PE/VC Industry in India

Group 4
Prateek Mukta Varun Nalin SanKalp (4) (28) (34) (44) (45)

Introduction
Private Equity
 Equity capital that is not quoted on a public exchange. Private equity

consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.  Capital for private equity is raised from retail and 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 majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company  Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firms strategic decisions.

Introduction
Venture Capital

 Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for aboveaverage returns.  Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships.  This form of raising capital is popular among new companies or ventures with limited operating history, which cannot raise funds by issuing debt. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity

Stages in Funding

Difference between VC and private equity

 Private equity refers to equity or quasi-equity investments in high-growth companies and includes buyouts, mezzanine financing, privatization and public as well as private deals.  The private equity asset class includes venture capital, buyouts, and mezzanine investment activity.  While venture capital focuses on investing in private, young, fast growing companies,  Private equity players largely provide mezzanine or bridge funding.

The Private Equity Summary

Insurance Companies Endowments Pension Funds Wealthy Individuals $ $ $ $ Work with: Investment Bankers Lawyers Accountants Insurance Consultants LBO Structure: Equity 30% Debt 70% Portfolio Companies
Exit 3-7 Years

Private Equity Firms: 40% Returns

Debt Providers

Value Creation: Strategic Direction Cut Expenses Acquisition Strategy Managing Oversight

Private Equity Firm Structure

 General

partners (GPs)
Managing Directors (MDs)

General Partners

The private equity firm employees that manage the firms investing activities Receive a 2% management fee and 20% of profit


Operating Partners

Back Office (Accounting, Treasury, etc.)

Principals

Limited partners (LPs)

The pension funds, college endowments, etc. that provide capital to the private equity firms but do not actively manage the investments Receive their initial investment and 80% of profit
Recent MBAs often with related experience Vice Presidents

Former CEOs, COOs, CFOs, and management consultants

Undergrads with 2-3 years experience as: Investment Bankers Management Consultants Big Four Accountants

Sr. Associates

Associates

Types of Private Equity

1. 2. 3. 4. 5. Leveraged Buyout Venture Capital Growth Capital Distressed and Special Situations Mezzanine Capital

Stages of Private Equity

Process of Private Equity Investment

1. 2. 3. 4. 5. 6. Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring Exit (IPO, Trade Sale or Buy back)

Ways of Investment
Direct investors Fund of Fund investors

Ways of Exit
1. Trade Sale 2. Management Buyout 3. Sale of the investment to another financial purchaser 4. IPO 5. Liquidation

Classification of PEVC funds

Corporate Venture (CORPVEN)
e.g., Intel, Siemens

Financial Corporations (FINCORP)

ICICI Venture, IL&FS Investment Managers, and AXIS PE.

Investment Banks (IBANK)

JM Financial, Motilal Oswal

Government Institutions (GOVT)

Gujarat Venture Finance Limited (GVFL)

Private Equity/ Venture Capital Firm (PRIV)

Nexus Venture Partners, TVS Capital

Regulatory aspects of VCPE investments

SEBI (Venture Capital Regulations) , 1996  Under the VCF Regulations a venture capital fund can be established either in the form of a trust or a company. Though the guidelines do not appear to make registration with SEBI mandatory, the institution has made its intention clear to regulate all domestic VCFs.  These are subject to investment conditions/restrictions such as:
 Aggregate minimum capital commitments from its investors should be Indian Rupees 50 million  A VCF cannot invest more than 25% of its aggregate Capital Commitments in any one Venture Capital Undertaking (VCU)

PEVC - Current Scenario

PEVC - Current Scenario

PEVC - Current Scenario

Current Scenario in India

Current Scenario in India

Top cities attracting venture capital investments

CITIES MUMBAI SECTORS Software services, BPO, Media, Computer graphics, Animations, Finance & Banking All IP led companies, IT & ITES, Biotechnology Software services, ITES , Telecom IT , Telecom IT & ITES, Pharmaceuticals Bio-technology, IT , BPO

BANGALORE

DELHI CHENNAI HYDERABAD PUNE

PEVC in India

PEVC in India

Private Equity Deals in 2009

Private Equity Exits in 2009

Major Private Equity Deals in India

Warburg Pincus & Bharti Airtel

The Investment (1999-2001) Between September 1999 and July 2001, Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 18.58 per cent stake, the first tranche being invested in September 1999. The Bharti IPO (January 2002) Bharti goes public (Warburg stake diluted). The other exits (2004-2005) August 2004: Warburg sells a 3.35 per cent stake for about $208 mn. March 2005: Warburg sells another 6 per cent stake for $560 mn, marking the largest ever equity deals in single scrip on an Indian stock exchange. October 2005: Warburg sells its final 5.65% stake to UK-based Vodafone for $847.5 Total realization: $1.616 bn. Profit: $1.324 bn - 450 per cent return on investment mn.

