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Building a case for Private equity/ venture capital Private equity india - a case for private equity a discussion document march, 2008.

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Presentation on theme: "Building a case for Private equity/ venture capital Private equity india - a case for private equity a discussion document march, 2008."— Presentation transcript:

1 Building a case for Private equity/ venture capital Private equity india - a case for private equity a discussion document march, 2008

2 Page 2Private & Confidential Who are we International boutique investment bank Focus is Mergers & Acquisitions and Private Equity Based Mumbai, Bangalore & London Deep insights into the needs of the business and investment communities Select transactions Kejriwal Stationery First round of private equity Eicher Motors Acquisition of gears business Ziqitza HealthCare First round of private equity Uma Precision Second round of private equity SLK ITES Strategic investment Anantara Solutions Seed capital Liners India First round of private equity Uma Precision First round of private equity Medicine Shoppe Second & Third round of private equity Commercial Engineers & Body Builders Co (CEBBCO) First round of private equity

3 Page 3Private & Confidential The team Vinay Shah | Director | Mumbai with a decade of specialisation in private equity preceded by a background in consulting, Vinay is among the senior-most investment bankers in India. He has held leadership positions in organisations like Arthur Andersen, Coopers & Lybrand and Ambit Corporate Finance. Vinay has an MBA from the University of Pittsburgh and is a Chartered Accountant from The Institute of Chartered Accountants of India Sanjay Krishnan | Director | London an electrical engineer with more than a decade of experience spanning consulting, mergers & acquisitions, private equity and start-ups. Prior to Mosaic, Sanjay worked for the privately held investment arm of the Mittal family, building and managing a portfolio in excess of USD 3 bn in mining, oil & gas, steel, agriculture - across Africa, central Asia and south east Europe. Sanjay held leadership positions at Andersen Consulting having executed engagements world-wide in the products & supply chain lines of business. Sanjay is a National Talent Search scholar Ashutosh Ghanekar | Director | Mumbai brings to Mosaic Capital a decade of experience in investment banking with a focus on Mergers & Acquisitions. He has held senior positions in leading professional services firms like Ambit Corporate Finance, Arthur Andersen and Price Waterhouse. He is a Chartered Accountant from The Institute of Chartered Accountants of India and a Bachelor of Commerce from the University of Bombay Vikram Bihani | Director | Bangalore has significant expertise in Corporate Restructurings. He brings to Mosaic Capital his extensive experience in sectors like pharmaceutical, consumer goods, healthcare and IT through his assignments in Ambit Corporate Finance. He has an MBA from the Indian Institute of Management, Bangalore

4 Page 4Private & Confidential A Case for Private Equity

5 Page 5Private & Confidential Private Equity – An overview Private Equity (PE) is medium to long-term finance provided in return for an equity stake in potentially high growth companies Private Equity Fund Organized as either a Limited Partnership (LP) or Limited Liability Company (LLC) which is controlled by the private equity firm that acts as the General Partner (GP) Run by Professionals Knowledgeable investors with strong relationships Raise funds every 4-6 years Pension funds, financial institutions and specialist Fund of Fund investors Invest money over 3-5 years 20% of the investments lose money 50% of the investments make an average return 30% of the investments make lots of money Management fee on funds managed ~ % p.a Carry ~ 20-25%x (Total Return - Total Amount Invested)

6 Page 6Private & Confidential Fund raising and M & A activity Corporate finance activity in India saw 382 transaction worth USD 26 bn (Rs 1,047 billion) in the first half of 2007 as against USD 19 bn in CY 2006 Private Equity investments USD 3.8 bn 2006 – USD 7.9 bn First half of 2007 it has already crossed USD 6 bn The total of Private Equity investments in India is set to cross USD 10 bn in the calendar year 2007 and may even touch USD 15 bn – PwC Domestic M & A USD 6 bn 2006 – USD 17 bn First half of 2007 it has already crossed USD 20 bn First half of 2007 for the first time the total value of overseas deals (USD 25.6 bn) exceeded the domestic M&A deal value (USD 25.5 bn) Corporate Finance deals in India Sector summary H1 CY2007 Source: Indata &

7 Page 7Private & Confidential Types of PE Funds Types Buyouts Venture (early & late stage) Fund of funds Mezzanine Real estate Distressed debt Pre IPO Shariah-compliant Most private equity firms will consider investing in a range of industry sectors Some firms specialise in specific industry sectors, such as biotechnology, outsourcing and other technology areas Others may actively avoid sectors such as real estate or film production Transaction size of funds varies: Current appetite highest for deals > USD 10 mn There are more funds than doable deals on the ground and timing is a factor

8 Page 8Private & Confidential Private Equity – Stages of Investment and Funds Seed Growth Stage Series A (B) Growth stage Series (B) C D Private Equity Upto USD 1 mn Friends and Family Angel Investors Venture Capitalist USD 5-20 mnUSD 20+ mnUSD 100+ mnInvestment size Potential sources of funds Private Equity Pre IPO/Buyout Some prominent PE Funds active in India Warburg Pincus, GW Capital, New Vernon, Actis, Chrys Capital, Standard Chartered, Temasek, 3i, Newbridge, Barings, Westbridge, Goldman Sachs, ICICI Ventures, Blackstone Group, Carlyle Group and General Atlantic Partners, Oak Hill Capital and Kubera Partners…

