. The time
period is ranges from 2005 to 2013 and produces a picture of exact impact of VC industry,
marked a historical peak in terms of capital volume and valuations. The study critically
evaluates the role of Venture Capitalists in the Indian VC market. Moreover the purposes of
the study are to find factors relevant to particular made of exit. It will also investigate
development of private equity activities in recent years, with the growth of local funds and
the arrival of global players, and how Private equity firms need to position themselves as
partners. The study would also be helpful for further descriptive studies on the ideas that
will be explored. Therefore, the present study is quite beneficial to gain knowledge
regarding VC/PE investments, and their role and impact on the promotion of Indian VC/PE
market.
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2.6 METHOD OF COLLECTION OF DATA
1. PRIMARY DATA
These include the survey or questionnaire method, telephonic interview as well as the
personal interview methods of data collection
2. SECONDARY DATA
The secondary data as it has always been important for the completion of any report
provides a reliable, suitable, adequate and specific knowledge. The standard cost reports,
working sheets provide the knowledge and information regarding the relevant subjects.
Secondary data is a data, which is collected from various sources. Secondary data is not a
fresh data so it has its own limitations like: Time Constraints, Accuracy and Applicability.
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The Stages 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.
The above stages can be explained by the diagram which is shown below -:
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The Private Equity Process in 6 Steps:
1. Deal Origination (Deal Sourcing)

2. Due Diligence
3. Deal Negotiation
4. Deal Closing (Acquisition)
5. Post Acquisition Monitoring
6. Exit (IPO, Trade Sale or Buy back)
Deal Origination or as some call it ‗Deal Sourcing‘ is how Deal Makers get their deals, a
potential deal can either come through a company owner approaching them or from an
intermediary who will try to bring both parties (Company and Deal Maker) to make the
deal. In some cases, they may just approach companies who are expanding fast and wish to
grow further. In a year, Deal Makers come across hundreds of potential deals - but only a
few are selected.
Due Diligence is what you could call ‗doing your homework‘. Before starting detailed
negotiations, investor try to make sure everything is fair and secure. Although Auditors and
Consultants are appointed to conduct the Financial, Tax, Legal and Technical Due
Diligence - they also work side by side to understand the target company and its industry
better. All the information collected at this time, is then used during negotiation.
At the Deal Negotiation phase, investor set out the terms and conditions (covenants,
representations and warranties) and other deal terms that defines (or makes the deal).
Contracts such as Investment Agreement, Share Purchase Agreement, Management
Agreement, Advisory Agreement etc are drafted to include all items that put the deal
together.
Deal Closing is probably the easiest part but also contains an element of risk. It‘s the
conclusion of the deal, the signing of all Agreements and transferring funds from the buyer
to seller, conducting other administrative functions (usually done by a separate entity) like
updating any articles of association etc.
Post Acquisition Monitoring requires the Deal Team (those who have worked on putting
the deal together) to closely monitor the company, both from an operational and financial
point of view against the expansion plan and budgets that were setup earlier by the
company. Improvements to business, from Corporate Governance, Financial Reporting, and
Information Flow to Strategy are made at each level through either the company‘s
management or its board.
As the company matures (usually after 2 - 4 years) with the presence of the Deal Team,
investor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger party, multi-
national or conglomerate) or in rare cases a Buy Back by the owners. By this time, the
company will have grown quite a bit with still plenty of room to grow further. (There‘s a
saying, in a deal - always leave something extra for the person buying - it makes everyone
happy.)
And once investor have exited the company, they return their money with the profit they
gained for company after taking their fees for all the effort put in the above process.
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Although this may seem like a linear process - it isn‘t exactly so, primarily because
investors deal with a number of companies and each one is at a different stage in the private
equity process.
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.
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.
The above stages can be explained by the diagram which is shown below -:
Source: private-equityonline.com
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India has been witnessing dramatic shift in the size and composition of foreign investment
inflows over the couple of years. Institutional investors in developed countries, for their
portfolio diversification, are continuously seeking new destinations and innovative and
alternative asset class. The Private Equity is the best alternative for raise money from an
investment.
capital, angel investing and private equity funds.
The major PE investments influencing the deal values are Real Estate, IT/IT Services and
Energy sectors. The other sectors, which have significantly contributed to private equity
deal value, are Logistics and Telecom. The most active sectors in terms of deal volume
were IT/IT Services and Manufacturing. Other sectors contributing significantly to deal
volume were Banking, Finance and Insurance and Real estate.
The PE investment pattern follows various stages, which are: seed, start-up, expansion and
replacement stages. It also follows a definite process, which is Deal Origination (Deal
Sourcing), Due Diligence, Deal Negotiation, Deal Closing (Acquisition), Post Acquisition
Monitoring and Exit (IPO, Trade Sale or Buy back).
The Indian Private Equity sector consists of many historical deals so far. Among
them ―Warburg Pincus – Bharti Tele Venture‖ deal was beginning of the PE era in
India. By this deal WP earned 450 % return on its investment which is the biggest
earning by any PE fund worldwide. On the other hand Bharti Tele Ventures Ltd. has
result as huge growth in its subscribers and became 2nd largest telecom company in
India. After the deal with Warburg Pincus, Bharti spread its business worldwide.
Currently Bharti have its operations not only in India, but also in Bangladesh, Sri
Lanka and 15 countries in South Africa. Subsequently Bharti became 5th largest
telecom service provider all over the world.
The project would deal with understanding the role of private equity in India, analyzing
their investment strategies, their success in the Indian financial market, future of Private
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Equity in India, regulatory norms in India and how it is beneficial of Indian companies. An
attempt will also be made to understand their investment patterns.
The project also includes the understanding of competitive profile of different players in
Private Equity in India and the different types of funding done by them in India like - seed
funding, expansion capital, and buyout financing, financing restructuring of companies and
providing mezzanine capital. These all types are discussed in ―Major Private Equity Deals
in India.‖
The project is consists of top PE firms in the world. According to Private Equity
International (PEI), the largest private equity firm in the world today is TPG, based on the
amount of private equity direct-investment capital. Some other players in this ranking are;
Goldman Sachs Capital Partners, The Carlyle Group, Kohlberg Kravis Roberts, The
Blackstone Group and Warburg Pincus
The project also includes the understanding of the Private Equity model of
investments and analyzing the reason for investments in selective sectors. With India
becoming a preferred investment destination, this heightened level of private equity
activity is likely to continue for some time to come.
OBJECTIVE
The objective of this project is to study the role of private equity in India, analyzing their
investment strategies, their particular strategies, by studying their entry strategies into India
financial markets, regulatory norms in India and how it is beneficial of Indian companies.
An attempt will also be made to understand their investment patterns.
The project would also deal with some of the major deals in India, this would help to
understand the investment pattern and than the exit strategies of the PE firms.
The project would also help to understand us what could be the scenario of the private
equity investments in the near future, and comparison of the Indian scenario with rest of the
world.
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Future of Private Equity in India

After a euphoric two years, the second half of 2008 and the first half of 2009 have mirrored
global trends difficult for PE investments in India. Until last year‘s credit crunch, deal sizes
had been increasing and were hotly competed for at high premiums.
Today, the PE landscape has changed due to the global financial crisis. There have been
fewer exits and lower volumes. Allocations to PE funds by Limited Partners (LPs) are
down, some even requesting a rescheduling of existing commitments. In response, some PE
funds, notably some global funds, have reportedly reduced their management fees and
reduced LP commitments.
It is likely that India will continue to be among the developing world‘s largest destinations
for growth capital, while control and buyout deals will be sought only by the largest funds.
However, deal volume and average deal size have declined, driven by declining capital
overall, with recovery only in Q2 2009.
PE funds will find another change in their operating environment: that global LPs are likely
to invest in fewer funds than before, picking those whose management teams have operating
experience and a track record. The reduction in capital from overseas may be offset to an
extent by the emergence of a number of domestic LPs investing from family and corporate
accounts. Overall, however a smaller PE industry is likely, this is a healthy development.
Previously, about 350 funds were active. The market was oversupplied with capital relative
to the quality of targets.
The future of PE is bright in India because India is an untapped market for private equity.
The spending of infrastructure is in large amount in India. Another reason for opportunities
in India is that India is one of the few growing economies in the world even in recession.
The collapse of the IPO market is a factor, leading to a shift in exit to lower-yielding
strategic and secondary sales. However, older funds with investments three years or longer
on average are yet exiting with high returns.
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Driven by less capital, higher due diligence and lower deal closure, the PE industry is
turning to more intensive portfolio management. Providing financial support is now less
important than operational and strategic support, quality corporate governance and
regulatory compliance. As the PE industry settles into its new habitat of a tighter investment
funnel and longer-term holdings, investment choices will shift to domestic demand-driven
and non-cyclical industries like infrastructure, healthcare and education.
The logic of investing in scale and in locations of growth means that India will likely be at
the forefront of a global PE recovery. The year ahead should be viewed as an opportunity to
build value in portfolio firms, and thus to show that PE is an integral part of India‘s future.
Important roles played by PE in the growth of Indian Economy

