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PRIVATE EQUITY - The new face of capital in IndiaThis note has been prepared by Kanvic for the exclusive purpose of our Cl...
Contents                                  PageA. Private Equity - An overview              3B. Evolution of PE investments...
A. Private Equity - An overview                                  3
Private Equity is defined as a form of equity capital that is not quoted on apublic exchange• Private Equity is a form of ...
PE funds raise money from long term investors and invest them inoperating companiesAn overview of PE operations           ...
PE can involve different categories of investors depending on risk profile,stage of funding and investment size           ...
Private Equity is a very important source of capital worldwide however ithas been impacted severely by global economic cri...
The strategy and behaviour of PE firms in India is very different from theglobal scenarioAverage deal size in             ...
B. Evolution of PE investments inIndia                                    9
India represents an attractive opportunity for global investorsRegion and countries in emerging marketsviewed as presentin...
Private Equity has gained importance in India only in this decade althoughits origins go back to 1970sKey milestones of PE...
PE has grown faster in India than other countries in Asia pacificAnnual growth in private equity investments(1998- 2007), ...
Private Equity related investments have started picking up againValue and number of PE related investment in India,$ Mn., ...
Growth of Private Equity related investments has been in line with stockmarket sentiments and GDP growthPrivate Equity inv...
VC firms’ share has been increasing as a percentage of total number of    deals struck by PE related investments, however ...
Deals below $10 Mn have dominated Indian market over the yearsNumber of deals1 between $ 0-10 Mn and above $10 Mn% of deal...
The unknown value deals have decreased in recent yearsNumber of PE deals100% =             195                  354       ...
Financial sector has attracted more investment while IT sector attracted     maximum number of deals in last six years    ...
Healthcare and consumer staples have been major gainers in 2010                                         Deal value        ...
Average size of deals has picked up in 2010Average deal size by type of investment,$ Mn                                   ...
Venture capital and Angel investing are concentrated in their top threesectorsTop three sectors for investment in 2010*   ...
Financial services sector has increased its share of PE investment overlast five yearsSector-wise share of PE investment  ...
Venture capital firms have moved beyond predominantly IT to cover moresectors including consumer discretionary and financi...
Portfolio of angel investors has done an about turn from IT to healthcareSector-wise share of Angel                       ...
C. Exit routes for PE                        25
PE exits have picked up in 2010 with value of deals already crossing lastyear’sNumber and value of PE exits1, $ Mn        ...
Open market sale has become a prominent exit route over last two yearswhile the share of M & A in total number of exits ha...
Buyback and IPO have picked up in terms of deal valueValue of deals by type of exit, $ Mn    118                          ...
D. Roadmap for companies seeking PE                                      29
PE backed firms have posted better results than those not backed by PE    Performance of PE backed companies compared to o...
Private Equity firms bring a number of advantages to investeecompanies...Advantages of PE firms                          •...
... however, they need to be looked in light of existing shareholders’ goalsand management stylePotential areas of conflic...
Companies need to answer key strategic questions before going for PEinvestment ...Roadmap for investee companies1         ...
... and pick the right valuation methodology to arrive at the value of theirbusinessValuation methodologies    Price of re...
Authors of the report                        Ravindra Beleyur                        Director                        M: +9...
About KanvicKanvic is a management consulting firm helping businesses develop winning strategies, drive profitable growth ...
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Private equity the new face of capital in india

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Our key findings from the study are:
•Private Equity firms are gaining more confidence in India, primarily driven by high economic growth and a potential to add value to businesses in various phases of their life cycle.
•Financial, IT and Industrial were the top sectors to attract PE investment between 2005 and 2010; however healthcare has gained momentum in 2010.
•Deals below $10 Mn have dominated Indian market over the years. The deal size has started picking up again in 2010.
•Open market has become a preferred exit route over last two years while the share of M & A in total number of exits has gone down.
•Private Equity firms bring a number of advantages to investee companies, however, they need to be looked at in light of existing shareholders’ goals and management style.