Warburg Pincus
Opportunities The deal with Bharti Tele Ventures Ltd. had a lot of opportunities for Warburg Pincus. National Telecom Policy encouraging Domestic Private Investment Foreign Direct Investment Competition to Fixed Line Service Providers High Installation Fees Order Backlog Mobile Telephony considered as a status symbol Markets were Price Elastic No Player having Pan-India presence Telecommunication is a prerequisite for Growth Challenges Lack of Regulatory Clarity Economic viability of Telecommunication Project Restriction on Licenses Monthly Fixed License fee to government High tariff charges-Expensive for users No investor interest No clarity on Exit route Bharti having presence only in North India

PE Impact on Airtel

PE Impact on Airtel

PE Impact on Airtel

PE Impact on Airtel

PE Impact on Airtel

Other major Private Equity Deals in India

1. 2. 3. 4. 5. Dalmia Cement & KKR Air Deccan & ICICI Ventures & CI Paras Pharmaceuticals & Actis Paras Pharmaceuticals & Actis Gokaldas Exports Ltd. & Blackstone

Recent trend in PE industry

 More private equity funds are choosing to invest in publicly held companies as stocks of many listed firms are now trading at attractive prices on the bourses.  The most recent deal is General Atlantic's 67 crore investment in Hindujas-promoted IndusInd Bank through open market purchase. Last month, ChrysCapital picked up around 10% stake in Punebased IT consulting firm KPIT Cummins Infosystems Limited for over 110 crore.

Worlds Top Private Equity Firms

Why has VC has failed in India ?

 History of Venture Capital in India dates back to early 70's when Govt of India appointed a committee laid by Late Shri R.S.Bhatt to find out the ways to meet a void in conventional financing for funding start-up companies based on absolutely new innovative technologies.  Such companies either did not get any financial support or the funding was inadequate which resulted into their early mortality.  The committee recommended starting of Venture Capital industry in India. In mid 80's three all India financial institutions viz IDBI, ICICI, IFCI started investing into the equity of small technological companies.

Why has VC has failed in India ?

 In Nov 1988, Govt of India decided to institutionalize Venture Capital Industry and announce guidelines in the parliament. Controller of Capital issues implemented these guidelines known as CCI for VC. These guidelines were very restrictive and following a very narrow definition of VC.  They required Venture Capital to be invested in companies based on innovative technologies started by first generation entrepreneur. This made VC investment highly risky and unattractive.  Nonetheless many private initiatives were taken. At the same time World Bank selected 6 institutions to start VC investment in India. This included TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC, RCTC (now known as IFCI Venture Capital Funds Ltd.) and ILF (now known as Pathfinder).

Why has VC has failed in India ?

 In 1995, Govt of India permitted Foreign Finance companies to make investments in India and many foreign VC private equity firms entered India. In 1996, government announced guidelines to regulate the VC industry. Though there were many shortcomings these guidelines were the starting point.  In 1997, IT boom in India made VC industry more significant. Due to symbiotic relationship between VC and IT industry, VC got more prominence as a major source of funding for the rapidly growing IT industry. Indian VC's which were so far investing in all the sectors changed their focus to IT and telecom industry.  The recession during 1999 - 2001 took the wind out of VC industry. Most of the VC either closed down or wound-up their operations. Almost all of them changed their focus to existing successful firms for their growth and expansion. VC firms also got engaged into funding buyouts, privatisation and restructuring. Currently, just a few firms are taking the risk of investing into the start-up technology based companies.

Why has VC has failed in India ?

 Limited Partnership(LP), Limited Liability Partnership(LLP) and the Limited Liability Company(LLC) are commonly used and widely accepted structures internationally especially in USA which has an active venture capital industry.  For venture capital funds which deal in high risk investments structuring flexibility is very important to meet their business strategies. In India, such structures like LP, LLP and LLC are not recognised under the Indian Partnership Act and the Indian Companies Act.

Why has VC has failed in India ?

Tax pass through for Venture Capital Funds :

 VCFs are a dedicated pool of capital and therefore operates in fiscal neutrality and are treated as pass through vehicles. In any case, the investors of VCFs are subjected to tax. Similarly, the investee companies pay taxes on their earnings.  There is a well established successful precedent in the case of Mutual Funds which once registered with SEBI are automatically entitled to tax exemption at pool level. It is an established principle that taxation should be only at one level and therefore taxation at the level of VCFs as well as investors amount to double taxation. Since like mutual funds VCF is also a pool of capital of investors, it needs to be treated as a tax pass through. Once registered with SEBI, it should be entitled to automatic tax pass through at the pool level while maintaining taxation at the investor level without any other requirement under Income Tax Act.

Why has VC has failed in India ?