“Private Equity in India: Adding Human Capital to the Value-Creation ―
If you are a global company and India is not part of your plan, then you have missed the
bus…..said by - Dr. Manmohan Singh, Prime Minister of India
In the days before economic liberalization, it was just established industrial houses such
as Tata or Birla which had easy access to the capital markets and money resources largely
on the basis of their pedigree.
The investment environment has radically changed since then. A whole new breed of
entrepreneurs now occupies front ranking positions in their respective fields. Many of the
old business houses which had the foresight to embrace change, have restructured, re-
focused and have flourished. The rest have withered into insignificance. And in their stead,
many have emerged who could become future stars in manufacturing, technology or
knowledge-based services. Indeed the investment environment is so attractive that investors
are flocking to scores of funds, domestic and international, taking a heavy exposure on the
future of these companies. Besides foreign institutional investors and mutual funds, private
equity funds are also taking concentrated bets across companies and segments. Many India-
dedicated funds have, and are, being set up to finance and to provide resources to the
organizations as they know the potential of these organizations.
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And allocations in existing ones are being ramped up for corporate in south Asia, India
and China. Draper Fisher recently announced plans for setting up a $200 million fund for
startups. Timothy Draper, founder of Draper Fisher Jurveston, a Silicon Valley venture
fund, on his first exploratory visit to the country in October went on record to say that he
was adopting a contrarian approach. "Now that everyone's crowding in China I have to go
someplace different. And that place is India." Draper is also contemplating to set up an
office in India. Draper is well known for funding Sabeer Bhatia of Hotmail, the free internet
e-mail service which was subsequently sold to Microsoft for over $400 million. There are
several other PEs which are rushing to India. Unlike Draper, they are not contrarians but are
willing to bet on the India growth story. Among them is west Bridge Capital Partners, a
Mauritius based company focusing on IT and BPO businesses and having offices in Silicon
Valley and Bangalore. It recently procured subscriptions to its second India VC fund of
$200 million. ―One major draw in favour of India is the diversity of enterprises which span
over virtually all sectors,‖ says Dhananjay Mungale a financial expert, who quit his high-
profile job at DSP Merrill Lynch to set up his own advisory venture. The breadth of
opportunity in India is much higher than places like Indonesia, Malaysia or Taiwan, he says.
Many of the private equity funds tend to seek a place on the board and participate
actively in laying down the policy framework to ensure quicker rise of the enterprise. This
is especially helpful in case of new economy businesses where traditional assessment by
investors may not get the same valuation as may be received from a private equity investor.
Again this is helpful in case of an unlisted company.
India‘s private equity sector is moving to the big league. Fund sizes have increased
dramatically from US $10 to US $25 million just a few years ago, to between US $400
million and US $1 billion today. The minimum deals now start at around US $25 million,
eclipsing the average deal size of US $8 million in 2002. With the strong global interest in
the Indian market continuing, the challenge is no longer about raising private equity funds,
but how to extract value from the portfolio investments, turning the focus from financial
capital to human capital.
During the first half of fiscal year 2005-06, US$7.96 billion of foreign direct
investment (FDI) poured into India — more than triple the FDI in the corresponding period
a year before. This is set to explode further, with sweeping reforms by the Indian
government to loosen restrictions on FDI across various sectors, which will lead to more
international corporations and financial investors entering the Indian market.
27
Examples include the retail sector, where 51 percent FDI is now allowed in single brand
products; the telecoms services sector, where the FDI limit has been raised from 49 percent
to 74 percent; and selected infrastructure sectors, such as the development of new airports,
laying of natural gas pipelines, petroleum infrastructure, captive mining of coal and lignite,
mining of diamonds and precious stones, as well as the development of townships where
complete foreign ownership is now welcome.
Role of Private Equity players
 Provides Fund irrespective of market conditions for –

 Expansion Capital
 Acquisition Capital/Change of control
 Restructuring Businesses
 MBOs, Divestments, Consolidation
 Restructuring B/S
 Shoring up Promoter stakes
 Privatisation (Public to private)
 To enable entrepreneurs achieve success that may otherwise have been beyond reach
by providing resources over and above money.
 Money can be availed through any other form of funding. But, money alone
can not catalyse the working of your organisation, thus along with the resources PE players
also provides risk management tools ensuring high degree of success to the organisation.
 PE players also facilitate and promote building businesses and teams ensuring
high standard of corporate governance.
28
 Success of PE Fund is dependent on success of the venture. PE funds make sure that
their star entrepreneur are helped with all the resources and learning which can be mustered
by the fund to help him realise his dream.
The different major roles played by Private Equity players in the economy are as follows -
•Financial
– Equity
– Quasi Equity
– Shareholder‘s Loans
– Guarantees
•Managerial
– Board inputs: Industry specialist Independent Directors
– Investment professionals with experience & knowledge of building businesses
•Networking
– Global access to valuable group of people and skills
Fast track partnership.

The chart below shows the different roles played by Private Equity firms –:
29
Reasons for Private equity players entering into India
The strong interest in India has resulted in very bullish stock market conditions, with
trading volumes increasing substantially. This has eased exit possibilities, with most of the
early domestic and foreign entrants such as Actis Partners, Warburg Pincus, Citigroup
Venture Capital, Barings and West Bridge Capital reaping significant multiples on their
investments. It is little wonder that other global private equity players such as 3i, Blackstone
and Goldman Sachs have been setting up shop in India, each with deep pockets.
The most of the private firms in India is still in the need of capital to expand them, in
spite of having the required technology, labour and knowledge they are not able to become
productive to the economy. Thus the advent of private equity players has provided an
opportunity for these firms to grow with the economy.
Private Equity players have came to India with a research back up and thus they know
the potential of these firms and thus there has been reduction in the corpus amount invested
in China than in India, which definitely gives a hunch where the Indian economy is
booming.
30
PRIVATE EQUITY INVESTMENTS IN INDIA- A PERSPECTIVE

The Indian stock markets witnessed tumultuous times during the years 1999-2000. There was continuous
surge in the stock markets and in 2001, the king pin of these surges, Ketan Parekh was arrested and put out of
action by SEBI. Back then, there were over 20 companies that had either planned or made allotment of shares
during this period through modes such as preferential and private placements of equity.
While preferential allotment was seen in companies where the promoters' stake is low, the private placement
was made to companies (in the form of strategic investment), mutual funds, FIIs, or high net worth
individuals. Between 1999 and 2000, when the market was in its infancy, around Rs 6,000 crores were raised
by private placement of equities.
Some of the big deals during these periods were:
 HFCL (Rs 735 crores at Rs 1,050 per share and Rs 1,039 crores at Rs 1,450 per share),
 Zee Telefilms (Rs 800 crores at Rs 1,000 per share),
 Pentasoft Technologies (Rs 798 crores at Rs 798 per share)
 Trigyn Technologies (Rs 606.38 crores at Rs 825 per share).
SEBI Concerns:
Between the years 2000 and 2007, a lot of water has flown under the bridge and there have
been many calls to call in for greater regulation of these funds and their target companies in
India because:
 The securities issued by companies through the private placement route get listed and
traded on the stock exchanges after allotment, just like a public issues.
 In turn, they are bought by all kind of investors, including the retail, through the
secondary market. Therefore, this way the transaction in them is at par with the securities
issued through the public issue.
The difference between the two is on the disclosure. In the case of public issue, the
disclosure is broad and the companies are mandated to inform their shareholders through
public announcement and annual reports about the utilization of the funds raised.
In the case of private placement, the disclosure is bare minimum. For instance, the
companies are not required to inform the utilization of funds raised through the private
placement.
31
India and Private Equity Investments
India has been on the radar for many Private Equity firms(also known as PE firms in
common parlance). Primary factors attracting these funds in India being a vibrant market
and democracy which fosters entrepreneurship as well as new firms. It is these new firms
which know the target market very well who form the basis for new investment by all
Private Equity Firms across the words.
PE(Private Equity) has come a long way from providing fuel (funds) to the fiery growth of
India Inc. It helps investor companies with a whole host of activities — from forging
strategic alliances to assisting in corporate governance, from providing management advice
to budgeting.To gauge the activities of these firms as well as their investment patterns in
India, the following study has been undertaken by me:
Analyze the performance of companies receiving PE funding. I did this by tracking deals
concluded before January ‘07, since it‘s too early to comment on companies that received
money in ‘07. I am in the process of analyzing data for approximately 100 listed companies,
spread across sectors like gems and jewellery, tea, shipping, aviation, edible oil and
garments, to name a few. I intend to compare the performance of companies receiving PE
funds with those of their peers in the corresponding Economic Times sectoral indices that
did not get any such funds.
On an average, a preliminary analysis of the Private Equity funding in new, virgin indutrsies
and companies concludes some basic, yet vital and important points:
It is observed that by and large, companies which received funding seemed to do much
better than their peers on the following parameters — profitability, cash profits, sales and
investor returns. There were some intangible benefits too, such as greater recognition and
increased media attention.
32
The Stages of PE Investment in Indian Scenario
1996-1997 - Beginning of PE activity in India: The Indian private equity (PE) market
roughly started in 1996-1997 and it scaled new heights in 2000 primarily because of the
success demonstrated by India in assisting with Y2K related issues as well as the overall
boom in the Information Technology (IT), Telecom and the Internet sectors, which allowed
global business interactions to become much easier. In fact, the total value of such deals
done in India in 2000 was $1.16 billion and the average deal size was approximately US
$4.14 million.
2001-2003 - PE becomes risk averse and activity declines: Not surprisingly, the investing
in India came ―crashing down‖ when NASDAQ lost 60% of its value during the second
quarter of 2000 and other public markets (including those in India) also declined
substantially. Consequently, during 2001-2003, the PEs started investing less money and in
more mature companies in an effort to minimize the risks.
For example:
(a) The average deal size more than doubled from $4.14 million in 2000 to $8.52 million in
2001
(b) The number of early-stage deals fell sharply from 142 in 2000 to 36 in 2001
(c) Late-stage deals and Private Investments in Public Equity (PIPEs) declined from 138 in
2000 to 74 in 2001, and
(d) Investments in Internet-related companies fell from $576 million in 2000 to $49 million
in 2001.This decline broadly continued until 2003.
2004 onwards - Renewed investor interest and activity: Since India‘s economy has been
growing at 7%-8% a year, and since some sectors, including the services sector and the
high-end manufacturing sector, have been growing at 12%-14% a year, investors renewed
their interest and started investing again in 2004. As Figure 1 shows, the number of deals
and the total dollars invested in India has been increasing substantially. For example, US
$1.65 billion in investments were made in 2004 surpassing the $1.16 billion in 2000 by
almost 42%. These investments reached US $2.2 billion in 2005, and during the first half of
2006, PE firms have already invested $3.48 billion (excluding debt financing).
33
We forecast that the total investment in 2006 is likely to be $6.3 billion, a number that is
more than five times the amount invested in 2000.
PE investment expands beyond IT and ITES: A very important feature of the resurgence
in the PE activity in India since 2004 has been that the PEs are no longer focusing only on
the IT and the ITES (IT Enabled Services, commonly known as ―Business Process
Outsourcing‖ or BPO) sectors. This is partly because the growth in the Indian economy is
no longer limited to the IT sector but is now spreading more evenly to sectors such as bio-
technology and pharmaceuticals; healthcare and medical tourism; auto-components; travel
and tourism; retail; textiles; real estate and infrastructure; entertainment and media; and
gems and jewellery. Figure 2 shows the division across various sectors with respect to the
number of deals in India in 2000, 2003 and the first half of 2006.
Percentage of the number of deals by PEs in various sectors