•Companies need to answer questions ranging from their goals to cultural fit and right time to exit route before going for Private Equity.

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Transcript of "Private equity the new face of capital in india"

  1. 1. PRIVATE EQUITY - The new face of capital in IndiaThis note has been prepared by Kanvic for the exclusive purpose of our Clients.. The material contained herein cannot be copied, used, circulated for any other purpose.All rights reserved Kanvic Consulting Private Limited.
  2. 2. Contents PageA. Private Equity - An overview 3B. Evolution of PE investments in India 9C. Exit routes for PE 25D. Roadmap for companies seeking PE 29 2
  3. 3. A. Private Equity - An overview 3
  4. 4. Private Equity is defined as a form of equity capital that is not quoted on apublic exchange• Private Equity is a form of equity capital that is not quoted on a public exchange.• It consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a de-listing 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 firms are generally organised as limited partnerships where private equity firms serve as general partners and large institutional investors and high net worth individuals providing bulk of the capital serve as limited partners.• 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 (Initial Public Offering) or sale to a public company.• The seeds of the Indian private equity industry were laid in the mid 80’s. The first generation venture capital funds, which can be looked at as a subset of private equity funds, were launched by financial institutions like ICICI and IFCI. 4
  5. 5. PE funds raise money from long term investors and invest them inoperating companiesAn overview of PE operations Makes Invest Invest way for money money PE exit • Buyback through • IPO Private Investee •M & A Investors Equity funds company • Open market • Secondary sales• High Networth • Funds can be Receives Individuals open-ended or funds for• Institutions close-ended1 (Bank, company etc.)• Fund of funds • Seed capital2 • Start up3 • Expansion • Replacement capital • BuyoutsNote: 1 Closed ended funds are formed for a period of 1 to 3 years while open ended have a time period of over 3 years. 2 Seed capital is used to provide small sums of money necessary to develop a business idea. 3 Start up funding is provided for new product development or initial marketing activities. 5
  6. 6. PE can involve different categories of investors depending on risk profile,stage of funding and investment size Risk Stage of Size of Definition Example profile funding funding • Typically invest in well established business with a proven track record Private • Commit large funds for Growth/ Equity expansion and growth Mature • Take well defined risks • Have reasonably good view of exit strategy • Provide funds for early stage companies • Typically made for scaling up operations by developing orVenture launching new products or Start-upcapital services • Provide entrepreneurial support and guidance in developing business strategy • High net-worth individuals who have been successful entrepreneurs • Invest in new ideas which Angel have not been proven yet • Take significant risks and Ideainvestors invest a lot of time in mentoring and guidance • Driven by entrepreneurial spirit Low High 6
  7. 7. Private Equity is a very important source of capital worldwide however ithas been impacted severely by global economic crisisShare of PE deals across key geographicareas, $ bn, percent100% = 332.4 718.9 716.1 215.1 95.5 • During 1970 to 2009, $ 3.9 trillion of transactions of leveraged buyouts (LBOs) in the form of Private Equity 34% 33% 35% investments have taken place 47% 48% globally. 6% 7% • More than $ 2.1 trillion of 18% transactions took place only 6% during 2005 to 2009 and more 14% than $ 1.4 trillion of transactions have taken place only in two 60% 60% years 2006 and 2007. 47% 47% 38% • During 2005 to 2009 more than $ 1.1 trillion worth deals have happened in US alone which is more than 50% of the global PE 2005 2006 2007 2008 2009 investments. America Asia Pacific EMEASource : The new demography of private equity, per Strömberg, Swedish Institute for Financial Research, Stockholm school ofeconomics, CEPR and NBER presented at the World Economic Forum in 2008, Dealogic, Kanvic analysis. 7
