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2010 
 
KOTAK INVESTMENT 
ADVISORS LTD 
 
LAKSHMI S PILLAI   
SCHOOL OF MANAGEMENT STUDIES 
NATIONAL INSTITUTE OF TECHNOLOGY,CALICUT   
 
 

[STUDY ON THE ALTERNATIVE ASSET 
CLASSES AND RESEARCH FOR 
ADDITIONAL  PROSPECTIVE INVESTORS] 
 
  2010 
Study on the Alternative Asset classes and Investor base of Private Equity 

Acknowledgement

The summer internship project at Kotak Investment Advisors Ltd was a excellent
opportunity for me to understand the working of a corporate office. I would like to
take this space and opportunity to thank the team at Kotak Investment Advisors
ltd, Mr Prakash Dalal, Head of Investor relations, Mr Rohit Nanda, Associate
Vice President, and Ms Snigdha Jain, Associate Vice President for their support
and cooperation towards the completion of this project work. I would like to
extend a special thanks to Mr Rohit Nanda for his constant guidance throughout
the period of project work. Also, I would like to thank Mr T Krishnakumar of
Kotak Mahindra bank , who has helped me get this wonderful opportunity.

Last but not the least I would like to thank Lord Almighty for giving me the
strength and patience to finish this project.

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Table of Contents

Content page no:

Executive Summary 5

1. Introduction 6

1.1. Private Equity 6

1.2. Evolution of Private equity 13

1.3. Private equity markets 15

1.3.1. Major Private Equity Players 16

2. Investor base 19

3. Kotak Mahindra Bank 21

3.1. History 21

3.2. Kotak Investment advisors Ltd 21

3.3. Kotak Private equity 22

4. Alternative Asset Classes 24

4.1. Asset reconstruction Fund 24

4.1.1. Details 24

4.1.2. examples 25

4.2. Infrastructure Fund 26

4.2.1. Details 26

4.2.2. Examples 27

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Content
page no:

4.3. Hedge Fund of Funds 28

4.3.1. Details 28

4.3.2. Examples 29

5. Consultants and their Role in Private Equity investments 30

6. Future of private equity investments in India 32

References 33

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Executive Summary

Private equity is capital that is invested in companies which are not listed on a
stock exchange or capital which invested as part of buyouts of public companies
in order to make them private. Private equity firms seek out companies in which
they believe they can unlock significant value—by changing the business
strategy, investing new capital or injecting new managerial talent and invest in
them through pooled funds. Private equity firms seek capital from investors for
their funds. For an interested investor, by following this route does not have to
seek a suitable Company for placing his investment, rather, they invest in a
specific fund managed by a PE firm, becoming a limited partner in the fund, with
the PE firm doing the investment process, from the identification of the
opportunity, the delineation of the processes of investment, to monitoring the
company. Investors in private equity are a diverse group of investors that populate
the global markets. They can be broadly classified into pension funds, insurance
companies, sovereign funds, Endowments and foundations, Wealthy families and
individuals, & fund of funds.
Investments in private equity are for companies that seek funding without having
to list in the stock exchange or borrow from financial institutions. These type of
investments are apt for early stage companies or entrepreneurial companies
putting forth innovations as they have unpredictable cash flows which make it
hard to get debt investments. Private equity, in short, holds potential for giving
huge gains to investors.
Kotak Private Equity Group (KPEG) focuses more on helping emerging corporate
and mid-size enterprises evolve into tomorrow's industry leaders. KPEG provides
these companies a combination of equity capital, strategic support and other value
added services, playing a pro-active role with the entrepreneur in building the
business.

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1. Introduction
1.1. Private equity

As the names suggests, Private equity is investment made in companies which are
not listed on stock exchanges in the form of equity, to get higher returns by
providing the companies not only capital but also strategic support in
management. It is also referred to investments as a part of buyouts of loss making
public companies making them private and then restructuring them to get higher
returns. Unlike stocks, mutual funds, and bonds, private equity funds usually
invest in more illiquid assets, i.e. companies. By purchasing companies, the firms
gain access to the assets and revenue sources of those companies which can lead
to very high returns on the investments.

The capital which is invested by the private equity firms is raised from retail and
institutional investors. Such capital raised is used to fund new technologies or
restructure the existing system or just to infuse cash flow into the balance sheet.

