Successfully reported this slideshow.
Review of Private Equity in India
                                 Preliminary Concept Outline - July 2008

       CONTENT...
India – Overview
  ‘The’ Emerging Market – Needs little introduction, but just to recap:

  GDP $1Tr – 12th largest glob...
M&A & Corporate Cycle
  The transaction market in India has grown
   significantly in the last 3yrs – to more than
   $60...
PE India – A Closer Look
  The rise of PE in India is well known – having grown from $1.8Bn in 2004
   to $11Bn in 2007. ...
PE India – A Closer Look
  A quick analysis of the Stage & Sector of PE in India reconfirms that
   Growth Capital & Late...
Invest Model - India
  India will need a flexible, evolving investment model & strategy
  Sectors: Consumer, TMT, + Heal...
The Evolving Market
  India – so what does the 1Bn market offer? And what is this middle class
   boom?
  In reality, th...
Consumer Sector
  A brief look at three sub-sectors that could present significant
   opportunities – Grocery Retail, FMC...
Consumer Sector
                                                                  Grocery Per Capita $ PA
  Food & Bevera...
Consumer Sector
  Pret Fashion: High end pret fashion (say Hugo Boss contrasted with
   premium high end eg Valentino) is...
Deal Sources - BuyOut
  LBO – Case In Point: Titan Industries Ltd


  The Tata Group’s strategy is to be a key player in...
TMT Sector
  Two dynamic and large sub-sectors within TMT: TV Media & Towers

  Media: The total Media industry in India...
TMT Sector
  Telecom: The fastest growing telecom market in the world. Current
   subscriber base of 250Mn expected to gr...
Exit Options
  Strategics: Rising M&A activity will make trade/corporate acquirers more
   aspirational & aggressive and ...
Returns - Possibility




  Though exact figures are difficult to come by, Average PE returns in India
   are estimated a...
Challenges
  There would be several challenges to manage in an Indian play. No deal
   breakers, but one has to go in wit...
The LP Angle
  Investing in India will not only provide a PE firm’s LPs with exposure to a
   highly dynamic emerging mar...
In Summary
  The Big Idea: How Do You Convert an almost certain Long Term Growth story which
   is Strategic into an Inve...
Upcoming SlideShare
Loading in …5
×

Review of Private Equity in India

2,540 views

Published on

The Private Equity sector in India has metamorphosed tremendously in the last 5-8yrs, both in scale and maturity. This review in late 2008 attempts to analyze the PE space and key drivers. Meanwhile, genuine VC investing in India is still in its infancy.