  8. 8. The strategy and behaviour of PE firms in India is very different from theglobal scenarioAverage deal size in Differences in Indian and Western PE market2007, $ Mn Indian market Western marketMalaysia 227 • Focus on minority • Focus on controlling investment stake • Providing growth/ • Providing capital for expansion capital mature companies Korea 97 • Limited use of leverage • Leveraged buyout very common • Shareholders not willing phenomenon to give up control India 47 China 37Source: Thomson Financial, AVCJ, Venture Intelligence, Kanvic research 8
  9. 9. B. Evolution of PE investments inIndia 9
  10. 10. India represents an attractive opportunity for global investorsRegion and countries in emerging marketsviewed as presenting the best opportunities forinvestment, % of respondents China 51 • India’s growth story is a big attraction for global investors. Asia 45 • In a recent survey conducted by Preqin, India is just behind India 41 China in terms of best opportunities for investment in emerging markets. Brazil 27 • 41 percent respondents found Russia 16 India as attractive investment destination.Latin America 14 • It is way ahead of Brazil, Russia and Latin America. CEE 12 Africa 8 Other 2Source: Preqin 10
  11. 11. Private Equity has gained importance in India only in this decade althoughits origins go back to 1970sKey milestones of PE evolution in India • Government of India announces guidelines for • Government of India issued guidelines in September venture capital funds A committee on 1995 for overseas venture (VCFs) in 1988 "Development of Small capital investment in India. and Medium • TDICI is set up to encourage private • SEBI issues the SEBI Enterprises" highlighted (Venture capital funds) the need to foster investment in technology regulations in 1996 venture capital sector as a source of funding • Many international PE/VC new entrepreneurs and funds enter Indian market technology. 2000 1984 1989 onwards 1973 1988 1995-2000 PE investment gain • Regional capital funds momentum during ICICI decides to APIDC Venture Capital last 10 years with allocate funds to and GVFL are set up in increasing deal size venture capital type Andhra Pradesh and and broader sectoral activity Gujarat respectively coverage • Lazard sets up Credit Capital venture fund - first private sector fundNote: TDICI- Technology development and information company of India Limited, later renamed as ICICI venture fundsSource: Kanvic research 11
  12. 12. PE has grown faster in India than other countries in Asia pacificAnnual growth in private equity investments(1998- 2007), percent • India has attracted maximum investment in India 72 private equity within Asia Pacific. • India’s PE market has grown Australia/NZ 52 at an annual growth rate of 72 percent over 10-year period from 1998 to 2007.Greater China 43 • Compared to India, China has grown at 43 percent per annum. South Korea 24 Japan 10Source: Thomson Financial, AVCJ, Venture Intelligence 12
  13. 13. Private Equity related investments have started picking up againValue and number of PE related investment in India,$ Mn., number1 366 346 • During the period 2005 to 2010, total PE related investments have taken place to the tune of $ 45.3 billion - of which a total 253 bulk value of $ 27.9 billion has 235 taken place only during 2007 and 2008. 167 145 16,153 • The drop in the value of transactions during 2009 is on 11,754 account of the global economic crisis and the consequent low 6,417 level of business confidence. 4,094 4,832 2,074 2005 2006 2007 2008 2009 2010* No. of deals Value of dealsNote: 1 Includes only those deals for which value is known.* The figures for 2010 are till August only.Private Equity related investment includes private equity, venture capital and angel investors.Source : VCCegde 13
