PRESENTATION ON PRIVATE EQUITY 16 th January, 2017 at the Institute of Chartered Accountants of India, EIRC 1
Brief Introduction on Speaker Anjan Mitra qualified as a CA in 1984 from Kolkata His corporate career started with PWC & Indian Oxygen in Kolkata, after which he joined the Swedish NCC AB Group in Dubai He was a key part of the team that did the first MBO in the Middle East followed by a very successful listing in 1998 of Topaz Energy & Marine SAOG, an offshore marine & engineering group Anjan was Chief Executive Officer of Topaz from 2002, operating across the Middle East, Caspian, and South East Asia At subsequent stages of his career, he was CFO of Magma, Director at Srei- BNP Equipment Finance & Chief Investment Officer at Srei Infrastructure Finance in 2014, he co-founded two Kolkata based companies in water infrastructure and financial services. 2
1.Background A- Understanding Private Equity. B- Overview of Private Equity in India. C- Why Private Equity? 3
I.A- Understanding Private Equity - Nature of Private Equity. - The Universe of Private Equity. I.B- Development of Private Equity in India. I.C- Why Private Equity? 4
What is Private Equity? Private equity is a source of investment capital from high net worth individuals and institutions for the purpose of investing and acquiring equity ownership in companies. 5
Private Equity Firm (General Partner) Limited Partners (Investors) (Public pension funds, corporate pension funds, insurance companies, high networth individuals, family offices, endowments, foundations, fund of funds, sovereign wealth funds) Fund / Investment Management Ownership of the Fund Private Equity Fund (Limited Partnership) Investment Investment Investment 6
Venture Capital Buy Out Special Cases Seed Stage Acquisition Capital Mezzanine Finance Start-up-stage Leverage Buyout Distressed Expansion Stage Replacement Capital Management Buyout Any Other 7
Development of Private Equity in India PE industry in India is a post-2000 phenomena Sharp growth between 2004-2007 $20Bn raised in 2007-2008 to invest in India High valuations and deal chasing investments skewed towards infrastructure & real estate towards infrastructure & real estate Issues: sub-optimal decision making, cultural mismatch, inadequate due diligence on promoters, opacity in operations, etc Critical learning: smaller ticket sizes, good understanding of promoter, longer fund duration, & need for operational expertise 8
Now -PE landscape in India Estimated $23Bn of PE deals in 2015; an increase of 51% over 2014. Dipped to $16Bn in 2016 More PE funds participating in Indian market ~ 240 compared to 193 in 2014 Total exit value of $ 10.3Bn in 2016 Major sectors: consumer technology, BFSI, & real estate PE funding plays a pivotal role in Indian capital needs 9
II. From the Practising CA s perspective : some guidelines A. Mandate. B. Identifying the right source. C. Preliminary Discussions. D. Establishing Valuation Range. E. Letter of Intent / Term Sheet key issues. F. Due Diligence. G. Valuation Adjustments & Final Terms and Conditions. H. Transaction Closure. I. Managing the soft issues. J. Preparing the client. K. Managing the Investor Client relationship. L. Management team in the context of the deal. 10
II.A- The Mandate defining the scope Establishing Scope of Assignment. Timelines & Resources. Success Fee and Costs. Managing Client Expectations. Briefing the Client. 11
II. B- Identifying & Short-listing the Right Fund Stage of business. Sector focus. Ticket size of Investment. Prospective Value addition. Record of Successful exits Committed funds or deal-by-deal funding Fund Manager track record References Communication style and expectations 12
II.C- Preliminary Discussions Doing the homework. Identifying Differentiators. Teaser document. Preliminary discussions. Establishing Credibility of Intermediary. Information Sharing & Confidentiality. Limiting circulation. The Information Memorandum. Further Information sharing and Meetings. Briefing the Client. 13
II.D- Establishing Valuation Range Preliminary Negotiations. Basis of Valuation. Pre-Money & Post-Money Valuations. Shareholding stake% - implications. Primary and Secondary transactions. Indicative valuation range. Getting to Letter of Intent / Term sheet stage. 14
II. E- Letter of Intent / Term sheet Key Issues Importance of Term sheet. Valuation Range. Typical Terms & Conditions / Rights. Understanding Rights. Due Diligence. Timelines & Exclusivity. Detailed term sheets. 15
II.F- Due Diligence Exercise Scope of Due Diligence. Information Requirements. Assigning Responsibility. Virtual Data Rooms. Onsite Due diligence precautions. Avoiding Disruption to Business. Importance of Timelines. 16
II.G- The Negotiation Process Valuation adjustments arising from due diligence. Terms & Conditions. Managing the negotiations. Reaching Agreement. Consequences of an abortive transaction. Importance of Keeping Notes. 17
II.H- Transaction Closure Seeking legal assistance factors to consider. Drafting & Reviewing the Investment Agreement. Warranties, Indemnities, Carve-Outs, Exits, Veto Rights, Dilution, Ratchet Mechanisms, Step In clause, etc. Exit Clause. Disclosure Letters. Regulatory and Statutory. Page Turn & Finalisation. Transaction Closure. Managing the Process. Records and Documentation. 18
II.I- Managing the Soft Issues Preparing the client. Managing the Investor Client relationship. Management team in the context of the deal. 19
Exits Public Market Sales Strategic Sales Secondary Sales 20
III. Case Studies 21
Apax Partners Investment in Global Logic 22
Apax Partners Investment in Global Logic Acquired 96% stake in 2013 at $420M Secondary sale by Goldman Sachs, Westbridge, Sequoia, & New Atlantic Ventures January 2017, sold 48% stake to Canada s CPP Investment Board at valuation of $ 1.50Bn x3 times return on a 4 year old investment Apax & CPP now each own 48% stake; Apax is now entirely de-risked Apax is one of the most successful global PE funds operating in India 23
Lilliput Kidswear Ltd. a problematic investment Company grew its turnover from Rs.170cr in 2007 to Rs. 560cr in 2011 Bain & Co. had taken ~31% stake for $60M in 2010 Company planned IPO for ~ Rs.1000cr in 2011; DRHP approved Investors alleged financial irregularities and demanded forensic investigation & withdrew approval for DRHP Parties go to arbitration Bain sues major audit & advisory firm in US Courts for $60M loss, alleging fraud and negligence; writes off investment Winding up petitions filed against Lilliput 24
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IV. Discussions 26
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