2. Contents
•
Why do companies need funds?
•
When is equity financing preferred?
•
Forms of Private Equity Funding
•
Recent Trends
•
General Process
•
Valuations
•
Structures and Instruments
•
Exit Options
•
Advantages and Disadvantages
•
Important factors for consideration
•
PE at crossroads…
2
3. Why does a company need funds?
Capital Expenditure
Working Capital
Retiring Debt
Expansion
Acquisition Finance
• Plant & Machinery
• Land & Building
• Fund Based
• Non Fund Based
• Term Loan Repayment
• Vertical – New Product Lines / New Segment
• Geographical – Operations in International Markets
• Leverage Buy-out
• Management Buy-out
3
4. When is equity financing preferred?
Over
leveraged
Ideal for start
ups
Equity
Financing
Difficult to
meet interest
commitments
4
Inconsistent
cash flows
5. Forms of Private Equity Funding
Mature
Business
Stages of Business
SME’s
Ideas
Incubation
Funds by
Promoters
Mid - Large
Business
Micro
Business
Family &
Friends,
“Angel” Investors &
Venture Capitalist
Venture Capital,
Private Equity
& Mezzanine
Types of Private Equity Funds
5
Capital Markets /
Private Equity
& Mezzanine
Buy Out Funds/ Capital
Markets
7. Recent Trends in PE - Sectorial Breakup
For H1 2011
Source: Grand Thornton Deal Tracker
7
8. Recent Trends in PE - Performance of various funds
• Expansion / growth capital accounts for 46% of total deals of 2011
• Big trends for 2011 was surge in start-up/early stage deals from 18% of total in 2010 to 33% of total in
2011
Source: Economic Times on 6th January, 2011
8
9. Angel Investor
•
Provides „seed funding‟
•
Usually affluent individual providing capital for business start-ups
•
Different from venture capitalists
•
Limitation on amount of money that can be raised
•
Bear high risk
•
Require very high return
•
Investment holding period of <5 years
9
11. Venture Capital
•
Typically occurs after seed funding stage
•
Subset of private equity
•
Venture capital consists of investing in equity, quasi equity and/or conditional loan in order to
promote unlisted, high risk or high tech firms driven by technically or professionally qualified
entrepreneurs.
•
Finance companies that have demonstrated extraordinary business potential
•
The risk anticipated is very high
•
Follow the concept of “high risk, high return”
•
Year 2011 is record year for early-stage Venture Capital investing
–
Deal values & volumes at all time high
–
Euphoria around e-commerce, across mobile, internet and related verticals
–
Evident from recent deals of InMobi, Fashionandyou, Snapdeal
–
Exit in MakeMyTrip touted as poster deal for domestic venture industry
–
JustDial , One97 Communications and others lining up for exit over coming months
11
12. Venture Capital
Sector
Majorly in
emerging sectors
Early Stage
Funds start up
& early expansion
Key Driver Innovation
Highly skilled
professionals,
scientist &
innovators with
innovative
business idea,
new product &
new technology
Investment
& Exit
Upto $10 mn, exit
through strategic
sale or IPO
Success
High mortality rate
& few great
success
12
14. Private Equity
•
Equity investments in relatively mature, primarily unlisted companies requiring growth capital
•
An asset class that involves value enhancement and high returns generation by sharing business
expertise of the Investor complementing the Entrepreneur
•
Typical value additions from the PE Fund House could include Strategy Formulation Financial
Formulation, Expertise and Global/Domestic Networks (including other investee companies)
•
Offer greater opportunity to exercise control over investments as compared with other passive asset
classes like equities, mutual fund, real estate, commodities, fixed income
–
Active involvement and influence on the company, including board seat
•
Each investment is backed by an investment thesis which plays out over a period of 3 to 5 years
•
Private Investment in Public Entities (PIPES)
14
15. Growth Stage – Private Equity
Success
Investment
& Exit
Key Driver Innovation
Growth
Stage
Sector
Capacity expansion,
new products, new
geography etc.