Sectors 2000 2003 2006(Q1&Q2)
IT & ITES 65.5 49.1 23.18
Financial Services 3.13 12.3 9.7
Manufacturing 3.0 1.8 19.3
Medical & Healthcare 2. 7.0 8.3
Others 25.2 29.8 37.9
Total 100 100 100
Important roles played by PE in the growth of Indian

Economy
“Private Equity in India: Adding Human Capital to the Value-Creation ―

If you are a global company and India is not part of your plan, then you have missed the
bus…..said by - Dr. Manmohan Singh, Prime Minister of India
In the days before economic liberalization, it was just established industrial houses such
as Tata or Birla which had easy access to the capital markets and money resources largely
on the basis of their pedigree.
34
The investment environment has radically changed since then. A whole new breed of
entrepreneurs now occupies front ranking positions in their respective fields. Many of the
old business houses which had the foresight to embrace change, have restructured, re-
focused and have flourished. The rest have withered into insignificance. And in their stead,
many have emerged who could become future stars in manufacturing, technology or
knowledge-based services. Indeed the investment environment is so attractive that investors
are flocking to scores of funds, domestic and international, taking a heavy exposure on the
future of these companies. Besides foreign institutional investors and mutual funds, private
equity funds are also taking concentrated bets across companies and segments. Many India-
dedicated funds have, and are, being set up to finance and to provide resources to the
organizations as they know the potential of these organizations.
And allocations in existing ones are being ramped up for corporate in south Asia, India
and China. Draper Fisher recently announced plans for setting up a $200 million fund for
startups. Timothy Draper, founder of Draper Fisher Jurveston, a Silicon Valley venture
fund, on his first exploratory visit to the country in October went on record to say that he
was adopting a contrarian approach. "Now that everyone's crowding in China I have to go
someplace different. And that place is India." Draper is also contemplating to set up an
office in India. Draper is well known for funding Sabeer Bhatia of Hotmail, the free internet
e-mail service which was subsequently sold to Microsoft for over $400 million. There are
several other PEs which are rushing to India. Unlike Draper, they are not contrarians but are
willing to bet on the India growth story. Among them is west Bridge Capital Partners, a
Mauritius based company focusing on IT and BPO businesses and having offices in Silicon
Valley and Bangalore. It recently procured subscriptions to its second India VC fund of
$200 million. ―One major draw in favour of India is the diversity of enterprises which span
over virtually all sectors,‖ says Dhananjay Mungale a financial expert, who quit his high-
profile job at DSP Merrill Lynch to set up his own advisory venture. The breadth of
opportunity in India is much higher than places like Indonesia, Malaysia or Taiwan, he says.
Many of the private equity funds tend to seek a place on the board and participate
actively in laying down the policy framework to ensure quicker rise of the enterprise. This
is especially helpful in case of new economy businesses where traditional assessment by
investors may not get the same valuation as may be received from a private equity investor.
Again this is helpful in case of an unlisted company.
35
India‘s private equity sector is moving to the big league. Fund sizes have increased
dramatically from US $10 to US $25 million just a few years ago, to between US $400
million and US $1 billion today. The minimum deals now start at around US $25 million,
eclipsing the average deal size of US $8 million in 2002. With the strong global interest in
the Indian market continuing, the challenge is no longer about raising private equity funds,
but how to extract value from the portfolio investments, turning the focus from financial
capital to human capital.
During the first half of fiscal year 2005-06, US$7.96 billion of foreign direct
investment (FDI) poured into India — more than triple the FDI in the corresponding period
a year before. This is set to explode further, with sweeping reforms by the Indian
government to loosen restrictions on FDI across various sectors, which will lead to more
international corporations and financial investors entering the Indian market. Examples
include the retail sector, where 51 percent FDI is now allowed in single brand products; the
telecoms services sector, where the FDI limit has been raised from 49 percent to 74 percent;
How the Indian firms will perform will largely depends on their
management
How successful these firms will perform in the big league of high stakes private equity
plays over the long run could depend heavily on one key factor — their teams of
professionals.
A recent global survey by McKinsey & Company revealed that Indian business leaders
are much more optimistic about the future than their international peers are. Yet Indian
business leaders see the high cost and low availability of talent as the single greatest
constraint on their companies — it‘s a problem that worries them much more than it does
their counterparts around the world. Similarly, top on the agenda of India‘s private equity
firms is finding the right leadership teams to drive business.
To date, private equity firms have focused on different stages of a portfolio company‘s
evolution, entering at an early stage with venture capital funds, later for growth capital, and
even after listing as a Private Investment in Public Equity (PIPE) deal players emerging in
the Indian market. Firms that focus on a few narrowly defined industry sectors are better
positioned to build upon and translate their expertise into value-creation potential,
transaction pricing, and higher potential returns over the long run. It is therefore no longer
sufficient to look primarily at the skill sets and track records of investment professionals.
36
Firms need to ensure that their executives think and act like owners, and will take active
responsibility for the proper guidance of portfolio companies.
We also envisage that more private equity firms will hire operating partners
who become deeply involved in the management of buy-out investments and other
portfolio companies. In many cases, private equity firms retain the incumbent
management, preferring not to rock the boat when buying out a company. As
seasoned managers with in-depth industry or functional expertise, operating partners
act as sage counselors and critical advisors on operating, financial, and strategic
issues for the portfolio companies‘ management teams. With a clear mandate to add
value to an investment within a fixed timeframe, they can adopt a less sentimental
approach and focus unflinchingly on results to make fast decisions and act rapidly
where necessary. An alternative to hiring operating partners is to create management
buy-in teams. Here, private equity firms enter into joint investments in specific
portfolio companies with a small group of seasoned professionals who are looking
for a new
challenge, and who have the funds for a small co-investment amount as ―sweat equity‖. It
has been shown that running the business as an owner inevitably helps unlock value. The
benefit of this joint management ownership program is that it instantly puts in place highly
motivated owner executives to run the company from day one.
Reasons for Private Equity players being accepted in Indian Economy are
–
Another practice that private equity players in India have yet to actively adopt is to
supplement executive teams in portfolio companies with a talented board of directors, who
not only play an active role in formulating the company‘s strategies but also use their
network of relationships, contacts and managerial expertise to implement various strategic
initiatives for the company — whether it is to tie up a joint venture, to acquire another
company, or to diversify into a new area through a greenfield project. These board members
are expected to devote a significant amount of time outside board meetings to contribute to
the company‘s growth and value creation.
37
The private equity industry in India is at a key injection point. Investors the world over
are increasing their allocations on India. The robust economy, supportive government, and
recent industrial reforms could see several hundred billion dollars channeled to the newly
opened infrastructure sector alone.
management ownership program is that it instantly puts in place highly motivated owner
executives to run the company from day one.
Reasons for Private Equity players being accepted in Indian Economy are –
38
Role played by PE in the growth of Indian economy

Since 2004, India has witnessed a tremendous rise in Private Equity financing. Indian
companies are creating partnerships with PE firms on a scale that has not been witnessed
before. Is this good for the Indian economy? What kind of value does this relatively new
form of financing offer to Indian entrepreneurs?
Private Equity boosts the Indian economy
 According to the Private Equity Impact study and research findings - A quantitative
comparison of Private Equity- and Venture Capital-backed companies against their non
Private Equity-backed peers and relevant market indices, in terms of PEs plays a critical
rule in the innovation process, not only as a source of finance to innovation but through
other functions that lie at the core of high tech Development.
 PEs bridge between sources of finance, entrepreneurs, scientists, suppliers, and
customers by providing not only the required sources of funds but also an added value of
technologies and requirements.
 PEs typically also add value to their portfolio companies through assistance in
strategic decisions in the day to day management of the firms.
 PE capitalists with technology & entrepreneurial background generate more value
added than PEs with financial background
Some other important roles are -

1.) Intermediation and Market Building - The enhanced access to business and
advisory/consultancy services and to knowledge/technology that PE provide will contribute
to the emergence of new markets in the global economy. Moreover PEs help enterprises
global product and global capital markets. This is particularly important for SMEs and
clusters wanting to expand the range of markets in which they would like to operate e.g new
markets for intermediate inputs which the Globalization process is opening.
2.) Source of External Capabilities - PEs complement the capabilities of innovative