Published in: Business
  • Be the first to comment

  • Be the first to like this

Review of Private Equity in India

  1. 1. Review of Private Equity in India Preliminary Concept Outline - July 2008 CONTENTS India – Overview Pg 02 M&A & Corporate Cycle Pg 03 India PE – A Closer Look Pg 04 India – An Investment Model Pg 06 The Evolving Market Pg 07 The Consumer Sector Pg 08 The TMT Sector Pg 12 Exit Options Pg 14 Returns – Possibility Pg 15 Challenges Pg 16 The LP Angle Pg 17 In Summary Pg 18 Srikumar Misra Srikumar Misra
  2. 2. India – Overview   ‘The’ Emerging Market – Needs little introduction, but just to recap:   GDP $1Tr – 12th largest global economy. GDP PPP $3Tr – 4th largest   One of the fastest growing economies, with 2008 GDP growth rate also expected in the 8% + range   Estimates project a 7-8% sustained future growth rate projection for the long term   Population over 1Bn – and demographics favourable. More than 300Mn below 14Yrs of age!   Urbanization rate of 30% significantly lower than most benchmarks, & presents a huge opportunity. Increased urbanization will drive several economic sectors significantly over the next 10-15 years   Democratic government & free press are key differentiators for India within the EM space. Functioning stable democracy – though chaotic! Srikumar Misra 2 India Model Market Exit Returns Challenges Angles Summary
  3. 3. M&A & Corporate Cycle   The transaction market in India has grown significantly in the last 3yrs – to more than $60Bn in 2007   This has been fuelled by a combination of corporate M&A and PE activity   Domestic / Outbound / Inbound M&A levels are all reaching new peaks & corporations are enjoying sustained growth   Indian Corporations have gone through a cycle of conglomeration – approximated graphically: - The current phase of Conglomeration aggressive conglomeration is Lo -Conglomeration- Hi expected to continue in the Conglomeration short term Divestures / Core Spin Offs - This phase has been driven by Competence high levels of inorganic growth - However, in the medium term this will lead to a series of divestment & spin off activity as sustained high returns in all sectors may not be possible in a conglomerate approach Srikumar Misra 3 India Model Market Exit Returns Challenges Angles Summary
  4. 4. PE India – A Closer Look   The rise of PE in India is well known – having grown from $1.8Bn in 2004 to $11Bn in 2007. Deal volume has also grown from 85 to 300+ in the same period   The interesting development is the increase in the average PE investment size – which has improved from $8Mn to $35Mn in the last 4-5yrs   There are 100+ nos of PE firms operating in India – with most of the global big names already having set up shop / in the process Srikumar Misra 4 India Model Market Exit Returns Challenges Angles Summary
  5. 5. PE India – A Closer Look   A quick analysis of the Stage & Sector of PE in India reconfirms that Growth Capital & Later Stage deals comprise the bulk of PE transactions, with BFSI & IT/ITES being the favoured sectors accounting for 25%-30% volume each   Consumer/Retail and Industrial Products/Services sectors have been attracting growing PE investments, and deal quantum has been increasing significantly in the last 2-3yrs Buyouts remain low. The only large buyouts were the 0.9Bn KKRLBO of Flextronics (Arcient) – which was not a 100% India originated deal, and the $200Mn Intelenet MBO sponsored by Blackstone Late Stage Transaction Volume has gone up from 20% to 40% Srikumar Misra 5 India Model Market Exit Returns Challenges Angles Summary
  6. 6. Invest Model - India   India will need a flexible, evolving investment model & strategy   Sectors: Consumer, TMT, + Healthcare & BFSI   Co-Investments: For pure IT deals, co-invest growth capital with leading American VC firms who have IT expertise / experience in India   Quantum: A strong view on committing a quantum which shifts the needle and takes a long term view of the market   A parallel approach also looking at consolidator/roll up opportunities, with the ultimate aim of becoming a key Buyouts player Growth Growth Capital Capital Buyouts / – Mid – Large LBOs Market Market   $30-100Mn for   $250Mn-500Mn for   100% Buyouts with <50% Equity <35% Equity EV>400Mn+   Family businesses   Co-Invest   Corporate India’s PIPE Deals   PIPE Deals in Large relentless growth/   Pre-IPO Investments Cap Stocks or high M&A will lead to spin momentum off activity   Dynamic growth businesses/ sectors fundamentals driven   MBOs / Go Private businesses Srikumar Misra 6 India Model Market Exit Returns Challenges Angles Summary