The main players of private equity are the institutional investors who commit
large sums of money for long periods of time. Private equity investments demand
long holding periods as the time required to turnaround a distressed company or
the time to strengthen/establish a new venture so that it can attain liquidity
through an IPO or sale to a public company is very long. The most common
strategies in private equity include venture capital, growth capital, distressed
investments and mezzanine capital.

Venture Capital: It is basically equity investments made in companies that are


looking for investment for launching a new innovation or early development or
expansion of operations or strengthening of the balance sheet. New innovations in
venture capital investments are new technology or unconventional concepts and
products.

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Growth Capital: Growth capital investments are often done in companies that
have already been established but need some restructuring in operations or force
entry into new markets etc. such companies generate revenue and profits but are
unable to fund expansions. These companies are only looking for financial
transformation and hence the investments are always not very large.

Distressed Investments: It is basically investments in financially stressed


companies, assets or debt. Distressed investments are often rescue financing for
companies undergoing financial challenges. It can also be acquiring the non
performing assets of financial institutions and then restructuring them to gain
profits.

Mezzanine capital: It refers to subordinated debt or preferred equity securities that


often represent the most junior portion of a company's capital structure that is
senior to the company's common equity. Mezzanine capital, which is often used
by smaller companies that are unable to access the high yield market, allows such
companies to borrow additional capital beyond the levels that traditional lenders
are willing to provide through bank loans. In compensation for the increased risk,
mezzanine debt holders require a higher return for their investment than secured
or other more senior lenders.1

Secondary investments: It refers to investments made in existing private equity


assets. In this sort of investment, private equity fund interests or portfolios of
direct investment in private companies are purchased from existing investors.
Those who sell private equity fund investments not only sell the investments in
the fund but also the remaining unfunded commitments to the funds. Though
large institutional investors purchase private equity investments through

                                                            
1
As quoted in Wikipedia explanation of private equity(link: http://en.wikipedia.org/wiki/Private_equity )

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secondary transactions, they are generally done through third party funds similar
to fund of funds.

Infrastructure: It is basically investments in various public works (e.g., bridges,


tunnels, toll roads, airports, public transportation and other public works) that are
made typically as part of a privatization initiative on the part of a government
entity.2

Energy and Power: They are investments in companies engaged in the production
and sale of energy, including fuel extraction, manufacturing, refining and
distribution (Energy) or companies engaged in the production or transmission of
electrical power (Power).3

Private equity funds are pooled investments which are used for making
investments in companies in the form of venture capital or growth funds or
distressed debt. Such funds are structured as limited partnerships where the
investors are the limited partners (LPs). General partners (GPs) are generally the
private equity firms which invest in the companies on behalf of the investor. The
GP is responsible for managing the fund and hence assumes all liabilities arising
out of the investments. In most cases the GP delegates the responsibility of
managing the investments made by the fund to a fund manager. These fund
managers are always related to the GP. They earn a management fee in return for
managing and also making investments on part of the limited partnership.

                                                            
2
 As citied in Wikipedia article on private equity (link: http://en.wikipedia.org/wiki/Private_equity ) 
 
3
 As citied in Wikipedia article on private equity (link: http://en.wikipedia.org/wiki/Private_equity )
 
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Figure 1 : Structure of Private Equity Fund


(source :http://en.wikipedia.org/wiki/private_equity_funds )

At initiation of the fund the investors make a commitment to the limited


partnership which is then drawn over the term of the fund. LPs liability is limited
to only the capital they have invested in the fund and as a rule cannot withdraw
from their obligation to meet their capital commitment. The investor will get only
the benefit from the investment he has made in the fund.
The life cycle of a private equity fund varies, but a fund is usually established for
a term of 10 years, with the general partner having an option to extend the life of
the fund for up to two years if necessary to allow for an orderly wind down.4

Normally, a single private equity firm manages a series of distinct private equity
funds and attempts to raise a new fund every 3 to 5 years as the previous fund is
fully invested.

                                                            
4
 As quoted by Keningston Capital partners.(link: http://kcpl.ca/private_equity/structure )

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The private equity industry has developed substantially over the years but the
basic principle has remained constant: a group of investors buy out a company
and use that company's earnings to pay themselves back.

Placement agents are employed to raise money from investors. Placement agents
are external fund raising teams. They approach potential investors for the fund
manager and charge nearly 1% of the capital they are able to raise as fee.