SMEs, sometimes in those areas were entrepreneurs are less likely to be knowledgeable and
capable e.g. export marketing; know whom, management, etc.
39
3.) Facilitating Complex Contracting - This is particularly so in relation to marketing

agreements, alliances, strategic partnerships, M&A, etc—many of these critical for fast
access to global product markets. A central condition for success in many of these is prior
experience which entrepreneurs frequently do not have. A PE sector may eventually have
such capabilities and thereby have a strong impact on innovative enterprises quest to rapidly
build global market share.
4.) Promoting International Links – It provides promotion and global links to the
enterprise thus increasing the industry visibility of the firms to go for global expansion with
the right partner.
5.) Supporting of the Global Expansion of Promising Innovative SMEs - The value roles
of PE is to provide equity based (generally private) finance and support organizations could
play important roles in promoting innovative SMEs and clusters in industrializing
economies PE could become a pillar of the Knowledge Economy—by facilitating the
provision of services to Innovative SME‘s; by being a node of three overlapping networks;
and because its capabilities are largely based on tacit knowledge. Moreover, by promoting
SME they are promoting invention (and indirectly innovation and diffusion), self-
organization and creation of new teams & tacit knowledge, and the continuous building of
new markets. Interactive learning lies at the basis of these processes.
6.) Facilitate the Transition to a Learning Economy – Since the PE are learned and
qualified investors, this could provide enterprise a new learning environment that constitute
a key sector in the creation, diffusion and adaptation of tacit knowledge, codified
knowledge and technology
40
Introduction to Private Equity and

Venture Capital
What is a Private Equity?
Private equity, in finance, is an asset class consisting of equity securities in operating

companies that are not publicly traded on a stock exchange.
Private equity investments are primarily made by private equity firms, venture capital
firms, or angel investors, each with their own set of goals, preferences, and investment
strategies, yet each providing working capital to a target company to nurture expansion,
new product development, or restructuring of the company‘s operations, management,
or ownership.
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 investors seek to obtain a substantial
interest in a company in order to have an active role in firms‘ strategic decisions. Their
goal is to boost the value of a company and walk away with substantially more money
Among the most common investment strategies in private equity are: leveraged
buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
In a typical leveraged buyout transaction, a private equity firm buys majority control of
an existing or mature firm. This is distinct from a venture capital or growth capital
investment, in which the investors (typically venture capital firms or angel investors)
invest in young or emerging companies, and rarely obtain majority control.
41
What is a Venture Capital?
Venture capital is a broad subcategory of private equity that refers to equity

investments made, typically in less mature companies, for the launch, early
development, or expansion of a business. Venture investment is most often found in the
application of new technology, new marketing concepts and new products that have yet
to be proven.
Venture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stage
and growth capital that is often used to fund expansion of existing business that are
generating revenue but may not yet be profitable or generating cash flow to fund future
growth.
Entrepreneurs often develop products and ideas that require substantial capital during
the formative stages of their companies' life cycles. Many entrepreneurs do not have
sufficient funds to finance projects themselves, and they prefer outside financing. To
compensate the risk of failure, venture capitalist's seeks higher return from these
investments. Venture Capital is often most closely associated with fast growing
technology and biotechnology fields.
Private Equity Investments and India

India today is among the more attractive investment destinations globally, driven by a
combination of strong economic growth, an improving regulatory environment and
favorable demographics. As India continues on its rapid-growth path, several large
potential investment sectors such as financial services, infrastructure and domestic
consumption offer significant opportunities for PE investor. India is generally
considered a ‗must have‘ destination for foreign institutional and PE funds, which
recognise the potential of Indian Companies to generate high returns leveraging on the
country‘s economic growth.
42
India‘s GDP grew from US$3.76 trillion in 2009 to US$4.05 trillion in 2010 (adjusted
for Purchasing Power Parity) while real GDP grew at 8.3% in 2010 which is an
increase from 7.4% in 2009. GDP per capita has increased from US$3,200 in 2009 to
US$3,400 in 2010. Even though the global economy as a whole experienced several
corrections in it‘s recovery from the recession, India was able to continue its growth
trajectory.
PE investors have played a significant role in the development of several sectors in

India over the past decade eg Telecom, Healthcare, Technology, Retail, Education etc.
PE investments have grown from US$ 2.0 bn in 2005 to US$ 19 bn in 2007. Thereafter,
investment value fell to around US$ 6.2 bn in 2010 registering a CAGR of 25% over
the last six years.
43
CHAPTER 3
LITERATURE REVIEW
44
LITERATURE REVIEW
Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows in the
second half of the year, this recovery in the primary markets did not help the PE activity.
The number of Private Equity deals (PE) in 2009 slid to a 4-year low, according to a new
report on PE activity in India.
Despite a surge in the secondary market in response to negative investor sentiments, the PE
market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in 2008 and
2007 respectively. This was a decline of 39% over 2008 and 53% on 2007 levels.
In terms of deal value, 2009 raised $3.35 billion from the market — the lowest in the last
four years — as compared to $10.59 billion in 2008 and $19.03 billion in 2007. Out of the
191 deals, as many as 118 came in the second half of 2009, garnering $1.8 billion and
accounting for more than 50% of the total deal value in 2009.
Telecom, Media & Technology emerged as the hottest sector of 2009. It accounted for 60
deals in 2009. Telecom, Media & Technology sector witnessed 31.4% of total deals
followed by Industrials and Real Estate & Infrastructure with 22.5% and 11.5%.
India accounted for 6 per cent of total global PE deals volume in 2009, while only 2 per
cent in terms of deal value. The deal activity in India declined by 39 per cent and 68 per
cent in terms of deal volume and deal size respectively in 2009 as compared to 2008.
Some reasons for success of private equity in India are:
Better environment for investment- The Indian economy has been enjoying a period of
sustained growth at around 8 per cent a year. The latest boom has attracted the attention of
private equity houses who have been participating in an unprecedented number of
investment deals. In sharp contrast to the time private equity funds invested in India from a
base overseas (for example Singapore), many private equity firms have now established a
presence in the country, spurred on by a bullish market and some spectacular and well
documented exits. This reflects the importance of understanding local markets and working
closely with promoters (families or controlling shareholders), as well as the benefits of local
decision making.
45
Innovative ideas- The Indian private equity market is different from that of Europe or the
United States in that small family-owned and family-managed businesses account for a high
proportion of the market and therefore investment opportunities are higher than Europe and
US. The next generation having different mindset and they believe in innovation, i.e.
Ranbaxy, which sold its stake in Daiichi, was result of innovative mindset. The average deal
size in India is significantly lower than in China or South Korea, for instance, but 6,000
companies are listed on Indian exchanges, a huge number by any standard, and the rising
performance of the stock market since 2004 has resulted in substantial wealth creation for
families with majority stakes in listed companies.
Improvement in management skills- Among non-listed family companies there has been a
traditional reluctance to share ownership and surrender control. However, there are signs
that private equity firms are willing to play a more active advisory role in parallel with their
ability to raise growth capital — a prospect that owners and promoters are starting to find
attractive. As well as providing capital and financial expertise, private equity firms are in a
unique position to introduce new disciplines and much needed structural reforms, for
example looking closely at the quality of management teams or challenging companies to
introduce leadership succession plans.
Investors’ role in decision taking- An aspect of private equity that companies find
attractive is that they gain an investment partner who is able and willing to provide
continuous advice and support. Here the Indian connection becomes important, since many
Indian companies understandably want Indian solutions to Indian problems. Many
companies appreciate being able to have in-depth discussions with their investment partners
about a variety of business decisions, for instance advertising investment, merchandising or
retailing.
Globalization- There has been phenomenal growth in the value of private equity
investment in India over the past decade. With an expanding domestic market and
additional opportunities brought by globalization, the impact of private equity on Indian
business is likely to increase further in the coming years.
46
After a euphoric two years, the second half of 2008 and the first half of 2009 have mirrored
global trends difficult for PE investments in India. Until last year‘s credit crunch, deal sizes
had been increasing and were hotly competed for at high premiums.
Today, the PE landscape has changed due to the global financial crisis. There have been
fewer exits and lower volumes. Allocations to PE funds by Limited Partners (LPs) are
down, some even requesting a rescheduling of existing commitments. In response, some PE
funds, notably some global funds, have reportedly reduced their management fees and
reduced LP commitments.
It is likely that India will continue to be among the developing world‘s largest destinations
for growth capital, while control and buyout deals will be sought only by the largest funds.
However, deal volume and average deal size have declined, driven by declining capital
overall, with recovery only in Q2 2009.
PE funds will find another change in their operating environment: that global LPs are likely
to invest in fewer funds than before, picking those whose management teams have operating
experience and a track record. The reduction in capital from overseas may be offset to an
extent by the emergence of a number of domestic LPs investing from family and corporate
47
CHAPTER 4
DATA ANALYSIS,
INTERPRETATION AND
PRESENTATION
CONTENTS:-
4.1 DATA ANALYSIS

4.2 ADVANTAGES OF COMPANY
4.3 TOP 10 PRIVATE EQUITY DEALS
48
4.1 DATA ANALYSIS, INTERPRETATION AND PRESENTATION
Private Equity: Current Scenario
India has a very vibrant Venture Capital (VC) / Private Equity (PE) industry with USD 32.5
billion invested across more than 1500 VC/PE deals from January 2006 till date.
Economists estimate that India needs about USD 1 trillion of investment over the next five
years to sustain a GDP growth of above 9 percent. This translates to USD 60-100 billion of
VC/PE investments requirement over three years, against which industry estimates that PE
investments would be in the range of USD 9-10 billion in the year ending December 31,
2010.
After a turbulent 2009, private equity investments in India displayed steady signs of
recovery in the first quarter of 2010. The latest quarter registered the highest value of deals
since 2009.
For the quarter ended March 2010, total announced deal value was $1,943 mn, a jump of
more than 185% from $675 mn in Q1 2009. Total deal count in Q1 2010 also increased by
35% to 88 deals, up from 65 in Q1 2009. Interestingly, despite the enormous growth in deal
value on a quarter-on-quarter basis, the deal count decreased by 11% to 88, down from 99
in Q4 2009.
49
SECTORAL BREAKDOWN
Real estate, IT/IT Services and Energy were the most targeted sectors for investment with deals
worth $0.65 billion, $0.62 billion and $0.54 billion respectively. Together, they accounted for
more than 40% of total private equity deal value during the year 2009.
50
Top Sectors deals in 2017
Sector Volume Deal Value ($mn) Average Deal Size
Real Estate 20 657 43.8