  14. 14. Growth of Private Equity related investments has been in line with stockmarket sentiments and GDP growthPrivate Equity investment in India, $ Mn 9.3 9.8 9.5 7.4 6.7 8.4 17,210 15,211 14,933 13,396 11,250 8,995 16,153 11,754 6,417 4,094 4,832 2,074 2005 2006 2007 2008 2009 2010* Average Sensex Private Equity related Investment GDP growth in %Note: GDP for 2010 is provisional. * The figures for 2010 are till August only.Source : www.tradingeconomic.com, CSO 14
  15. 15. VC firms’ share has been increasing as a percentage of total number of deals struck by PE related investments, however their value share is still very low Number of PE related deals1 , percent Value of PE related deals, $ Mn100% = 145 253 346 366 235 167 3% 2% 3% 3% 3% 14% 19% 18% 2005 2006 2007 2008 2009 21% 27% 1,941 6,016 15,719 11,044 3,761 83% 79% 79% 76% 125 388 421 700 331 70% 8 13 12 9 3 2005 2006 2007 2008 2009 Private Equity Venture Capital Angel Investing Note: 1 Includes only those deals for which value is known. Source : VCCegde 15
  16. 16. Deals below $10 Mn have dominated Indian market over the yearsNumber of deals1 between $ 0-10 Mn and above $10 Mn% of deals 59 51 42 43 64below $10 Mn 400 300 206 200 200 123 85 59 100 146 160 150 130 86 2005 2006 2007 2008 2009 Deals between $ 0-10 Mn Deals above $10 MnNote: 1Includes only those deals for which value is known.Source : VCCegde, Kanvic analysis 16
  17. 17. The unknown value deals have decreased in recent yearsNumber of PE deals100% = 195 354 493 510 276 15% 26% 29% 30% 27% 85% 74% 71% 70% 73% 2005 2006 2007 2008 2009 Deals with value known Deals with value unknownSource : VCCegde, Kanvic Analysis 17
  18. 18. Financial sector has attracted more investment while IT sector attracted maximum number of deals in last six years Average deal size Deal value in $ Mn. from No. of deals1 from from 2005-2010*, 2005 - 2010* 2005 - 2010 * $ Mn Financial 13,480 281 48 Industrials 6,108 255 24 Telecom 5,903 28 211 IT 5,801 334 17Consumer Discretionary 5,687 313 18 Utilities 2,655 44 60 Healthcare 2,124 133 16 Energy 1,704 20 85 Materials 1,126 59 19 Consumer Staple 737 45 16 Note: 1 Includes only those deals for which value is known. * The figures for 2010 are till August only. Source : VCCegde, Kanvic analysis 18
  19. 19. Healthcare and consumer staples have been major gainers in 2010 Deal value Deal value 2009, $ Mn 2010*, $ Mn % changeFinancial 843 1124 33Industrials 826 618 -25IT 667 253 -62Consumer 503 703Discretionary 40Utilities 459 945 106Telecom 326 415 27Materials 238 114 -52Healthcare 122 386 216Consumer 74 220 197StaplesEnergy 40 52 30Note: 1 Includes only those deals for which value is known. * The figures for 2010 are till August only.Source : VCCegde, Kanvic analysis 19
  20. 20. Average size of deals has picked up in 2010Average deal size by type of investment,$ Mn • The average size of Private Equity 1.2 deals used to hover between $ 16 to 7 $ 58 million, dropped to $ 23 million during 2009 and has increased again to $ 39 million in 2010. 0.8 9 0.9 • The average size of Venture Capital 2.7 6 deals used to hover between $ 6 to $ 9 million from 2005 to 08, 8 dropped to $ 5 million in 2009 and 58 0.3 has increased to $ 6 million in 2010. 5 1.9 6 40 39 • The average size of Angel Investing 30 deals used to hover around 0.8 to 23 2.7 million during 2005 - 08, 16 dropped to $ 0.3 million in 2009 and it has increased again to $ 0.9 million in 2010. 2005 2006 2007 2008 2009 2010* Private Equity Venture Capital Angel InvestingNote: 1 Includes only those deals for which value is known. * The figures for 2010 are till August only.Source : VCCegde, Kanvic analysis 20
  21. 21. Venture capital and Angel investing are concentrated in their top threesectorsTop three sectors for investment in 2010* Private Equity Venture Capital Angel Investing 1 Financial Information Healthcare Technology 2 Utilities Consumer Information Discretionary Technology 3 Consumer Utilities Consumer Discretionary DiscretionaryTop 3 sectors’contribution to the total 59% 93% 99% investment in 2010Note: * The figures for 2010 are till August only.Source : VCCegde, Kanvic analysis 21