Capital to be invested is usually drawn down in the first three to four years of the
funds life. This period is known as the commitment period. Once the fund is
closed the manager monitors and maximizes the value of investments by
providing strategic support to the companies. During the later period of funds
capital maybe drawn but new investments are not done. This period is called the
holding period and it lasts from five to 10 years. Management fees and operating
expenses are drawn from the LPs over the course of the funds life.

When the investments are realized at the end of the holding period, the fund will
distribute the proceeds to the LPs. In this process first the capital contributions of
the LPs are distributed. After the capital contributions are distributed, the next
distributions made are of the profits made by the fund. The profits are allocated
between the GP and LPs. The GP usually gets 20% of the overall profits, which is
referred to as the carried interest.

The manager of the fund typically earns a management fee of 1.5% to 2.5% per
year, throughout the life of the fund. During the commitment period, management
fee is based on the aggregate capital committed to the fund and after that it si
decided as per the actual amount invested. The management fee represents an
expense of the fund, and is typically recouped by the limited partners before the
manager is paid the carried interest. As a fund approaches its termination date, its

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remaining portfolio positions are liquidated or, in limited circumstances, are


distributed to the limited partners.

An important element of limited partnerships is the agreement to end the


partnership and repay the limited partners within a specified period of time.
There must be a clear route for the partnership to exit the firm. The three exit
routes which are generally used are a public offering, a private sale of equity to a
third party and a share repurchase by the company.
Each exit route has different consequences for the LPs, the GPs, and the
company’s management. A public offering usually results in the highest valuation
of for a company and hence is often the more preferred exit route. In addition,
company management favors an IPO because it preserves the firm’s independence
and provides it with continued access to capital by creating a liquid market for the
firm’s securities. For LPs and GPs a private sale is attractive, as it provides
payment in cash or marketable securities and ends the partnership’s involvement
with the firm. For the company’s management, a private sale is not preferred as
the company may have to be merged with or acquired by large company and
hence loses its independence.
The third exit route is buyback of shares by the firm. Generally a valuation
method is decided in advance. For minority investments, a guaranteed buyout
provision is essential, as it is the only means by which the partnership firm can be
assured of liquidity. For most investments buybacks by the firm are considered a
backup exit route and are used primarily when the investment has been
unsuccessful. Partnerships add value to investments by choosing how and when to
exit and by obtaining the maximum value for the firm in connection with any
given exit strategy.

Because partnerships have finite lives, the private equity managers who serve as
general partners must regularly raise new funds in order to stay in business. In

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fact, to invest in portfolio companies on a continuing basis, managers must raise


a new partnership once the funds from the existing partnerships are fully
invested that is about once every three to five years.
The raising of partnerships is very time consuming and costly, involving
presentations to investors and their advisers. This process can from two months
to well over a year depending on the GPs reputation and experience. A
favorable track record is important because it conveys some information about
ability and suggests that managers will take extra care to protect the reputation
and also because experience itself is regarded as an asset.
To minimize their fund-raising expenses, partnership managers generally turn first
to those that invested in their previous partnerships that is of course if their
previous relationships were satisfactory. In addition, funds are often raised in
several stages, referred to as closings. This approach is primarily a device for
communicating to the investment community that a fund is being successfully
raised, implying a favorable evaluation of the fund by those that have already
committed.

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1.2. History of Private Equity

The origins of the modern private equity industry can be traced 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.5

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
in the private Equity and is essentially the origin of private equity. 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. Rockefeller helped 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 ultimately become Warburg Pincus, with investments
in both leveraged buyouts and venture capital.6

Organized and professionally managed investments in private equity can be dated


to 1946 and the formation of the American Research and Development
Corporation (ARD), a publicly traded, closed-end investment company. ARDC is
credited with the first major venture capital success story when its 1957
investment of $70,000 in Digital Equipment Corporation (DEC) would be valued
at over $355 million after the company's initial public offering in 1968. Before
World War II, venture capital investments (originally known as "development
capital") were primarily the domain of wealthy individuals and families. One of
                                                            
5
 Early history of private equity(link: http://en.wikipedia.org/wiki/Early_history_of_private_equity )
6
 History of private equity and venture capital( link: http://en.wikipedia.org/wiki/History_of_private_equity_and_venture_capital )
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the first steps toward a professionally-managed venture capital industry was the
passage of the Small Business Investment Act of 1958. The 1958 Act officially
allowed the U.S. Small Business Administration (SBA) to license private "Small
Business Investment Companies" (SBICs) to help the financing and management
of the small entrepreneurial businesses in the United States.7