IT/IT Services 47 621 15.9
Energy 16 538 41.4
Logistics 15 354 23.6
Telecom 5 336 84
Banking, Finance & 32 244 8.4
Insurance
Manufacturing 34 242 9.3
The major PE investments influencing the deal values of these sectors were investments in
Aricent Inc., Indiabulls Real Estate Ltd., Mohtisham Estates and Ind Barath Power Infra
Pvt. Ltd. The other sectors, which have significantly contributed to private equity deal value
in the year 2017, are Logistics and Telecom accounting for 15% of total deal value.
The most active sectors in terms of deal volume were IT/IT Services and Manufacturing
which lead with 17% and 11% of deal volume respectively in 2009. Other sectors
contributing significantly to deal volume were Banking, Finance and Insurance and Real
estate accounting for 11% and 7% of deal volumes respectively. As seen in the year 2008,
2009 too saw large number of deals in IT/IT Services, Manufacturing, Banking, Finance
and Insurance and Real estate.
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Advantages of Private Equity
 By definition, private equity firms work outside the public eye and do not have to
follow the same transparency standards that public firms and funds must adhere to. This
allows private equity firms to reform the companies without the constraint of having to
report quarterly to the SEBI, ROC or similar distractions.
 Private equity firms generally perform very rigorous due diligence on potential
investments. By utilizing a team of researchers the private equity firm is able to identify
most risks that would not otherwise be found.
 The management receives carried interest, a portion of the profits, so managers and
their staff are motivated to produce good results to investors. Although carried interest is
often criticized for taking money from the investors, it is a very big incentive for managers.
 Economic Scenario- India is one of the fastest growing economies in the world, with
enormous growth potential in many industries. This means that capital requirements are
high, translating into an ideal hunting ground for PE funds .
 Abundance of skilled labor - India offers a huge advantage in the form of its highly
talented and skilled labor pool, which can lead to the success of the firms in which
investment is made through the private equity route. The funds are not just bullish about the
businesses in India but have also grabbed a fair share of highly rated managers like Vivek
Paul, Rajeev Gupta, Avnish Bajaj, Akhil Gupta, and Nikhil Khattau. PE funds are
invariably on the lookout for high profile managers, not only to manage their own funds but
also as their representative on the board of companies in which they have invested.
 Success of several sectors - India has firmly established itself as the world‘s IT
superpower with almost all major software development companies having an Indian
development centre. It is also becoming the the hub of back office operations, and a leading
provider of BPO and KPO services.
52
 Mature Financial markets - Capital markets have stabilized in the recent past with
regulators like SEBI keeping a firm watch on the market development. This means both
increased opportunities as well as an easier and painless exit route for PE funds. The
emergence of entrepreneurs in India who consider PE their full time occupation is also a
positive sign. Besides, there are well established corporate houses diversifying their surplus
investment, as a strategy for their assets allocation, through PE funds without involving
themselves directly in the operations of target companies.
 Successful M&As- A recent spate of mergers and acquisitions has given rise to yet
another way of exiting from Indian companies for private equity investors.
 Successful track record - The first generation of private equity players have realized
significant success in the last several years. For instance, Warburg Pincus earned
huge
returns out from its investments in Indian companies like Bharti Telecom.
53
4.2 ADVANTAGES FOR COMPANY:
 Private equity managers are paid very well and so it is easy to attract high caliber,
experienced managers that tend to perform very well. The same goes for lower level
employees at private equity firms, they tend to be the top young business school graduates.
This helps the company to utilize best talent in the industry without shelling out even a
single penny from its pocket.
 PE helps a company to prepare for stock market listing (IPO) as the exit route of
investment. It opens up enormous opportunities for companies to raise funds. The
continuous scrutiny by stock market participants, SEBI & ROC facilitates efficiency
improvement and proper strategic decisions.
 PE helps those companies which cannot raise money from the market. By private
equity company get money from the investors, which help in the growth of the company.
Disadvantages of Private Equity

 Difficult to access for small & medium investors- private equity Limited
Partnership funds may only be marketed to institutions and very wealthy individuals; in
addition the minimum investment accepted is usually more than £1mn.
 Relative illiquidity –Private Equity funds normally invest in a unlisted space and they
find it difficult to exit the investment at their wish, since it require concentrated efforts to
find a suitable investor for unlisted company. Even in the listed space, the impact cost
remains very high due to sheer magnitude of scale.
 A long term investment perspective is necessary to achieve gains for a private equity
investment programme because the investment programme depends on the company
growth. It depends on the gap between entry and exit of the investor.
 Political condition - India, being divided into a number of states, causes an

investment decision to be affected by politics. Changes in regulation and infrastructure
development are often sidelined due to friction and conflict between the state and the
federal government.
 Competition from China - China is a direct competitor of India and most of the
private equity investors, eyeing the Asian region, draw a comparison across both the
countries to decide where their money should be parked. The new state-of-the-art airports in
China bear a stark contrast to the abysmal conditions of the terminals in India‘s main cities.
 High costs - private equity managers charge relatively high fees for managing capital
committed by external investors (generally around 2%) and, if the fund performs well, take
54
Disadvantages for Company:
 It is a lengthy process since private equity managers conduct detailed market,

financial, legal, environmental and management due diligence, which could take several
months before they make final decisions on investing.
 Entrepreneurs have to give up some of their company‘s shares to a private equity

investor, i.e. control. Because investor have some control over the company, so it is not easy
for the entrepreneur to take decision independently. He have to take advice of the investor
to take decision and it causes delay in the process.
 The private equity managers have control over the timing of a sale of (a part of) the
business.
 Lack of promotion in investment across sectors - PE funds are being channelized into
only a few sectors like IT, infrastructure & real estate and telecommunications, to the
exclusion of the remaining industries, desperately in need of funds for growth.
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4.3 TOP 10 PRIVATE EQUITY DEALS
•The top 10 private equity deals accounted for more than 36% of total private equity
deals in 2009. In 2008, top 10 deals accounted for about 40% of total deal value for the
year
•The largest deal by value was KKR‘s $255 mn buyout of Aricent, followed by Siva
Ventures investment in S Tel Ltd. and TPG‘s $200 mn investment in Indiabulls Real
Estate.
•Top deals occurred across various sectors, with 3 of the top 10 deals in Real Estate.
p Private Equity deals in 2015
S.
NO. Industry Target Buyer Price ($mn)
1 IT/IT Services Aricent Inc. Kohlberg Kravis Roberts & Co. 255
2 Telecom S Tel Ltd. Siva Ventures Ltd. 230
3 Real Estate Indiabulls Real TPG Capital Inc. 200
Estate Ltd.
4 Logistics Krishnapatnam 3i India Infrastructure Fund 161
Port Co. Ltd.
5 Real Estate Mohtisham Estates Oman Investment Fund 125
6 Agriculture Karuturi Global Emerging India Focus Funds, 124
Ltd. India Focus Cardinal Fund, Elara
India Opportunities Fund,
Monsoon India Inflection Fund
Ltd.
7 Hospitality & Capricon New Silk Route Partners 124
Hospitality
Travel Services
Pvt. Ltd.
8 Healthcare & Max India Goldman Sachs 115
Services
9 Real Estate Century Real Goldman Sachs Whitehall Real 104
Estate, Seven Star Estate Fund
Hotel Project
10 Energy Ind-Barath Power Bessemer Venture Partners India, 100
Citi Venture Capital
Infra Pvt. Ltd. International,
Sequoia Capital India
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Ways of Exit
There are different ways in which a private equity investor can exit from an investment:
A. Trade sale
A trade sale, also referred to as M&A (Mergers & Acquisitions), of privately held company
equity is the most popular type of exit strategy and refers to the sale of company shares to
industrial investors.
The trade sale is agreed in private and makes both the buyer and the seller less vulnerable to
the external pressures of a stock market flotation. It is often advisable to keep the
transaction a closely guarded secret because clients, suppliers and employees may interpret
a trade sale negatively. These negative signals become even stronger if the negotiations fail.
B. Entrepreneur or Management Buy-Out

The Buy-Out of the funds stake by its management team is becoming more and more
successful as an exit strategy. It is a very attractive exit for both the investment manager and
the company‘s management team if the company can guarantee regular cash flows and can
mobilize sufficient loans. The accounting and financial aspects of this exit need to be
studied very carefully.
C. Sale of the investment to another financial purchaser (called a

secondary market investor)
One financial investor may sell his equity stake to another one when the company has
reached the stage of development or when the current development of the company no
longer corresponds to the investment criteria of the original fund. This can also occur if the
financial support required maintaining the company‘s development has exceeded the
capacity of the fund. This strategy has the advantage of enabling an exit when the team does
not want a trade sale or a stock market flotation.
D. IPO (Initial Public Offering): flotation on a public stock market