Investor funds at
growth stage of
the company
All growth sectors
15
From $5 mn to
$500 mn, exit
through IPO
Few failures &
great success
17. Buyout Funds
•
Globally most important strategy of PE; though not a very prevalent strategy in India
•
Generally buyout‟s done at matured stage of business
•
Mature companies with leading market position, active management team, strong cash‐flow
•
Taking a controlling stake in the company through leveraged buyout (LBO) or through management
team alongside the PE fund (MBO)
•
PE funds provide capital for expansion, promoters‟ / corporate divestures, succession issues…
•
Development of a business plan over 4 to 6 years in order to add value
•
Revenue growth + Margins improvement + deleveraging = added value
17
18. Transactions (Illustrative)
Company
Flextronics Software Systems
GE Capital International Services (GECIS)
Financial Investor
Kohlberg Kravis Roberts & Co.
General Atlantic Partners, Oak
Hills
Value (US$ Mn)
Type
900
LBO
600
LBO
Phoenix Lamps
Actis Capital
29
MBO
Nilgiris Dairy Farm
Actis Capital
65
MBO
WNS Global Services
Warburg Pincus
40
MBO
Infomedia India
ICICI Venture
25
LBO
Nirula‟s
Navis Capital Partners
20
MBO
Gokaldas Export
Blackstone
165
MBO
N.A.
MBO
Paras Pharmaceuticals
Actis Capital
Sequoia Capital
18
19. Mezzanine Debt / Structured Product
•
Mezzanine financing is provided by mezzanine funds and sometimes hedge funds
•
Finance as Debt instrument / structured product like partly or optionally convertible instruments etc.,
immediately subordinated to equity
•
Mezzanine financing might include, besides coupon bearing debt, an equity sweetener as well
•
Considered as debt instrument with very high yield which at times in substitution of equity
•
Returns generated by the fund are
–
–
•
Interest ‐ fixed rate or fluctuate along an index (e.g. LIBOR) OR a pre agreed IRR
Upside potential through Equity
Illustrations:
19
20. Sector focused funds
•
Real estate funds
–
•
Focus on investments in real estate and real estate intensive businesses
Infrastructure funds
–
Roadways
–
Port projects
–
Railway projects
–
Power projects
–
Telecom
–
Logistics
20
21. Key Differentiators
Particulars
Stage
Level of risk
Assessment Focus
Investment Size
Angel Investors
Very Early
Very High
Mostly Technology
< $ 1 Mn
Venture Capital
Early
High
Mostly technology
< $ 10 Mn
Private Equity
Growth
Moderate
Diversified
> $ 10 Mn
Buyout‟s
Mature
Moderate
Diversified
> $ 50 Mn
All stages
Moderate
Diversified
> $ 5 Mn
Mezzanine
21
22. General Process
Stage
Preparation
3-4 weeks
Investor
Identification
Term Sheet
3-5 weeks
4-6 weeks
Final negotiations
and Closing
4-6 weeks
Timing
Process » Understanding
and evaluating
historical
performance
» Recast of
Historical
numbers; if
needed
» Preparation of
IM and
Projections
» Industry
Overview
Total Time
14 – 21 weeks
» Identify target
Investors
» Share
Information
» Follow-ups
» Promoter
Meetings
» Plant visits
» Negotiate
valuations and
other terms of
the
transaction
Sign NDAs
22
» Due Diligence
» Definitive
Agreements
Sign Term Sheet
» Pre & Post
Closure
formalities
Sign Definitive Agreements
24. Structures and Instruments
Primary Investment
•
Involves fresh infusion of capital in the company against issue of fresh shares to augment future
growth
•
Ideal for growth companies
Secondary Investment
•
Involves payment to existing shareholders of the company
•
Could be either on account of buying out or providing some liquidity to existing shareholders
•
Ideal when promoters wants to cash out (fully or partially) or buyouts
24
26. Exit Options
•
•
Three important pillars
Modes of exit
–
Valuations
–
Initial Public Offering (IPO)
–
Timings
–
Exit via M&A
–
Restrictions, if any to exit
–
Sale to another investor
–
Secondary sale on stock markets
–
Buy Back / Call / Put Option
Nature of Exit
2009
2010
Volume
Value (US$ Mn)
Volume
Value (US$ Mn)
Initial Public Offering
2
31.64
15
502.22
M&A
18
157.97
40
1,238.13
Open Market
69
1,390.10
76
1,448.54
Secondary Sales
8
78.17
18
160.85
Buyback
6
500
15
1,695.32
103
2,158
164
5,045
Total
Source: VCEdge
26
27. Advantages
•
Fills funding gaps for long term capital