In India, private equity is reasonably young, dating back to the mid-1990s. Indian
companies received almost no Private Equity (PE) or Venture Capital (VC)
funding a decade ago. The environment heated up in the end of the ‘90s with the
IT boom. This scenario began to change in the late 1990s with the growth of
India’s IT companies and with the simultaneous dot-com boom in India. VCs
started making large investments in these sectors; however, the bust that followed
led to huge losses for the PE and VC community, especially for those who had
invested heavily in start-ups and early-stage companies. After almost three years
of downturn in 2001-2003, the PE market began to recover towards the end of
2004.8 PE investors began investing in India again, except this time they began
investing in sectors BPO and most investments were in late-stage companies.
Early-stage investments have been dwindling or have, at best, remained stagnant
right through mid-2007. In recent years, there has been a resurgence of these
firms, with India’s stock markets booming and sectors like the life sciences,
infrastructure and most recently, real estate being growth stories for the future.
Global firms such as Warburg Pincus, Blackstone and the Carlyle Group have a
presence in India while Indian players like ICICI Venture and ChrysCapital also
have a large presence.9

                                                            
7
 History of private equity and venture capital( link: http://en.wikipedia.org/wiki/History_of_private_equity_and_venture_capital )
8
Written by Yogesh Thakker on Nov 1,2008.(link: http://knol.google.com/k/yogesh-thakker/private-equity-in-india/167x67nr4tn24/2# )
9
Written by Yogesh Thakker on Nov 1,2008.(link: http://knol.google.com/k/yogesh-thakker/private-equity-in-india/167x67nr4tn24/2# ) 

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The year 2009 began badly with the full gloom of the credit crunch with new
loans virtually unavailable for acquisition financing. During the year private
equity sponsors navigated, among other obstacles, difficult fundraising markets,
liquidity constrained limited partners and portfolio company loan amendments,
restructurings and bankruptcies. The difficult fund raising environment of 2008
continued into 2009. New sponsors had difficulty raising any capital and even
many brand name sponsors were required to reduce the target size of their funds
or to postpone fund raising. According to Dow Jones LP Source, a total of $95.8
billion was raised by U.S. private equity funds in 2009, the lowest total since
2003 and 68 percent off the pace in 2008. Even the traditional LPs faced liquidity
issues during the year.

But it can be said that the private equity model seems to be still very attractive to
the investors. It is said that that though fund raising will be difficult during 2010,
there will be a solid surge in the deal activities. Debt seems to be a prospective
area of investment for PE investors. So are the emerging markets. In short it can
be said that Private equity is shaken but not broken.

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1.3. Private Equity Markets

Private equity markets are an important source of capital for venture firms,
distressed firms, and public firms seeking buyouts. Private equity markets have
been the fastest growing markets in the last few years and have outrun public
equity and bonds. Since private equity does not involve any transactions in the
public market its exempt from registering with the Securities and Exchange
Commission of India. The reverse side of this is that information about private
equity markets is limited and hence analyzing these markets become difficult.

Till late 1970s wealthy families, industrial corporations etc used to directly invest
in companies, it was after 1980s when the sizes of investments and the amount of
capital invested grew that they started turning to professional private equity firms
to manage the investments on behalf of the investors.

The organized private equity market, professionally managed equity investments


in the unregistered securities of private and public companies. Professional
management is provided by specialized intermediaries and, to a limited extent, by
institutional investors. Private equity managers acquire large ownership stakes
and take an active role in monitoring and advising portfolio companies. In many
cases they exercise as much control as company insiders, or more.10

Private equity encompasses other markets that are distinct from the organized
market. One is the market for angel capital, investments in small, closely held
companies by wealthy individuals, many of whom have experience operating
similar companies. Angel capitalists may have substantial ownership stakes and
may be active in advising the company, but they generally are not as active as
professional managers in monitoring the company and rarely exercise control.