A stock market flotation may be the most spectacular exit, but it is far from being the most
widely used, even in stock market booms.
A stock market flotation should correspond with a genuine wish to make the company
more dynamic over the long term and to profit from the growth possibilities offered by
a stock market. Therefore, the equity share placed on the market (the float) must be
sufficiently large to ensure liquidity – the reward for appealing to the market. A
flotation is not an end in itself but the beginning of a long process of development.
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A stock market flotation always leaves company open to the risk of an unwanted bid
whereas equity held by an investor that company has chosen can be better managed. If
company decides to opt for this route, it must be minutely prepared over a long period.
E. Liquidation
This is obviously the least favorable option and occurs when the efforts of the head of
the company and the investors to save the company have not succeeded.
Top Private Equity Exits in 2015
S.
N Price ($
O. Target Seller Type mn)
1 DLF Assets Pvt. Ltd. DE Shaw Composite Buyback 470
Investments (Mauritius)
Ltd.
Temasek Holdings Pte. Ltd.,
2 ICICI Bank Ltd. GIC Open Market 460
Special Investment Pte. Ltd.
3 Shriram Transport ChrysCapital lll LLC Open Market 221
Finance Co. Ltd.
4 XCEL Telecom Pvt. Q Investments LP M&A 150
Ltd.
5 Cognizant Sequoia Capital India Open Market 60
Technology Solution
Corp.
Galleon Special
6 Edelweiss Capital Opportunities Open Market 54.93
Ltd. Master Fund SPC Ltd.
Orient Global Tamarind
7 India Infoline Ltd. Fund Open Market 51.9
Pte Ltd, Orient Global
Cinnamon Capital Ltd.
Warburg Pincus India Pvt.
8 Max India Ltd. Ltd. Open Market 50.5
Carlyle Asia Venture
9 Financial Software Partners l Secondary 51
& System Pvt. Ltd. Sales
10 Mindtree Ltd. Capital International Global Open Market 47
Emerging Markets Private
Equity Fund LP.
58
How the Indian firms will perform will largely depends on their
management
How successful these firms will perform in the big league of high stakes private equity
plays over the long run could depend heavily on one key factor — their teams of
professionals.
A recent global survey by McKinsey & Company revealed that Indian business leaders
are much more optimistic about the future than their international peers are. Yet Indian
business leaders see the high cost and low availability of talent as the single greatest
constraint on their companies — it‘s a problem that worries them much more than it does
their counterparts around the world. Similarly, top on the agenda of India‘s private equity
firms is finding the right leadership teams to drive business.
To date, private equity firms have focused on different stages of a portfolio company‘s
evolution, entering at an early stage with venture capital funds, later for growth capital, and
even after listing as a Private Investment in Public Equity (PIPE) deal players emerging in
the Indian market. Firms that focus on a few narrowly defined industry sectors are better
positioned to build upon and translate their expertise into value-creation potential,
transaction pricing, and higher potential returns over the long run. It is therefore no longer
sufficient to look primarily at the skill sets and track records of investment professionals.
Firms need to ensure that their executives think and act like owners, and will take active
responsibility for the proper guidance of portfolio companies.
We also envisage that more private equity firms will hire operating partners who
become deeply involved in the management of buy-out investments and other portfolio
companies. In many cases, private equity firms retain the incumbent management,
preferring not to rock the boat when buying out a company. As seasoned managers with in-
depth industry or functional expertise, operating partners act as sage counselors and critical
advisors on operating, financial, and strategic issues for the portfolio companies‘
management teams. With a clear mandate to add value to an investment within a fixed
timeframe, they can adopt a less sentimental approach and focus unflinchingly on results to
make fast decisions and act rapidly where necessary.
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An alternative to hiring operating partners is to create management buy-in teams. Here,

private equity firms enter into joint investments in specific portfolio companies with a small
group of seasoned professionals who are looking for a new challenge, and who have the
funds for a small co-investment amount as ―sweat equity‖. It has been shown that running
the business as an owner inevitably helps unlock value. The benefit of this joint
management ownership program is that it instantly puts in place highly motivated owner
executives to run the company from day one.
Reasons for Private Equity players being accepted in Indian Economy are
–
Role played by PE in the growth of Indian economy

Since 2004, India has witnessed a tremendous rise in Private Equity financing. Indian
companies are creating partnerships with PE firms on a scale that has not been witnessed
before. Is this good for the Indian economy? What kind of value does this relatively new
form of financing offer to Indian entrepreneurs?
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Private Equity boosts the Indian economy
According to the Private Equity Impact study and research findings - A quantitative
comparison of Private Equity- and Venture Capital-backed companies against their non
Private Equity-backed peers and relevant market indices, in terms of key economic
parameters like Sales, Profitability, Exports, Wages and Research & Development.
In accordance with the research reports and findings from the study:
 PE-backed companies grew at a significantly higher rate compared to non Private

Equity backed companies as well as market indices like the Nifty and CNX Midcap.
Comparative Annual Sales Growth (2000-2006)

25.0% 22.9%
19.0%
20.0%
15.8%
15.0% 13.0%
CAGR 10.0%
10.0%
5.0%
0.0%
PE-Backed Non PE Nifty CNX CNX
Pharma Midcap
Source: ICFAI reader august 2007

 Wages at Private Equity-backed companies grew at a significantly higher rate
compared to their peers who are not PE-backed.
 About 96% of top executives at Private Equity-backed companies believe that without
Private Equity financing, their companies would not have existed or would have developed
slower.
 More than 60% of top executives at Private Equity-backed companies said that the
number of employees at their companies had increased after the PE investment.
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Roles played by PE in the growth of Indian economy –

 PEs not only provides resources of funds to the new ventures but also focuses on
identifying and upgrading both product/process innovation and management functions in
accordance to the global economy.
 PEs plays a critical rule in the innovation process, not only as a source of finance to
innovation but through other functions that lie at the core of high tech Development.
 PEs bridge between sources of finance, entrepreneurs, scientists, suppliers, and
customers by providing not only the required sources of funds but also an added value of
technologies and requirements.
 PEs typically also add value to their portfolio companies through assistance in
strategic decisions in the day to day management of the firms.
 PE capitalists with technology & entrepreneurial background generate more value
added than PEs with financial background
Some other important roles are -
7.) Intermediation and Market Building - The enhanced access to business and
advisory/consultancy services and to knowledge/technology that PE provide will contribute
to the emergence of new markets in the global economy. Moreover PEs help enterprises
global product and global capital markets. This is particularly important for SMEs and
clusters wanting to expand the range of markets in which they would like to operate e.g new
markets for intermediate inputs which the Globalization process is opening.
8.) Source of External Capabilities - PEs complement the capabilities of innovative

SMEs, sometimes in those areas were entrepreneurs are less likely to be knowledgeable and
capable e.g. export marketing; know whom, management, etc.
9.) Facilitating Complex Contracting - This is particularly so in relation to marketing

agreements, alliances, strategic partnerships, M&A, etc—many of these critical for fast
access to global product markets. A central condition for success in many of these is prior
experience which entrepreneurs frequently do not have. A PE sector may eventually have
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such capabilities and thereby have a strong impact on innovative enterprises quest to rapidly
build global market share.
Private Equity Exits Breakdown
•2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale in Centurion
Bank of Punjab to HDFC Bank. Total exit value rose to $2.2 billion in 2009 compared to
$0.93 billion in 2008.
•Funds utilized the sharp rise in the stock markets to cash out and return some money to
LP‘s. There were 66 open market exits and only one IPO exit – the part sale of Warburg
Pincus‘ stake in DB Corp.
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Overview of Investment Banking Services for Private Equity

The investment banker plays a key advisory role in formulating the transaction for
raising equity and intermediates in the whole process till the transaction is closed
successfully. More specifically, the role of the arranger can be broken down into the
following components:
I. Business Advisory
Advise the company on the necessary steps to be taken to fine-tune the business model
and make it investor friendly. Perform a study of the industry landscape and competitor
analysis, product pricing strategy and SWOT analysis.
II. Formulation of the Transaction
Formulate the business plan incorporating the company's stated business objective
along with detailed financial modelling that establishes the financial forecast of the
company and the requirement of capital.
III. Valuation
Conduct a valuation of the company for the purpose of assessment of its equity value
and develop a deal structure.
IV. Deal Structuring

Formulate the investment offering to be made by the company in line with the
requirements of the company and the investment parameters that would find favor with
targeted investors. Ensure that the deal structure complies with relevant regulatory
framework.
V. Offer Literature
Prepare an 'Information Memorandum' that incorporates the business plan, the

transaction and the investment offering. The information memorandum should
incorporate the necessary corporate disclosures that are mandatory under law. In the
case of listed companies it should also comply with the requirements under the DIP
Guidelines.
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VI. Transaction Advisory
Identify suitable investors with related investment appetite, facilitate investor

presentations, co-ordinate with agencies that would perform due diligence and
valuation on behalf of the investor, negotiate on behalf of the client on the term sheet
for the deal, work closely with legal advisers who would draft the documentation for
the transaction and co-ordinate the steps to be achieved till the transaction is closed.
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Business Plan and Financial Model
One of the initial tasks in a fund raising program would be to map the business model
of the company and based on it, prepare a comprehensive business plan. The business
plan preparation helps in understanding the business dynamics that shape the fortunes
of the company. This understanding is fundamental to the investment banker as it lays
the foundation for the transaction and also gives an insight into the likely perception of
investors when the plan is presented to them for investment. The involvement in the
business plan preparation helps the investment banker in the following ways:
In understanding the business model so that it stands a test of scrutiny by the investors
at a later date.
In providing the key assumptions and inputs required to construct the financial model.
To prepare the company for investor due diligence at a later date.
The most important aspect of a business plan analysis is to make an assessment of the
risks that are involved in the business and how well the business plan addresses the
mitigation of such risks.
The financial model follows the preparation of the business plan as all the key
assumptions that go into its preparation directly flow from the business plan. The
financial model helps in assessment of the following parameters:
The investment plan envisaged by the company and its relevance and justification from
a financial perspective.
The generation capacity for operating cash flow based on the revenue and cost model
and the positive and negative cash that the operating statement throws up.
Key financial parameters that define profitability and financial position such as
EBITDA, ROCE, RONW, EPS, debt gearing and book value per Share.
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Transaction Structuring
Transaction formulation is another conceptually important aspect of raising private

equity since it should meet the requirements of the company and be appropriately
compliant with the regulatory framework. Structure of the transaction primarily stems
from the following:
The current status of the company in terms of its size, shareholding, listing status etc.
The amount of capital to be raised through the transaction after careful assessment of
the company's requirements as per the financial model and finalisation of the financing
plan.
The type of instrument to be structured that would meet the requirements of the
company and the investors.
The provisions of the Companies Act, Income Tax Act, SEBI Guidelines, FEMA and
SCRA.
Target group of investors to be considered.
Based on the above parameters, it is possible to discuss the following transaction

