Hedge Fund & Private Equity

Team Number - 7

Indian Scenario and PE & HF

Source of Job Creation Source of Finance For Expansion Requires Money More number of SMEs are coming For Economice Growth Lack of capital is barrier of growth

ORIGIN OF HEDGE FUNDS - A BRIEF HISTORY

Alfred Winslow Jones, a sociologist, Fortune magazine investigating fundamental and technical research on forecasting the stock market Setup an investment fund with himself as general partner Incentive fee amounting to 20% of any realized profits or gains with no fixed fees. Fortune magazine article, in 1966,branded the marketneutral strategy that Jones designed as a hedge fund. Definition :- any unregistered, privately-offered, managed pool of capital for wealthy, financially sophisticated investors.

 Trading strategies Equity, Fixed-income Mathematical algorithms Algo-Trades Techniques : Short-selling Arbitrage Hedging Leverage

RISKS IN HEDGE FUNDS

Minimally regulated and least transparent & requires a lot of due diligence work. Managers do not disclose information on a regular basis (in order to protect their trading strategies). Performance reporting is voluntary in the industry, making industry statistics less reliable. Retain the best brains in investment management. Encourage greater risk-taking in order to ensure that the fund is productive. High investment minimums

Private Equity- An Introduction

Private equity funds are investment companies that, do not hold publiclytraded securities. Instead, they normally seek equity stakes (that is, partial ownership) in private companies..
Structure of PE Funds

Institutional Investors
Fund 1

PE firm

High Net worth Individual

Fund 2

Company A

Company B

Company c

What Private Equity offers ???

To the Company Strong capital base for future expansion Accelerated growth possible because of PEs value addition Viable alternative to expensive debt Good for small size companies looking to access capital Helps improves corporate image & profile Useful for companies which have long gestation projects as PE investors can often take a long term (3-6+ years view)

Provides a valuation benchmark for future fund raise events

Funds may bring expert financial / capital structuring advise To the Investors Ability to realize High growth & High Returns

Identify potentially high value companies at an early stage

Ability to acquire meaningful stakes (10-100%) in companies which is typically difficult in listed companies Option of having multiple exit routes such as IPO, secondary sale, strategic sale, sale back to promoters, etc.

Key Ingredients of a PE Deal

Which Investor?

What valuation?
What deal structure?

What investor rights?

What exit terms? What due diligence?

Stages and Nature of Investments

Aster Infrastructure INX Media JustDial Lemon Tree Meru Cabs Suzlon Energy Early Stage Product or service is ready Apollo Hospitals Allcargo Global M&M Finance Nagarjuna Const. Reid & Taylor India Expansion Stage Directed at growth and expansion of the enterprise Buying out other investors Aditya Birla Telecom Excelsoft Punjab Tractors Sanghvi Movers Replacement Capital Special Situation Buyout May include project financing, one-time opportunities etc. Spice Jet DLF Assets Usually associated with a change in management. Transaction is typically leveraged

Aim is to launch it in the market

Maturity of the Company

Flextronics Gokaldas Sigma Electric Intelenet Global

What PE Investors Look For?

Overall sector attractiveness potential for strong future growth Reasonable valuation

Companys ability to deliver consistent earnings growth

High return ratios high return on capital employed and return on equity are the most significant parameters for investors

Enunciation of clear exit opportunity

Reputed promoters, strong franchise and a top class management team Clear enunciation of a business strategy/future plans

Key Challenges
Buyout Challenges
Focus on Current Scenario IPO an attractive option Cautious for fresh Investments Willing to invest in sound companies

Size and Type-wise Deal Activity Yrs 11

Total Deal Volume Size-wise
US$ >200 mn 9 (2.7%) US$ 100-200 mn 13 (3.9%) US$ 50-100 mn 20 (6.0%)
4,000 3,500 3,000
Deal Value (US$ mn)

Deal Value by Type

3,543 39%

2,560 28%

2,500 2,000 1,500 1,000 500 Buyout Early Buyout-Large Pre-IPO PIPE

< US$ 5 mn 105 (31.3%)

US$ 25-50 mn 42 (12.5%)

1,504 16%

US$ 5-10 mn 64 (19.1%)

US$ 15-25 mn 44 (13.1%)

382 4%

276 3%

191 2%

560 6% 105 1%
Other

Late

US$ 10-15 mn 38 (11.3%)

Note: Figures are the total number of deals in the category; For 105 deals the Investment Amount is not available

Total number of deals = 335 (84 deals above US$ 50 mn) Average overall deal size = US$ 27 mn

Late stage (39%) and growth stage (28%) were most preferred by the investors Early Stage investment (4%) and buyouts (3%) were still not as popular with Investors

Growth

Annual deal value in Asia Pacific ($ Billion)

Sector-wise Deal Activity CY11