                                                            
10
The economics of private equity, December 1995, Board of Governors of the Federal Reserve System Washington, DC 20551

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Another distinct market is the informal private equity market. In the informal
market, in which unregistered securities are sold to institutional investors and
accredited individuals, the number of investors in any one company typically is
larger, and minimum investments smaller, than in either the organized private
equity market or the angel capital market.11

1.3.1. Major Private Equity Firms12

According to an updated 2009 ranking created by industry magazine Private


Equity International (published by PEI Media called the PEI 300), the largest
private equity firm in the world today is TPG capital, based on the amount of
private equity direct-investment capital raised over a five-year window. As ranked
by the PEI 300, the 10 largest private equity firms in the world are:

1. TPG
2. Goldman Sachs Capital Partners
3. The Carlyle Group
4. Kohlberg Kravis Roberts
5. Apollo Global Management
6. Bain Capital
7. CVC Capital Partners
8. The Blackstone Group
9. Warburg Pincus
10. Apax Partners

Because private equity firms are continuously in the process of raising, investing
and distributing their private equity funds, capital raised can often be the easiest to
measure. Other metrics can include the total value of companies purchased by a
firm or an estimate of the size of a firm's active portfolio plus capital available for
new investments. But the list does not provide any indication as to relative
investment performance of these funds or managers. Additionally Preqin
                                                            
11
 The economics of private equity, December 1995, Board of Governors of the Federal Reserve System Washington, DC 20551 
12
 As quoted by Wikipedia in private equity article (link: http://en.wikipedia.org/wiki/Private_equity#Private_equity_firms )
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(formerly known as Private Equity Intelligence) an independent data provider,


ranks the 25 largest private equity investment managers. Among the larger firms
in that ranking were AlpInvest Partners, AXA Private Equity, AIG Investments,
Goldman Sachs Private Equity Group and Pantheon Ventures. The major private
equity firms in India includes firms like Blackstone ,Actis ,CVC Capital ,Barings ,
3i Capital, Deutsche ,KKR ,JP Morgan ,Merill Lynch ,India Value Fund ,Permira,
Kotak PE , ICICI Ventures , Indivision etc.

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2. Investors base
Investors in private equity are a diverse group of investors who invest in the
global markets. These investors can be broadly classified into pension funds,
insurance companies, sovereign wealth funds, endowments and foundations,
wealthy families and high net worth individuals, & fund of funds.
A pension fund is a pool of assets formed from the contributions of a pension
plan. These funds invest solely for the purpose of financing the pension plan
benefits. California State Pension Retirement System (CALPERs) is an example
of a large pension fund.
A sovereign wealth funds (SWF) are basically owned and instituted by the
government. It composes of assets such as stocks, bonds, real estate and other
financial instruments. Examples of Sovereign wealth funds include Abu Dhabi
Investment Council, China Investment Council etc.
Wealthy families and high net worth individuals invest substantial amounts of
capital in private equity, but the growth of amounts invested by the pension funds
and university endowments has reduced its importance. But these are still
prevalent as investors in most emerging markets. Fleming Family and Partners is
example of a family office which invests on behalf of wealthy families.

Though many investors begin investments as LPs, large investors eventually turn
to direct investments. But the ability of the institution to manage its own funds
and also select the most profitable investments decides its future. Many large
investors also turn to co-investments. Public pension funds who have limited
access to deals and little experience, are the least likely to invest directly.

In fund of fund style of investment, funds invest in portfolios of other funds rather
than investing directly. They are also referred to as multi manager funds. A fund
of hedge funds is a fund of funds that invests in portfolios of different hedge
funds to mitigate the risks associated with a single investment fund. Funds of

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hedge funds select hedge fund managers and construct portfolios based on them
and they make investments in private equity. Fund of Funds which invests in
Private equity includes examples like Arden Asset Management, Culross Global
Management Limited etc.

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3. Kotak Mahindra Bank

3.1. History13

The Kotak Mahindra group is a financial organization established in 1985 in


India. It was previously known as the Kotak Mahindra Finance Limited, a non-
banking financial organization. In February 2003, Kotak Mahindra Finance Ltd,
the group's flagship company was given the license to carry on banking business
by the Reserve Bank of India (RBI). Kotak Mahindra Finance Ltd. is the first
company in the Indian banking history to convert to a bank.

While the Kotak Group has been associated with Private Equity investments since
1997, it commenced its private equity activity through setting up of Kotak
Mahindra Venture Capital Fund in 2000. In 2004, Kotak launched an India
Growth fund as a part of its private equity fund. To bring a sharper focus to the
Group's Alternate Assets strategy, Kotak Mahindra Bank initiated its first
structured third party Private Equity Fund in early 2005. Since then, the Alternate
Assets business of the Group has grown to over USD 1.35 billion under
management across two asset classes namely – Private Equity & Real Estate, both
led by independent investment teams.