structures for raising private equity:
Private Equity in Unlisted Companies
This transaction structure applies to early stage and later stage unlisted companies
wherein there is more flexibility under regulatory provisions. Usually, if the company is
in early stage, a debt convertible is structured so that it can be converted into equity as
and when the company achieves pre-set milestones. A convertible addresses two
important concerns:
o For the issuer company it does not unduly depress the EPS when the earnings of the
company are still at a nascent stage,
o For the promoters, it protects dilution of their stakes to a minority
o it protects the investor from high conversion price at the time of investment and from
bankruptcy losses if the business plan does not take off.
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Other alternatives are preference capital or convertible preference shares and non-
voting shares. These are seldom used by well established profit-making companies.
As far as regulatory provisions are concerned, private placements in unlisted companies

are governed by the Companies Act, the memorandum and articles of association, the
Unlisted Public Companies (Preferential Allotment) Rules, 2003 and the FEMA. These
regulatory provisions are not very stringent and provide a lot of legroom for transaction
structuring to the investment banker. The only important consideration to be kept in
mind is the pricing of a convertible instrument shall be disclosed to the shareholders at
the time of approving such issue. However, it may be noted that the pricing itself is left
open for the company to decide.
Private placement under this route is available to all types of investors, whether QIBs or
not. Therefore venture capital and private equity funds that are not registered with SEBI
(and are therefore not QIBs) are also eligible to invest in these transactions. There are
several such unregistered overseas funds operating in the Indian capital market.
Therefore, this kind of a placement provides unlimited choice of investors to the issuing
company.
 Private Investment in Public Equity (PIPE) Placement
PIPE placement is identical to that described above except that it is made by a listed
company. Listed companies suffer from several constraints including regulatory
restrictions on transaction structure. The pricing restrictions on listed companies are
discussed in the following
paragraphs on valuation. Apart from pricing, the other issues for consideration are the
Takeover Code of SEBI and the type of instrument. As per New Takeover code a
company can acquire up to 25% in a firm without requiring to make an open offer. The
new takeover code also raised the open offer size from a minimum of 20% at present to
26%, providing an exit for more investors.
For example, unregistered foreign venture capital or private equity funds are not
eligible for a QIP. A QIP is very similar to a Rule 144A private placement that is
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available in the US capital market. Since QIP is made only to institutional investors, it
has some relaxations as compared to a PIPE transaction. The important provisions
applicable to a QIP are as follows:
o The issue should be only for pure equity or convertible instruments

except warrants.
o The placement should be to QIBs only. None of the allottees shall have
any direct or indirect association with the promoter group.
o The company should be listed on a nationwide electronic stock exchange
(BSE or NSE).
o The company should be compliant with the minimum non-promoter
shareholding norm under the listing agreement.
o There should be a reservation of at least 10% of the offer to mutual
funds. The unsubscribed portion of this reservation can be allotted to other QIB
investors.
o The total amount raised under the QIP shall not exceed five times the net
worth of the company prior to the placement.
o The shares allotted under QIP can be sold in the secondary market
without any lock-in but not in off-market deals upto a period of one year.
 Preferential Allotments to Strategic Investors
Under this category, a private placement is considered to technical

collaborators, joint venture partners or other types of strategic investors. The modalities
of this transaction would depend upon whether the issuer company is listed or not. If
the company is unlisted, this transaction would amount to a private placement by an
unlisted company. If the company were listed, this would amount to a PIPE transaction
and would accordingly be governed by the relevant statutory provisions.
 hoice of Transaction Structure
The transaction methodology has to be worked out carefully after assessment of the
facts involved and looking at the different structures available as discussed above. The
transaction structure determines the efficiency of the transaction, i.e. cost and time
efficiency and the quality of investors attracted to the company. The level of
preparedness and growth of the company also determine the transaction structure. The
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more mature the company, institutional equity becomes preferable. However,

institutional equity comes with a lot of responsibility and corporate governance
requirements. From a transaction perspective, institutional private equity demands
stringent due diligence and more time for execution of the transaction. The investment
banker has to assess all these factors and determine the best transaction structure in a
given situation.
70
Valuation in Private Equity Transactions
The PECV Method:
o The PECV will be calculated by capitalizing the average of the after-

tax profits at the following rates:
 15% in the case of manufacturing companies
 20% in the case of trading companies
 17.5% in the case of intermediate companies, i.e. companies
whose turnover from trading activity is more than 40% but less than 60% of their total
turnover.
o There may be cases wherein the capitalization rate may have to be
relaxed to factor in intangible value or other parameters in order to ensure fair and
equitable valuation. In such cases, the rate of capitalization can be relaxed up to 12%.
o The critical areas in the PECV method are the assessment of future
maintainable profits, the provision for taxation and the treatment of profits from fresh
issue of capital if any.
o Ordinarily the profits are averaged for three years but in cases where
there is no perceptible trend or the profits are not optimal, a longer period of five years
immediately preceding the valuation date should be used. If profits are showing a
declining trend, the profits of the latest year alone shall be used.
o If a company is loss making and there is reasonable belief that the
company would generate profits in future, the average of the projected profits for five
years shall be considered. If there is no certainty of future maintainable profit, the
PECV shall be reckoned as zero.
o If additional issue of shares is involved, the end use of the funds has to
be considered to ascertain the generation of return on such capital. In case the funds are
proposed to be used for a new project or for meeting working capital requirements, the
return thereon shall be computed as follows:
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Valuation for PIPE Transactions
In the case of listed companies, the valuation should also be in line with the current
trend in market price of the share, the current state of the capital market and the
statutory provisions on pricing. The relevant statutory provisions are outlined below:
Under the DIP Guidelines, the pricing of the shares shall not be less than the
higher of the following:
o The average of the weekly high and low of the closing prices of
the share during the six months preceding the date which is thirty days prior to the date
of the general meeting i.e. EGM or AGM as the case may be approving the placement.
Or
o The average of the weekly high and low of the closing prices
during the two weeks preceding the date of the general meeting i.e. EGM or AGM.
In the case of issue of shares to non-resident investors, the price should not be less than
the price arrived at as stated above or as arrived at under the
government valuation guidelines, whichever is higher. Therefore, if the price as per the
government guidelines were more than the price arrived at under the DIP Guidelines,
such price would apply.
It may be noted that the above provisions regulated the minimum valuation under a
PIPE transaction. The investment banker has to consider the actual valuation arrived at
for the company in case it is higher than the minimum valuation as stated above.
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 Valuation for Preferential Allotments
The essential feature that distinguishes preferential allotments to strategic investors

from other types of transactions discussed above is the fact that a strategic investor
would be in a position to pay a strategic premium, which is usually negotiated over and
above the valuation justified for the company. The amount of such premium depends
on the extent of stake being offered and the profile of the investor. Strategic premium is
not paid for minority stake unless it happens to be at least 26%.
Apart from the aspect of strategic premium, the rest of the valuation methodologies that
govern such preferential allotments are identical to those discussed above for either an
unlisted or a listed company as may be applicable.
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Deal Structuring
The deal structure normally evolves as the discussions with investors progress.
However, many a time, if it is decided that the Information Memorandum should be
presented with the proposed deal structure, it would be necessary for the investment
banker to formulate the same. In this context, it would be necessary to discuss certain
concepts and terms used in private equity deals.
Pre-money Valuation
This is equal to the post-money valuation of a company at a financing round minus the
amount raised at that round.
For example, a post money valuation of Rs 500 million after raising Rs 200 million
implies a pre-money valuation of Rs 300 million.
Step-up in Value
The increase in a company's pre-money valuation between two financing rounds. It is

calculated as the pre-money valuation at a round divided by the pre-money valuation at
a prior round.
For example, a company with a valuation of Rs 100 million in the fourth round and Rs
25 million in the third round has achieved a step up valuation of 4 times between the
two rounds.
Return on Capitalisation
The percentage annualised change in the pre-money valuation between two financing
rounds. This, to some extent represents the annualised return on investment for the
investors if the dilution in his stake from the previous round to the next round is not
considered.
Example:
From the following details, the stake to be offered to a VC under the Conventional VC
method is shown below.
74
a. The expected annual growth rate of revenue (r) = 50%

b.The required capital at present round - Rs 2.5 million
c. Expected holding period = 5 years
d.Expected Profit after tax margin at liquidity event = 11%
e. Expected P/E ratio = 15
f. Expected rate of return (d) for the VC = 40%
Solution to Problem
Step 1:
Extrapolate the revenues at the end of five years at a CAGR of 50%. This comes to Rs
15.19 million which forms the top line at the end of year 5.
Earnings
Year
(In INR Million)
2011 2.00
2012 3.00
2013 4.50
2014 6.75
2015 10.13
2016 15.19
Step 2: Calculate PAT thereon @ 11% works out to Rs 1.67 million.
Step 3: The PAT capitalised at a P/E ratio of 15 yields a valuation of Rs 25.06 million
Step 4: The required present value factor = (1 + 0.40)5 = 5.378
Step 5: The present value of the company = 25.06/5.378 = Rs 4.66 million.
Step 6: The stake to be offered to the PE = 2.5/4.66 = 53.7%
A variation of the above method is the 'First Chicago Method' wherein three scenarios,
the best, the worst and the survival scenarios are plotted to get three different
valuations. These are assigned appropriate weights to arrive at a weighted average
75
valuation. This weighted valuation is discounted to arrive at the present value and the
stake to be offered.
The computations under the above method get complicated if there are proposed future
rounds of financing wherein the investor in the current round may or may not
participate. If the current investor does not participate in future rounds, to that extent,
based on the valuations adopted in such future rounds, there would be a dilution of such
investor's stake. Therefore, when a future valuation is being made under this method, it
is difficult to estimate what would be the extent of future equity financing that may be
required to achieve such valuation and the consequent dilution. The following
illustration explains the point.
Example
The promoters float the business with a capital of Rs 5 Cr and support from a VC to the
extent of a further amount of Rs 5 crore. Thereafter, the company goes for two more
rounds of financing and an IPO. The changing
profile of investor returns is explained by the following table and the discussion
thereafter.
76
Warburg Pincus & Bharti Airtel Ltd.
About Bharti Airtel Ltd.