  22. 22. Financial services sector has increased its share of PE investment overlast five yearsSector-wise share of PE investment Sector-wise share of PE investmentin 2005, percent in 2010*, percent 100% = $ 1,941 Mn 100% = $ 4,564 Mn 4% 12% 12% 11% 24% 8% 18% 9% 30% 14% 21% 14% 24% Financial Consumer Discretionary Financial Utilities Industries Healthcare Consumer Discretionary Industries IT Others Telecom Healthcare Others During 2010, Financial, Utilities Financial has been the most A B and Consumer discretionary favourite sector of Private Equity have attracted significant Private Investors during 2005 to 2010. Equity investment.Note: 1 Includes only those deals for which value is known. * The figures for 2010 are till August only.Source : VCCegde, Kanvic analysis 22
  23. 23. Venture capital firms have moved beyond predominantly IT to cover moresectors including consumer discretionary and financial in 2010Sector-wise share of VC firms’ Sector-wise share of VC firms’investment in 2005, percent investment in 2010*, percent 100% = $ 125 Mn 100% = $ 264 Mn 5% 16.8% 2% 18% 0.1% 52% 23% 83.1% IT Consumer Discretionary IT Financial Financial Healthcare Healthcare Others Information Technology, Consumer Information Technology has been theA discretionary and Financial are the B most favourite sector of Venture favourite sectors among the Venture Capital Investors from 2005 to 2010. Capital Investors in 2010.Note: 1 Includes only those deals for which value is known. * The figures for 2010 are till August only.Source : VCCegde, Kanvic analysis 23
  24. 24. Portfolio of angel investors has done an about turn from IT to healthcareSector-wise share of Angel Sector-wise share of Angelinvestors in 2005, percent investors in 2010*, percent 100% = $ 7.6 Mn 100% = $ 4.32 Mn 0.2% 6% 10.2% 6% 10.2% 79.4% 88% IT Healthcare Healthcare IT Financial Consumer Discretionary IndustrialsA Healthcare, Information Technology B In 2010 Healthcare has been the and Consumer discretionary most favourite sector investors. continued to remain the favourite sectors among the Angel Investors.Note: 1 Includes only those deals for which value is known. * The figures for 2010 are till August only.Source : VCCegde, Kanvic analysis 24
  25. 25. C. Exit routes for PE 25
  26. 26. PE exits have picked up in 2010 with value of deals already crossing lastyear’sNumber and value of PE exits1, $ Mn 107 3,823 3,837 103 3,187 2,856 2,868 78 2,429 78 60 50 56 2005 2006 2007 2008 2009 2010* No. of deals Value of dealsNote: 1 Includes only those deals for which value is known.Source : VCCegde 26
  27. 27. Open market sale has become a prominent exit route over last two yearswhile the share of M & A in total number of exits has gone downType of exits, number of deals1100% = 50 60 107 56 103 78 3.3% 6.4% 10.0% 9.3% 7.8% 17.9% 23.3% 20.0% 30.8% 23.2% 51.3% 67.0% 50.0% 56.7% 50.5% 48.2% 19.2% 16.5% 9.0% 12.0% 10.0% 3.6% 2.9% 14.1% 5.6% 8.0% 6.7% 7.1% 5.8% 3.7% 2005 2006 2007 2008 2009 2010 Buy Back IPO M&A Open Market Secondary SalesNote: 1 Includes only those deals for which value is known.Source : VCCegde 27
  28. 28. Buyback and IPO have picked up in terms of deal valueValue of deals by type of exit, $ Mn 118 672 1,046 282 121 55 155 621 503 105 552 116 605 2,944 1,429 2,141 1,497 1,945 209 1,440 186 518 788 353 500 33 67 2005 2006 2007 2008 2009 2010 Buy Back IPO M&A Open Market Secondary SalesSource : VCCegde 28
  29. 29. D. Roadmap for companies seeking PE 29
  30. 30. PE backed firms have posted better results than those not backed by PE Performance of PE backed companies compared to other group of companies Sales growth PAT growth 2000-08, Annual wages growth Annual R & D growth 2000-08, percent percent 2000-08, percent 2000-08, percent PE backed 24.9 34.6 32.0 45.0 CNX Midcap 20.6 25.4 11.1 29.0 Sensex 20.0 26.0 22.5 32.0 Nifty 19.0 26.4 20.3 30.0Non-PE backed 15.5 25.3 14.9 21.0 Note: For PAT growth, Nifty 50 companies are considered Source: Venture intelligence PE impact report 2009 30