3.2. Kotak Investment Advisors Ltd (KIAL)

Kotak Investment Advisors Limited (KIAL), a subsidiary of Kotak Mahindra


Bank focuses exclusively on managing the Alternate Assets business of the Kotak
Mahindra Group. While the Kotak Group has been associated with Private Equity
investments since 1997, to bring a sharper focus to the Group's Alternate Assets
strategy, Kotak Mahindra Bank initiated its first structured third party Private
Equity Fund in early 2005. Since then, the Alternate Assets business of the Group

                                                            
13
 This information is taken from Wikipedia article on Kotak Mahindra Bank (link: http://en.wikipedia.org/wiki/Kotak_Mahindra_Bank )
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has grown to over USD 1.40 billion under management across two asset classes
namely - Private Equity & Realty Funds, both led by independent investment
teams. 14

3.3. Kotak Private equity 15

As part of KIAL, Kotak Private Equity Group (KPEG) is focused on helping


emerging corporates and mid-size enterprises evolve into tomorrow's industry
leaders. KPEG provides these companies a combination of equity capital,
strategic support and other value added services, playing a pro-active role with the
entrepreneur in building the business. KPEG currently manages / advises two
funds across two strategies – Growth Capital (India Growth Fund) and Venture
Capital for Life Sciences (Kotak India Venture Fund – I). They have launched 3
funds, Growth Capital (India Growth Fund I & India Growth Fund II) and
Venture Capital for Life Sciences (Kotak India Venture Fund - I), till date with a
total commitment of nearly USD 500 million. KPEG invests in companies across
a broad range of industries seeking capital for business expansions, acquisition
financing and buyout transactions typically investing between USD 15mn and
40mn depending on the nature of the company's business, stage of growth and its
financing requirements.

Kotak India Growth Fund I, has invested in companies such as Home Solutions -
a subsidiary of Pantaloon Retail Ltd which is India's fastest growing chain of
home improvement stores; INX Media- the media entertainment company , DRS
Logistics - a leading player in the 3PL logistics space in India, BFW - the largest
                                                            
14
 The information cited in this heading is taken from the Kotak Mahindra site (link: www.kotak.com )

15
 The information cited in this heading is taken from the Kotak Mahindra site (link: www.kotak.com )
 

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manufacturer of CNC machines in India; SIRO Clinpharm- India's largest local


full service Clinical Research Services company, Metahelix - an Ag-Biotech
company, ICOMM Tele- India's largest telecom tower manufacturing company
and BVG India- India's leading Facilities Management Service provider among
others.

KPEG is led by Nitin Deshmukh, who has put together an experienced investment
team with a successful track record in venture capital / private equity investments.
The other partners in the team are K.V. Ramakrishna and Vamesh Chovatia. The
three partners of the Fund collectively bring in over 55 years of industry and
private equity vestment experience with strong deal origination and networking
capabilities.

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4. Other Alternative Asset Classes

4.1. Asset reconstruction fund

4.1.1. Details

Asset reconstructions funds are also known as distressed debt funds. In these
funds, PE firms buy nonperforming assets (NPAs) of companies and restructure
them through operations and exit by getting higher returns. Such NPAs are called
as Distressed Assets. These assets are distressed because of operational
deficiencies and not because of market conditions. The most common is the
commercial loan which the company has defaulted on payments of interest or
principal. These types of investments are ideal in times of recession only and
hence are undertaken only by few firms. Such type of investing requires specific
skills and firms with them can reap high profits from these types of investments.

These funds can be categorized into Turnaround operators and Asset liquidators.16
The turnaround operators believe in the entity’s growth potential and thus work to
turn-around the troubled entity over a period of several years. They play an active
role in key management decisions and their investment is valued based on the
cash flows generated from regular business operations. Investment exit is
available in the form of a stock exchange listing or through a strategic sale
The asset liquidators believe in generating value by acquiring a portfolio of
distressed assets and then negotiating with borrowers to strike the best deal
possible. Such transactions are completed in a relatively lower time period with
very little time commitment and involvement from the management. The
investment is valued based on the discount realized while settling each lender

                                                            
16
 VC Circle article dated Jan 26th,2010, SARFARAZ AGBOATWALA & RISHIKA CHANDAN, ISB (link: http://www.vccircle.com/500/news/distressed-assets-
investing-–-an-emerging-private-equity-strategy )