Bharti Airtel provides telecommunication services primarily to retail, corporate, and small
and medium scale enterprises in India. It offers global system for mobile communication
(GSM) services, broadband and telephone services, national and international long distance
services, and enterprise services.
The company's mobile communication services include information services, short

message, and prepaid and post paid services, as well as wireless application protocol-
enabled Internet access and roaming services. Its telephone services include telephone
services, dial-up services, special phone plus services, unified messaging, and audio
conference services; and broadband services comprise integrated services digital network,
leased line, virtual private networks, and wireless fidelity networks.
The company also offers long-distance voice and data communication services, as well as
enterprise services, such as voice services, mobile services, satellite services, managed data
and Internet services, and managed e-business services.
As of Mar. 31, 2009, it provided telecommunications services to approximately 96,649,000

customers, consisting of GSM mobile, broadband and telephone customers.
Bharti Airtel had strategic alliances with SingTel and Vodafone; partnerships with Ericsson
and Nokia; and an information technology alliance with IBM. The company was founded in
1995. It was formerly known as Bharti Tele-Ventures and changed its name to Bharti Airtel
in April, 2006. The company is based in New Delhi, India. Bharti Airtel is a part of Bharti
Enterprises.
First, the company has formulated a focused acquisition strategy, acquired three companies
and successfully won bids for 15 new licenses. Second, all the key support functions and
processes (like human resources, finances, marketing and technology) have been
strengthened, with experienced professionals heading these functions. Lastly, in spite of
tough market conditions, the company made a successful initial public offering on the
Indian stock exchanges in February 2002 and raised $172 mn.
77
About Warburg Pincus
Over the last 30 years, Warburg Pincus has become one of the leading private equity and
venture capital firms in the world. The firm‘s experience is unparalleled in building
successful businesses. Working in partnership with management teams, Warburg Pincus
takes an active role in building businesses. The firm operates globally to source new
investment opportunities, provide strategic advice and guidance, and fund the growth of
attractive opportunities, since its inception, Warburg Pincus‘ strategy has been to:
•Develop broad investment capabilities internally.
•Create a network of talented and experienced business people around the world.
•Provide superior rates to return for its limited partners over the long term.
Warburg Pincus is a global leader in the industry it helped create: Private equity. With more
than 40 years of experience, its track record of continuous and successful investing is
unmatched by any other private equity firm.
triving to create sustainable value in partnership with superior management teams, it work
with companies to formulate strategy, conceptualize and implement creative financing
structures, recruit talented executives and draw on best practices from the firm‘s portfolio
companies.
It takes a different approach to investing, beginning with a thorough evaluation of
macroeconomic and industry fundamentals. Private equity at Warburg Pincus means
investing at all stages of a company‘s life-cycle: From founding start-ups and fostering
growth in developing companies to leading complex recapitalizations or large-scale buy-
outs of more mature businesses. This growth-oriented philosophy is incorporated across
each of its investment sectors. With an investment horizon of five to seven years, it takes an
unusually long-term perspective. Matched with its size and scope of funds under
management, this approach enables the firm to provide substantial resources to its portfolio
companies.
78
This is a critical advantage in the face of constantly changing economic conditions and
financial markets.
The firm has been industry-focused for more than two decades. With more than 160
investment professionals worldwide, Warburg Pincus provides deep expertise in a range of
investment sectors including financial services, healthcare, industrial, technology, media
and telecommunications, energy, consumer and retail and real estate.
The firm also works with its consultants, entrepreneurs-in-residence and advisory boards,
whose expertise can be tapped at any time.
In addition to the support provided by its investment professionals, Warburg Pincus

enhances its involvement with management by providing portfolio companies with value-
added services in capital markets, IT strategy and assessment and marketing.
Warburg Pincus has been the lead investor in more than 100 companies that have completed
initial public offerings. Over the last few years, the firm‘s global portfolio has generated
more than $20 billion annually in equity and debt financings on a global basis. The firm‘s
IT Strategy and Assessment group is available to evaluate and advise businesses on their
technology strategy. Warburg Pincus also provides companies with marketing expertise to
develop brand-building programs and strategic communications platforms for internal and
external audiences.
79
PE Impact on Bharti
The deal of Warburg Pincus & Bharti Tele ended not only with the increase in profit for
WP, but also high growth in subscribers of Bharti Tele Ventures.
In partnership with Warburg Pincus, Bharti‘s management team was able to complete
additional cellular property acquisitions and extend its leading position in India. Today they
are among the top 5 largest Wireless & Cellular Company in world, with expanded
footprints of over 25 countries in two of the largest continents spread over South Asia and
Africa.
WP also worked with management to secure a strategic partnership with Singapore

Telecom, which subsequently committed support in the management of the operations. The
company was listed on Indian stock exchanges in February 2002. Now known as Bharti
Airtel, the company has a market capitalization in excess of $35 billion and is a dominant
player in the Emerging Markets telecommunications with a customer base of more than 200
million (including operations in Africa and other South Asian countries).
―Partnership with Warburg Pincus helps management focus. They‘ve helped us look at
things in a different light. And, they know how to move a company from something small
to something much larger…‖
80
CHAPTER 5
CONCLUSION
81
5.Conclusion
India has been witnessing dramatic shift in the size and composition of foreign investment
inflows over the couple of years. Institutional investors in developed countries, for their
portfolio diversification, are continuously seeking new destinations and innovative and
alternative asset class. Private equity is one such investment avenue which is broadly
defined as involved investment in equity linked to an asset that is not listed and therefore
not publicly traded in the stock markets.
At present private equity firms have invested even in listed companies, though the buyout
by an investor occur through a negotiated process and these buyouts turnout to be hostile or
friendly depending on whether the negotiation is with controlling interest or not.
The present market scenario is transforming, as doors have been widened for foreign
players to enter. Private equity investment in India first chased IT and outsourcing during
their boom period, but now the opportunities are expanding in sectors such as
pharmaceuticals and finance.
The project would deal with understanding the role of private equity in India, analyzing
their investment strategies, their particular strategies, by studying their entry strategies into
Indian financial markets, regulatory norms in India and how it is beneficial of Indian
companies.
82
SUGGESTIONS:-
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.
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.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:
o Venture capital: an investment to create a new company, or expand a smaller
company that has undeveloped or developing revenues.
o Buy-out: acquisition of a significant portion or a majority control in a more mature
company. The acquisition normally entails a change of ownership.
o 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
83
CHAPTER 6
BIBLIOGRAPHY
84
BOOKS :
SR. NO. NAME OF AUTHORS PUBLICATION

BOOK NAME
1 Venture Jia Makhija Vipul
Capital &
Private Equity
WEBSITES:
SR. WEBSITE
NO
1 www.privateequity.com
2 www.indiavca.org
85

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PRIVATE EQUITY FIRMS 2018

Indian investment banking industry has a heterogeneous structure. The bigger

 To prevent excessive exposure to business risk under one entity

Indian investment banks follow a conglomerate structure by keeping their business

2.3 SCOPE OF THE STUDY

2.4 LIMITATIONS OF THE STUDY

2.5 SIGNIFICANCE OF THE STUDY

2.6 METHOD OF COLLECTION OF DATA

2.1OBJECTIVES OF THE STUDY

Private equity is considered to be a form of alternative investing, meaning that it contrasts

Graph 1: Global private equity market in US$1

Source: IFSL estimates based on PEREP_Analytics, AVCJ,

Types of Private Equity

Figure 1: Private equity investment strategies and Hedge funds

Source: Metrick (2006)

2.3 SCOPE OF THE STUDY

PE investment professionals manage the funds by making investments in companies of

2.4 LIMITATIONS OF THE STUDY

2.5 SIGNIFICANCE OF THE STUDY

2.6 METHOD OF COLLECTION OF DATA

The Stages of Private Equity

Private Equity investments can be classified into:

•Start-up stage financing for product development and initial marketing.

The Private Equity Process in 6 Steps:

1. Deal Origination (Deal Sourcing)

Private Equity investments can be classified into:

Future of Private Equity in India

Important roles played by PE in the growth of Indian Economy

Role of Private Equity players

 Provides Fund irrespective of market conditions for –

 Acquisition Capital/Change of control

 MBOs, Divestments, Consolidation

 Shoring up Promoter stakes

 Privatisation (Public to private)

Fast track partnership.

Reasons for Private equity players entering into India

PRIVATE EQUITY INVESTMENTS IN INDIA- A PERSPECTIVE

India and Private Equity Investments

The Stages of PE Investment in Indian Scenario

Percentage of the number of deals by PEs in various sectors

Important roles played by PE in the growth of Indian

“Private Equity in India: Adding Human Capital to the Value-Creation ―

Role played by PE in the growth of Indian economy

Private Equity boosts the Indian economy

Some other important roles are -

2.) Source of External Capabilities - PEs complement the capabilities of innovative

3.) Facilitating Complex Contracting - This is particularly so in relation to marketing

Introduction to Private Equity and

What is a Private Equity?

Private equity, in finance, is an asset class consisting of equity securities in operating

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

What is a Venture Capital?

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

Venture capital is often sub-divided by the stage of development of the company

Private Equity Investments and India

PE investors have played a significant role in the development of several sectors in

Success of Private Equity in India

Some reasons for success of private equity in India are:

4.1 DATA ANALYSIS

4.1 DATA ANALYSIS, INTERPRETATION AND PRESENTATION

Private Equity: Current Scenario

Top Sectors deals in 2017