  7. 7. The Evolving Market   India – so what does the 1Bn market offer? And what is this middle class boom?   In reality, the market to address right now is the 50Mn strong Upper Middle Class. And this segment will continue to grow. Discretionary spending in this segment has increased by 16% The real focus is the Upper Middle Class – 20% which is about 50Mn people with AHI $25,000 Middle (PPP $75,000). This segment is socially & Class economically vibrant and robust 300Mn The 300Mn strong middle class is considered one of the strongest, growing Lower Income Group mass markets in the world. 430Mn The much talked about ‘Bottom Of The Poverty – 270Mn Pyramid’ is really not the bottom-most. Srikumar Misra 7 India Model Market Exit Returns Challenges Angles Summary
  8. 8. Consumer Sector   A brief look at three sub-sectors that could present significant opportunities – Grocery Retail, FMCG, Pret Fashion   Retail: Currently FDI is only allowed in single-brand retail. However, this sector will be deregulated in the near future   The total retail market in India is worth approx $300Bn – with organized retail being a mere 4% and growing at more than 35% Srikumar Misra 8 India Model Market Exit Returns Challenges Angles Summary
  9. 9. Consumer Sector Grocery Per Capita $ PA   Food & Beverage : Grocery spending has been growing significantly driven by macro-economic growth – disposable income & lifestyle change. This makes the FMCG an attractive sector   The grocery market is currently worth approx $190-$230Bn, making it the sixth largest globally & projected to grow to $480Bn by 2020 or 4th largest   Organized retail growth is baring the lack of product range to fill shelves. Lifestyle trends are making increasing demands on branded F&B products   Current inflationary pressure will lead to long term margin enhancement as well – making companies more profitable in the medium term   Food Processing: $70Bn – projected to grow at 20% till 2015, with value addition increasing from current 8-10% to 35% by 2025. Investments of $20-25Bn estimated within the next 3-5yrs   Consolidation & roll up opportunities could become significant in the medium term for the F&B industry Sales $80Mn EBITDA $8Mn Srikumar Misra 9 India Model Market Exit Returns Challenges Angles Summary
  10. 10. Consumer Sector   Pret Fashion: High end pret fashion (say Hugo Boss contrasted with premium high end eg Valentino) is undergoing significant structural change in the Indian fashion apparel market   McKinsey estimates that average real disposable household income will increase at a CAGR of 5.3% till 2025. The volume of disposable income is especially significant in the UMC segment   Case: Genesis Colors Pvt Ltd building a high end pret fashion franchise via portfolio of offerings:  $26Mn investment from Sequoia, Mayfield, SVB for 15-20%  Organized apparel market is approx $5Bn & growing at 30%+ Srikumar Misra 10 India Model Market Exit Returns Challenges Angles Summary
  11. 11. Deal Sources - BuyOut   LBO – Case In Point: Titan Industries Ltd   The Tata Group’s strategy is to be a key player in large, strategic sectors, with businesses >$1Bn   Titan is a leading player in the Watches & Branded Jewellery sector. Is this core?   Titan’s sales & profitability has doubled in the last 3yrs. The sector is vibrant and would be a prime investment in the Consumer space Titan Stock Price Movement   The stock is trading lower than 12 months back, PE of 30. Debt/EBITDA:1. EV/EBITDA:18-20*   One of the few businesses within the group that doesn’t share Tata branding – divestment easy Srikumar Misra 11 India Model Market Exit Returns Challenges Angles Summary
  12. 12. TMT Sector   Two dynamic and large sub-sectors within TMT: TV Media & Towers   Media: The total Media industry in India is more than USD12Bn, growing at a CAGR of 19%   TV is the biggest segment at USD 5.4Bn, and growing at 19%. The fastest growing media segment is radio, at 37% CAGR, though off a small size of USD 0.15Bn - TV Distribution is the biggest - TV Distribution: 60% (CAGR 22%) growth area, however, - TV Advertising: 35% (CAGR 20%) investment horizon is long - TV Content: 5% (CAGR 16%) (7-9yrs), & appropriate cost model is critical for continuity - Content is a profitable growth area. Segmentation is a fundamental driver: Balaji, Contiloe, Adlabs - Key Investments: -Soros/REL: $100Mn -Temasek+/INX: $259Mn -Temasek/T.Sky: $XXMn Srikumar Misra 12 India Model Market Exit Returns Challenges Angles Summary