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whereas investment exit is available through liquidation of the debt portfolio or


through securitization.
In the aftermath of the financial crisis, there is ample supply of distressed assets in
various parts of the world, with rapidly rising NPAs, pressure on part of banks to
free their balance sheet of such assets. Long-term private equity funds with
patience and restructuring experience can buy these troubled companies at huge
discounts and unlock value in the companies to bring them back on their feet. The
industry is certainly expected to reflect strong growth opportunities.
In India, Asset Reconstruction Companies were initially sponsored by the bankers
however later private sector has also been involved. Now in India, Asset
Reconstruction Companies are in both public as well as private sector. Arcil is the
major investor in distressed debt funds in India. Banks and financial institutions
with a large proportion of their bad loans or Non Performing Assets can sell to a
separate entity i.e. Asset Reconstruction Company. Then Asset Reconstruction
Companies recover a sum through attachment, liquidation etc.
The objective is to help banks in making clean books by reducing Non Performing
Assets. Asset Reconstruction Companies are also making profit by buying Non
Performing Assets at a lower price.
4.1.2. Example of the database

Sl Company Country Website Address Contact person Contact


no name number

1 CALPERs USA www.calpers.ca.gov CalPERS George Diehr (916)7953400


Investment
Office

400 Q Street
Suite E4800
Sacramento,
CA 95811

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4.2. Infrastructure fund

4.2.1. Details

Investors are always in lookout for new sources of return and diversification of
risks in investment. It is in these situations that infrastructure fund s find place.
Whether private or public, infrastructure needs large amounts of capital.
Infrastructure investments have different risk and return profiles from traditional
investments.
The majority of investments in infrastructure funds to date seem to have gone into
transport (airports, ports, toll roads) but investors are trying to diversify into other
sectors, such as communication infrastructure, waste, renewable energy and social
infrastructure.
The investment industry deduces a number of favorable investment characteristics
of infrastructure assets:
1. Stable and predictable cash flows
2. Long term income streams
3. Often inflation-linked (helping with liability-matching)
4. In some countries, tax-effective
5. returns insensitive to the fluctuations in business, interest rates, stock markets
6. Relatively low default rates
7. Low correlations with other assets classes (offering diversification potential)
8. socially responsible investing (SRI) (providing public goods essential to
society)

The importance of infrastructure sector also follows from the fact that foreign
investors are now looking at infrastructural development as a yardstick for
directing their investments. In fact infrastructural development had taken
precedence over wage levels in assessing the investment potential in developing
countries. In India infrastructure sector itself is becoming an attractive

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investment area for FDIs. The bulk of infrastructure investments in India were in
the public sector. To encourage foreign funds flow into the infrastructure sector,
the Financing Ministry has allowed Foreign Institutional Investors (FIIs) also to
invest in unlisted companies. This was aimed at helping infrastructure
companies as they would not be in a position to list their shares in the initial
phase. But because of the long gestation period, and many social implications,
the infrastructure sector compares unfavorably with manufacturing and many
other sectors.17

4.2.2. Examples

Sl Company Country Website Address Contact person Contact no:


no: name

1 Universities London www.uss.co.uk 6th floor,60 Donna Wheeler +44(0)207-


Superannuation
Threadneedle 972 6328
Scheme
street,
London,
EC2R 8HP

                                                            
17
  As citied in the article about Indian Infrastructure (link: http://www.asiatradehub.com/India/intro.asp )

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4.3. Fund of Hedge Funds

4.3.1. Details

A fund of hedge funds is a fund of funds that invest in different portfolios of


different hedge funds to spread the risks associated with a single investment fund.
Funds of hedge funds select hedge fund managers and construct portfolios based
on them. Funds of hedge funds generally charge a fee for their services, always in
addition to the hedge funds management and performance fees, which can be
1.5% and 15-30%, respectively.

Funds of Funds which are structured as limited partnerships have many


advantages to the investor. One advantage is in their due diligence process. It is a
very time consuming process and can also be very expensive. Employing a fund
of fund reduces this process as they do the due diligence on behalf of the investor.

The second advantage is in terms of diversification as they spread their capital


among a variety of different managers, all of whom employ a unique investment
strategy. Thus, it is possible for a Fund of Funds investor to gain exposure to a
long/short fund, a distressed fund, and a private equity fund, all through one
investment vehicle. Funds of Funds have some drawbacks and risks. One
drawback is the double layer of fees. A second potential risk stems from the due
diligence process.

Funds of funds provide an important role within the hedge fund community. Not
only do they provide the benefits of in-house due diligence, but they also offer a
unique layer of diversification to the investor.