 The Foreign Venture Capital Investors (FVCI ) needs to obtain approval for pricing from RBI at the time of investment as well as disinvestment. FIIs invest in unlisted equity stocks, they are not required to obtain such approvals.  In addition to this, the formula applied for arriving at the prices of unlisted securities based on book value and PE multiples of BSE National Index are extremely restrictive and not in tune with the valuations relevant to the new generation enterprises which typically obtain VC funding like in infotech, bio-tech, service industries, etc. Such enterprises especially start up enterprises do not have tangible assets but the stock of the same may obtain high valuations due to their intangible assets like human resources, growth prospects, etc.  Therefore, once foreign venture capital investor either coming through 100% funding in a domestic VCF or otherwise registered with SEBI should not be subjected to such requirements.

MICROFINANCE

Significance Of Microfinance
Poverty Alleviation

Social Building

Definition of Microfinance
Providing financial assistance to an individual or an eligible client, either directly or through a group mechanism for : an amount, not exceeding rupees fifty thousand in aggregate per individual, for small and tiny enterprise, agriculture, allied activities (including for consumption purposes of such individual) an amount not exceeding rupees one lakh fifty thousand in aggregate per individual for housing purposes such other amounts, for any of the purposes mentioned at items (i) and (ii) above or other purposes

Microfinance: The Concept

Micro Credit Micro Saving Micro Insurance

SWOT Analysis

Strengths
Informal sources do not allow savings to be collected from more than a small group of individuals well known to one another, and they do not move funds over large distance. Helped in reducing poverty Borrowing households can substitute away from labour Huge networking opportunities available

Weaknesses
Not properly regulated for companies which are not NBFC Large numbers of people have access to informal sources of finance like local moneylenders Concentrating on few people only and mainly in urban areas. Lack of product variety

Opportunities
Huge demand and supply gap according to the World Bank: Estimated need for micro credit is around 15-16 billion dollars while MFIs are catering around 5 Billion dollars Employment Opportunity: Microfinance industry can help in generating huge employment opportunities in order to serve 220 million families. Huge Untapped Market: Only 27 million accounts and possibility to expand it to 220 million accounts. Opportunity for Pvt. Banks, NBFCs, Foreign Banks to enter this business segment

Threats
Political intervention can reduce the profit margins. Instability in Institutional and legal front. Government regulation for non deposit taking MFIs.

MFI and its Structure

Legal Structure of MFIs

3 Pillars of MFI : Not-For-Profit MFIs Mutual Benefit MFIs For-Profit MFIs

Not-For-Profit MFIs
Societies (60% contribution) Public Trusts (20% contribution) Non-Profit Companies (18% contribution) Others ( individual donors 2% contribution)

Mutual Benefit MFIs

Co-operatives registered under Govt. Acts Mutually Aided co-operative Societies (MACS)

For-Profit MFIs
Non-Banking Financial Companies Producer Companies Local Area Banks

The Self Help Group (SHG)

A homogeneous group of about 15 to 20 Transaction costs of both the SHG and MFI reduced Every member learns prioritization and financial discipline Adequate & sustained access to financial services

Design features of SHGs

Self-selection Focus on women Intra group appraisal systems and prioritization Credit rationing Shorter repayment terms Progressive lending

SHG-MFI Linkage Models

MODEL-I : SHGs formed and financed by MFI MODEL-II NGOs act as Facilitators SHGs financed directly MODEL-III SHGs financed by MFIs using NGOs as Financial Intermediaries

Distribution Structure

Mechanism
COMMERCIAL BANKS & INVESTMENT FUNDS FOUNDATIONS & DONORS (incl. enterprises)

GOVERNMENT & LOCAL BODIES

MICROFINANCE INSTITUTIONS (MFIs) (MFIs)

(NGO, ASSOCIATIONS & BANKS)

SUPPORT ORANIZATIONS

BENEFICIARIES

MF to bring positive impacts

Systematic approach Aligning MF with MDG

Trends
High growth rates continue MFIs added more new clients States outside south zone showing of growth Inclusion- gathering pace

MFIs increased outreach faster last year

10 9 8 7 6 5 4 3 2 1 0 2004 2005 2006 2007 Incremental clients SHGs mn Incremental clients MFIs mn

2008

2009

Comparison of annual a

retion of clients

Contemporary Issues
Banks dont provide microfinance as:
High Risks
Due to

No Collateral
Due to

High Transaction Costs

A very large number of very small loans given to rural people

People still rely on moneylenders for loans as their services are convenient, fast and flexible. Uneven geographical spread heavily south focus Low focus on system developments Too many legal forms hard to regulate High rates of default and repeated loan waivers

Anomalies within the Malegam Committee Report

The definition of an MFI preferred by the committee is limited to the non-banking financial companies (NBFCs), leaving out a large number of non-government organisations (NGOs) Argued for not taking away the priority sector status from MFI loans. Recommends that the interest rate for individual loans be capped at 24 per cent. It is unfortunate that the committee has given sanction to group repayment of individual loans

FUTURE SCOPE
Deepening Broadening Inclusive involvement

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