  13. 13. TMT Sector   Telecom: The fastest growing telecom market in the world. Current subscriber base of 250Mn expected to grow to 500Mn in the next 2-3yrs and reach a market size of $85Bn by 2012   Investments in the sector are expected to be in the $20-25Bn in next 2-3yrs. Apart from core service providers, the backbone network presents significant investment opportunities B2B Bharti Infratel: 9%-12% @ $1.25Bn Infra Tower – KKR / Temasek / GS / ICD / Etc Hive Offs 125,000 Reliance Infratel: 5% @ $375Mn+ Towers Filed 10% IPO. EV $10Bn+ expected to Telecom B2C Tata Teleservices: Hive off currently increase Service in progress. Strategic stake sale to 300,000 in the GTL: Strategic stake sale @ $275Mn next To build 25,000 towers 2-3yrs Content / American Tower Corp / Tower ValAdd Vision / Xcel / Indus Towers Srikumar Misra 13 India Model Market Exit Returns Challenges Angles Summary
  14. 14. Exit Options   Strategics: Rising M&A activity will make trade/corporate acquirers more aspirational & aggressive and the M&A cycle will firm up   Market Entry: Still, there are MNCs which are playing the waiting game and trying to understand India. Acquiring a proven business from a known PE player would be attractive to such majors. Case in point: Danone – which just entered India via a Yakult JV, after prolonged issues in the Britanina investment   IPOs: Well developed stock markets - BSE & NSE. Though current credit confidence levels & inflation numbers have dampened the IPO market   Alt X: Further, AIM & LSE could become attractive options in the coming years. Already, Indian corporate majors are beginning to discuss LSE listings   Secondaries: Not only vis-à-vis PE players, but also large Secondaries: Coller Capital acquired $35Mn in ICICI Ventures’ IAF I in 2006 Srikumar Misra 14 India Model Market Exit Returns Challenges Angles Summary
  15. 15. Returns - Possibility   Though exact figures are difficult to come by, Average PE returns in India are estimated at 22-24% IRR. This would indicate that Upper Quartile returns in India would be in excess of 30% Srikumar Misra 15 India Model Market Exit Returns Challenges Angles Summary
  16. 16. Challenges   There would be several challenges to manage in an Indian play. No deal breakers, but one has to go in with eyes open:   Deal Size / Flow: Though increasing, the average deal size in India still remains low and relatively lower than other Asian markets as well. Deal flow could be a challenge given large supply side   Buyout scarcity: Large BOs will be scarce, and heavily competed for. On the ground presence / execution experience critical   MBOs: Still very new & ltd – The Manapreneurs are still in evolutionary stage. Socio-psychological & structural factors need to change -You may check my article at http://ssrn.com/abstract=1159726 or http://research.kauffman.org/   Clean businesses: Several family owned / professionalizing businesses are still cleansing – operational, financial, & legal due diligence has to be rigorous & robust   Portfolio Monitoring: Corporate & entrepreneurial culture & processes are distinct in India and developing the right collaborative approach would be important   Mixed Bag Environment: In the last 2 years – Apax & Blackstone have had very different levels of investment. Learnings from both would be critical Srikumar Misra 16 India Model Market Exit Returns Challenges Angles Summary
  17. 17. The LP Angle   Investing in India will not only provide a PE firm’s LPs with exposure to a highly dynamic emerging market, but also provide an angle to recruit new LPs desirous of EM exposure   Further, a quick look at India’s increasing Forex Reserves:   Increase from $25Bn in 1995 to $250Bn+ in 2007   The Indian Govt may very well set up a sovereign fund to invest in various asset classes. A global PE firm’s presence in the Indian PE space, showcasing commitment to Indian investments could lead to accessing LP interests in India’s sovereign fund Srikumar Misra 17 India Model Market Exit Returns Challenges Angles Summary
  18. 18. In Summary   The Big Idea: How Do You Convert an almost certain Long Term Growth story which is Strategic into an Investible high return generating PE proposition. Most certainly a possibility   Phased Approach: A parallel phased approach in investment strategy & model would be required. A long term quantum commitment to the market would deliver dividends   Transformational: The investment mindset would probably need some form of a transformational change – though evolutionary. Employing existing metrics to a market like India may not be entirely useful   Focus + Opportunistic: A single mindedness in sectoral focus could reap initial reputational dividends in the market. Yet, a flexibility to execute opportunistic investments at the right time should be developed   Real Expertise: Need to showcase real operational expertise / networks in chosen sectors. Building a franchise based on adding significant value would be important to access the best deals in the market A fundamentally strong & resilient economy with several investment opportunities Srikumar Misra 18 India Model Market Exit Returns Challenges Angles Summary

×