•
No interest cost. Seeks return through capital appreciation rather than immediate and regular interest
payments
•
Adds value because, apart from funding, PE contribution includes:
–
–
Networking and Global Integration
–
Confidential as compared to IPO or even debt funding
–
•
Financing expertise and strategic management support
Independence of the capital markets volatility
Positive signaling effects to the market:
–
Debt, IPO
–
M&A
–
Employees, Suppliers and Customers
–
Increases Industry Visibility
•
Corporate Governance
•
Relatively less expensive fund raising exercise in comparison to IPO
27
28. Disadvantages
•
Raising Private Equity finance is demanding, time consuming; at times the business may suffer if
promoter devotes more time for the transaction
•
Depending on the investor, promoters may lose a certain amount of power to make management
decisions
•
Will have to invest management time to provide regular information for the investor to monitor
•
Might create conflict or differing opinion in long‐term strategy due to pressures of EXIT from the
investor
•
The cost of complying with regulations could be relatively higher
•
Non‐alignment of Interest of fund manager on the board and entrepreneur could hamper the growth
of company
28
29. Important factors for consideration
Growth Potential
Exit
Market Positioning
Returns
Management Bandwidth
Stage / Sector /
Structure
Historical Performance
Competitive Scenario
Project Period
Industry Trends
29
30. PE at Crossroads…
•
PE operating in a challenging environment today
•
Difficult fund raising environment
•
A large number of India focused funds were raised during 2004-06. Many of these are due to raise their
next fund
•
Funds with dry powder putting monies to work in environment beset with intense competition
•
Tremendous competition amongst funds to win deals resulting in bid war
•
Expensive entry valuation continues to frustrate
•
Investments by real estate funds have reduced - slowdown in sales & high borrowing cost continue to
plague the sector
Number of funds raised and announced
Value of funds raised and announced ($ Mn)
Particulars
2010
16,853
Announced
Announced
52
51
Funds Raised
17,828
2011
Funds Announced
2011
2010
10
25
Source: Economic Times on 6th January, 2011
4,111
2,024
Raised
Raised
30
31. PE at Crossroads… (contd.)
•
Deep inventory of future exits in the PE pipeline
–
PE exits will take a lot of PE manager‟s time, energy and
bandwidth
–
Approximately 68% of PE deals made through boom years of
2006-08 remain in PE funds‟ portfolios
–
Now reaching the upper end of their investment holding periods,
many of these holdings should soon be coming up for sale
–
PE exits account for only 20% of PE activity in 2011, indicating
strong potential for M&A transactions in the coming years. Also
reflected in increased preference towards exit through M&A route.
More than 100% rise in instances of exit through this option in
2010 over 2009
•
Source: Economic Times on 6th January, 2011
Funds will look to learn from past and spend greater time on deal evaluation and make investment
decisions based on merits rather than sentiments
•
PE firms also expected to spend considerable time on their portfolio management as holding periods have
been stretched
31
32. PE at Crossroads… (contd.)
•
Motivation for PE players to provide high yield debt finance continues to grow. Such endeavors
undertaken to cater to all investment needs of promoter, debt & equity
•
Increased activity in PIPES deals
–
Volatile capital markets in 2011
–
Conventional fund raising options for listed companies not available
–
New Takeover code provides a boost for PE funds
–
Greater number of listed companies expected to source growth capital needs from PE
•
Early stage investing is in the limelight & will continue to gain momentum
•
Deals in cloud computing, clean technology, online commerce and technology enabled services such as
mobile & online advertising, analytics and data management business will continue to attract Venture
Capital funding
•
Strong growth potential for Venture Capital, Buyout funds and Pre-IPO / late stage placements
32