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4.3.2. Examples

Sl Company Country Website Address Contact Contact no


no: name person

1 Adair New www.adaircapital.com 405Park Paolo 212-750-1577


capital York th
Avenue,8
LLC Alimonti
floor, New
York, NY
10022

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5. Consultants and their role in private equity

Many large institutions find themselves with money in employee retirement plans
that needs to be managed, the senior management of an airplane manufacturer or
pharmaceutical company, for example, may not be the most qualified at knowing
how to invest the funds of its employee’s pensions. In addition, they may not
have the expertise to pick the right portfolio manager to do this for them. This is
where the investment consultant comes in. These are the "gatekeepers" that allow
asset managers the chance to manage money for large institutions i.e. they are the
ones who suggest the asset managers to the investor.

Since there are large number of investment managers, consultants are a necessary
intermediary who provide the essential matching function. They match asset
managers expertise to their clients investment needs. Because this is the
consultant's area of expertise, they generally have screening methods and
extensive contacts in the industry.

Investment consultants are often used in the due diligence process because some
firms are either too small or lack the expertise to staff a department to search
about the investment managers. Even if it is a large sophisticated firm, an
investment consultant may be needed to help it appear unbiased in its decision
making. The point is to make sure that people feel that the portfolio manager was
selected based on appropriate criteria. The investment consultant helps guide
clients towards the best asset allocation. A consultant can also help define the
formal investment guidelines that will guide asset allocation (an investment policy
statement). Their main business is to help choose the best portfolio manager.

Advisers also typically provide negotiation services for their clients. They
evaluate the terms of the offering such provisions as general partner fees and rules
regarding the calculation of carried interest in the context of current market

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conditions. In deciding whether to recommend investing in the partnership, the


advisory firm takes into account other partnership investment opportunities that
might arise in the near future; it may recommend against investing in a
partnership that appears fairly attractive.

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6. Future of private equity in India

Private equity has grown remarkably in India in the past years as a separate asset
class. They attract huge amounts of capital every year from investors like pension
funds, university endowments, foundations, trusts, insurance companies, high net
worth individuals etc. As such, private equity investments provide these investors
with newer avenues to put in their money and reap higher returns. In the
international avenue PE investments have grown significantly over years, in India
PE has developed mostly in the last decade. Till the recent credit crunch, the PE
market was very competitive and the deal sizes where big. But during the last year
the sizes of deals have dropped but we can say that this asset class still continues
to be an area of interest in the emerging markets.
India as an emerging market provides immense scope for PE investments and
should be at the top of recovery chart of PE investments. Indian markets maybe
attractive to investors because of many reasons. Firstly, because of the strong
economic growth and the rate of recovery from the economic depression,
secondly because of the huge investment base available and also the developing
infrastructure. These factors together with the tough market conditions in
developed economies make India a strong contender in the PE market. China is a
strong contender for Indian PE market but it can be said that India stands ahead
because of factors like English speaking society, entrepreneurial status etc. Along
with favorable factors there are also unfavorable factors which act as barriers to
entry for PE investors like the complex regulatory norms, same investment
opportunities for multiple investors etc. Overall it can be said that India will
continue to attract large amounts of PE funding in the coming years.

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References

1. Keningston Capital Partners (http://kcpl.ca/private_equity/structure )

2. http://en.wikipedia.org/wiki/Private_equity

3. The Role of Institutional Investors in Corporate Financing by Hao Jiang,


( http://www.qfinance.com/contentFiles/QF02/g26fs3i7/11/0/the-role-of-
institutional-investors-in-corporate-financing.pdf )
4. Distressed Asset Investing- An emerging Private Equity Strategy
(http://www.vccircle.com/500/news/distressed-assets-investing-%E2%80%93-an-
emerging-private-equity-strategy)
5. http://www.eurekahedge.com/news/04august_archive_news_spinnaker_distressed
_investing_eng.asp
6. http://www.hedgeco.net/hedgeducation/hedge-fund-articles/fund-of-funds/
7. http://www.ecb.int/pub/pdf/scpwps/ecbwp1078.pdf
8. www.investopedia.com
9. Private Equity Funds- Homing in on India, N.B.Rao
10. Kotak Mahindra Bank Website ( www.kotak.com )
11. Private Equity:Shaken, Not Broken, Published: February 01, 2010, Douglas P.
Warner and Michael E. Weisser , Weil, Gotshal & Manges LLP

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