9 Page 9Private & Confidential Good reasons to raise PE Unique product or concept Large potential market opportunity Excellent development capability Need to move rapidly Intense competition likely Hiring Rapid product development Alliances CommercialisationInternationalisationInfrastructure Pre-requisites Implications…. PE funding supports Forward looking management

10 Page 10Private & Confidential Thoughts before considering Private Equity Are you willing to sell some of your companys shares to a private equity investor? Does your company have high growth prospects and are you and your team ambitious to grow your company rapidly? Does your company have a product or service with a competitive edge or unique selling point (USP)? Is it globally competitive? Do you and/or your management team have relevant industry sector experience? Do you have a clear team leader and a team with complementary areas of expertise, such as management, marketing and finance? If your answers are yes, private equity is worth considering

11 Page 11Private & Confidential Private Equity – Typical deal terms Target 20-40% ownership Board Representation Liquidation Preference Participation Rights Certain control and veto rights Tag and Drag Period of exclusivity to close the transaction

12 Page 12Private & Confidential Bankers methodology and timelines Phase 1 Business review, Profile of desired investor/ strategic partner Phase 2 Preparation of information on Company Phase 3 Contact investors/ strategic partner, evaluate proposals Phase 4 Negotiation with shortlisted investors/ strategic partner Phase 5 Due diligence, shareholder agreements Phase 6 Transaction closure, Investment Review of business Review relevant operational, financial and regulatory issues Address relevant issues Conclude on preferred structure Obtain required information Prepare discussion draft of IM Review with the Company Finalise IM Contact investors Send profiles, elicit investor interest Arrange and coordinate meetings Make presentations to interested investors Negotiate with shortlisted investors Finalise key terms of investment Finalise and execute term sheet Advise company on commercial issues that may arise during due diligence Work with companys lawyers to advise company on commercial issues pertaining to shareholders agreement Work with company till receipt of investment 2-4 weeks6-8 weeks1-4 weeks

13 Page 13Private & Confidential The business plan An essential document to identify its critical success factors Emphasis on why you are convinced that the business will be successful and convey what is so unique about it Key elements of the plan: The market for product or service The management team Business operations Financial projections Amount and use of finance required and exit opportunities It should show potential investors that, you and your team will give them a unique opportunity to participate in making an excellent return

14 Page 14Private & Confidential How do private equity firms evaluate a business plan? Is the product or service commercially viable? Does the company have potential for sustained growth? Does management have the ability to exploit this potential and control the company through the growth phases? Does the possible reward justify the risk? Does the potential financial return on the investment meet their investment criteria?

15 Page 15Private & Confidential Where do Private Equity investors see green? Investors look at Entrepreneurial businesses, investors look at companies with high growth prospects, which are managed by experienced and ambitious teams who are capable of turning their business plan into reality Many small companies are life-style businesses whose main purpose is to provide a good standard of living and job satisfaction for their owners and are not suitable for private equity investments As a rule of thumb, unless a business can offer the prospect of significant turnover growth within three years, it is unlikely to be of interest to a private equity investor

16 Page 16Private & Confidential What a good PE will add Advice and strategy Hiring Advisory board CEO/CFO/COO Country managers Sales Partnerships Profile and PR Work in conjunction with other providers of finance Internationalisation, a catalyst for alliances Trusted service provider relationships Search/recruiting Branding/PR Finance, etc Exit optimisation Knowledge/contacts with relevant buyers Experience with process Access to a higher earnings multiple during an IPO Private equity backed companies have been shown to grow faster than other types of companies

17 Page 17Private & Confidential What you can do to attract Private Equity? Before looking at new external sources of finance, make sure you are making optimal use of your internal financial resources Focus predominantly on the business not fund raising Evidence of executional ability is more exciting to a PE than a 100 page business plan Transparency in discussions and openness of relationship Reasonable valuation expectation Provide risk management tools Ensure high standards of corporate governance Acknowledge the value addition and commitment from the investor Within a few years your slice of the cake should be worth considerably more than the whole cake was to you before

18 Page 18Private & Confidential Key things to consider Relationship With key individual (s); and Broader team References Speak to other founders Portfolio Relevant experience Non competitive Community you want to be a part of Valuation and associated deal terms Right partner at a fair price Vs Any partner at best price

19 Page 19Private & Confidential Summary Committed capital to fill the demand gap left by traditional financial institutions Emergence of a mature Indian Private Equity market Return expectations - that out of 10 investments, 2 may fail completely,5 may give average returns and 3 may give superlative returns Investor needs reasonable size of operation, mutual comfort, execution capability and ethical conduct Paucity of doable deals and transactions may take more than three months to close Increase a companys value to its owners, without managerial interference Entrepreneur is assisted with all the learning and resources which can be mustered by the fund to help him realise his dream Value creation recipe….. Growth capital for ambitious entrepreneurs

20 Page 20Private & Confidential Thank you Mosaic Capital Services Pvt Ltd Vinay Shah Ashutosh Ghanekar Vikram Bihani Sanjay Krishnan Mumbai Bangalore London


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