  31. 31. Private Equity firms bring a number of advantages to investeecompanies...Advantages of PE firms • A source of risk capital which may not be available through other sources1 CAPITAL • Help recapitalise the company • Access to new sources/channels of funding • Provide strategic inputs for growth2 STRATEGIC • Help access new markets SUPPORT • Build a global footprint • Help find new acquisition targets/strategic partners • Develop new business models • Management processes and control3 OPERATIONAL • Efficiency improvement MANAGEMENT • Better corporate governance practices • New ways of management reporting • Help in improving quality perception of the company4 BRAND BUILDING • Attract talent at senior management level • A network of contactsSource: Kanvic research 31
  32. 32. ... however, they need to be looked in light of existing shareholders’ goalsand management stylePotential areas of conflict between PE firms and Investee companies Investee company PE firms• Companies may find PE firms too • Expect to earn a return on intrusive in their business affairs investment of 25 percent or more• Bringing alignment amongst • Push for change in management family members can be style, business model, cost challenging to implement changes structure etc. expected by PE firms • Set up strict management• The leadership team may find it information and performance challenging to work in new ways evaluation system• Operational excellence takes longer to achieve, raising the holding periodSource: Kanvic 32
  33. 33. Companies need to answer key strategic questions before going for PEinvestment ...Roadmap for investee companies1 2 3 4Set clear goals and Choose the right Plan for exit Assess cultural fitexpectations time• Why should we go for • Does the PE firm • Is the time right to • What would be the PE investment? have a team which go for PE exit strategy for the can understand us investment? investors?• Are there other better? financing options • Are macro indicators • Are we prepared for available and how do • Are all stake-holders favourable? that or do we have they stack up? within our company sufficient time to get in sync with the • Can we get good ready for the exit?• What else do we investment? valuation for all the expect from investors hard work done over other than finance? the years?Source: Kanvic 33
  34. 34. ... and pick the right valuation methodology to arrive at the value of theirbusinessValuation methodologies Price of recent • Applicable when the investment being valued was itself made recently1 investment methodology • Use the cost of investment or the price at which a significant amount of new investment was made into the company2 Earnings • Involves use of an earnings multiple Multiple • Earnings multiple applied to current business earnings to derive value of the business • Derives the value of a business by reference to the value of its net assets3 Net Assets • Appropriate for a business where its underlying value derives from value of its assets rather than its earnings • Derives value of a business by calculating present value of its expected4 Discounted cash flows future cash flows • Cash flows are of ‘underlying business’ and not those of investment itselfSource: International Private Equity and Venture Capital Valuation Guidelines, 2009 34
  35. 35. Authors of the report Ravindra Beleyur Director M: +91 94481 46963 E: ravi@kanvic.com Shiv Kumar Sharma Associate Consultant M: +91 75685 21803 E: shiv@kanvic.com 35
  36. 36. About KanvicKanvic is a management consulting firm helping businesses develop winning strategies, drive profitable growth and achieveoperational excellence to reap long lasting rewards in fast growing Indian economy. We work with C-level executives to developinnovative solutions for business challenges of 21st century India by bringing in leading edge management thinking informed byin-depth research and sound analysis.ContactJaipur Bangalore LondonDeepak Sharma Ravindra Beleyur Bharat VagadiaM: +91 99283 77800 M: +91 94481 46963 M: +44 7711 898089E: deepak@kanvic.com E: ravi@kanvic.com E: bharat@kanvic.com 12.10 www.kanvic.com
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