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8/7/2019 Investment Process - Private Equity
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PRIVATE EQUITYINVESTMENT PROCESS
Presentation for WIRC - ICAI
March 28, 2009
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Structure
of
Presentation IntroductiontoPrivateEquity
Private E uit Placement Process
ApproachestoValuation
Key
Issues
in
DD/
SPA
&
SHA CertainMinimumRightstoPEInvestors
Monitoring
Exit SEBInormsforprivateequity
2
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Global Private
Equity
Syndrome
1. Prematurely grey hair
.
3. Persistent daze / jet lag / hoarse throat
4. Equating sleep on an airplane with real sleep
5. Inabilities to remember (or be present at) birthdays, anniversaries, or school
conferences6. Contact w t new r en s concerne a out o ng c ar ta e nners n your onour
or naming school buildings for you
7. Fre uent musin s about the fairness of renu tial a reements
8. Doubling of golf handicap every 6 months
9. Ability to schedule annual physical only every five years
10. Frequent spousal / child discussions about the value of sound estate planning
3
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Private
Equity
in
India
Growth
over
the
years
Starting from a meagre five deals and a
total investment of USD 20 million in 1996,
in 2007 2008 USD 25 billion was invested
across 700 deals in 2 years
Average deal size has come a long way
from USD 4 million in 1996 to ~USD 40
Private Equity deals peaked in 2007 with
.
First half of 2009 saw 93 deals raising a
total of USD 2.89 billion
Source:IVCA,VentureIntelli ence,GrantThorntonYearsdenoteCalendaryears
4
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PEFundRaisingforIndianMarkets
Total US$ 27 billion in Private Equity
capital has been raised in the last 4 years
by India focused funds
More than 400 funds are active in the
Indian Market and around 100 of them
have been raised in the last four years
e s ar o , un s were on
the road to raise US$ 24 billion funds for
India focused investments
Source:Preqin,VCCircle Some very large funds operating and/ or
being raised are infrastructure focusedears eno e a en aryears
5
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Net
FII
and
FDI
Flows
Source:ReserveBankofIndia,
FDI inflows have been on an uptick since the past few years
Net FII flows are stron in ood market conditions but dr u in difficult
economic scenario
Direct Investments are long term and considered stable, to help balance the
6
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Classification
of
Private
Equity
Funds (1)
I. Buyout Fund Use leverage to do buyout deals, typically big deal sizes and long termfinancial and strategic decision
II. Growth Capital
Fund
Classic PE investors providing capital to established businesses to attainexplosive growth through expansion geography, products, deliverychannels etc.
III. Proprietary Book
of Banks
Similar to a PE fund which can be either pure equity or structured to private/public companies
IV. Distress/ Special
Situation
Funds focused on distress and invest in turnaround situations
V. Hedge Funds
Public market fund with high return and high risk appetite, short term focus
. en ure ap a Typically provide the first round of capital to companies, smaller size andlong term horizon
7
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Classification
of
Private
Equity
Funds (2)
$6,000
4 000
$5,000BuyoutFund
HedgeFund$million
$3,000GrowthCapital
izeinUS
$1,000
,
VentureCapital
Distress/SpecialSituationsProprietaryBook
Fund
0 2 4 6 8 10
InvestmentTimeHorizoninYears
8
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PE
What
do
they
bring
besides
Capital
9
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Challenges
to
PE
in
India
10
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The
PE
placement
process
InformationMemorandum
T+2 T+4 T+8 T+12 T+16
Circulation
BusinessKva ua on
C
K Negotiationsand
OF
TermSheet
Financial and
F
LegalDue
Diligence
AgreementandClosure
11
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The
PE
placement
process
Information Businessplanreviewbyfinancialadvisorsinconjunction
withtheto mana ementteamofthecom an
Circulation Preparationofsalescollateralspecifictothecompanyanddeal
VariedformsofsalescollateralarepreparedbytheFinancialAdvisors Teasers,Informationmemorandum,FinancialModel Valuation Rationale etc.
ShortlistPEinvestorsbasedonindustry,sizeofinvestment,typeandstageofinvestment
Touching
base
with
the
targeted
PE
Investors Circulationofspecificsalescollateral
Wk 1-2
12
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The
PE
placement
process
Business InitiatingdiscussionwithPEinvestorsandreviewof
Information Memorandum
va uation
FinancialAdvisorscontinuouslykeepintouchwithinvestorsandhelpresolvequeriesoftheinvestors
Furtherinformationflowandclarifications
Marketintelli encecheckonthebusinessandindustr players
Preliminarysitevisitandinitialnegotiations
Wk 2-4
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The
PE
placement
process
Negotiations MultipleroundsofInvestorMeetings
Sheet
nves ors
ge
com or a e
w
e
us ness
model,industry,managementandgrowthplansofthecompanyandmeansandwaystoachievethem
Detailednegotiationsoninvestmentstructure,termsand
valuations Submissionandsigningoftermsheet
Wk 4-8
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The
PE
placement
process
Financial and Lawfirmappointedfor legalduediligence
Diligence
rm
appo n e
or
accoun ng
ue
gence Factoryandsitevisits
Clientreferralchecks
DetailedreportofthefindingssubmittedtothePEnves or
Anyflagsraisedarediscussedwiththecompanyand
Wk 8-12
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The
PE
placement
process
Share LawyersdrafttheSharePurchaseAgreementonthelinesof the term sheet executed between the investor and the
AgreementAnd Closure
company
Processoffundtransferandsharecertificateissuanceclearlydefinedandclosingdateconfirmedtoallpartiesinvolved
gn ngo an rans ero un s o appenon eclosingdate
Wk 12-16
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ApproachestoValuation
Differentassetsmaybevaluedusingdifferentvaluationtechniques.
Usuallytherearethreeapproachestovaluationwhichareasfollows:
A roachestoValuation
MarketbasedCostbased Incomebased
NetAssetValue StockMarketQuotes ProfitEarning
CapacityValue
Discounted Cash
PrecedentTransactions
Flows
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Due
diligence
(DD)
exercise Revenueandprofitabilitytrends
Breakupofvariouscostsandoperatingmargins
xe sse s
Scheduleofdepreciation
Revaluationofassets,ifany
Investments
Method
of
valuation
of
investments
(subsidiaries
if
any) equacyo prov s ons
Liabilities
Termsoftheloans
Inventorydetails
Extentofworkingcapitalfinance
Taxationmatters
Contingentliabilitiesandimplicationsthereof
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Due
diligence
(DD)
exercise
Contd Reviewofdocumentsrelatingtotitletopropertyandotherassets
Reviewofleaseholdagreementsandcommentonsignificantissuesrelatingtothesame
Reviewofagreements,contractsenteredintobythecompanywithmajorsuppliersandcustomers
,commentofpotentialliabilityifany
Review
of
all
statutory
compliance
including
status
of
licenses
and
permits
essential
for
runn ng e us ness
Reviewofcurrent,pendingorpotentiallitigation/claimsbyoragainsttheCompany,oritsdirectorsandcommentonpotentialliability
Reviewofsuchothermattersthatmayberelevanttothetransaction
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KeyIssuesinDueDiligence
AccountingMethodologies
ContingentLiabilities
Clearancesspecifictobusiness
CorporateMIS
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KeyIssuesinSPA/SHA
UnusualfindingsfromDD
Reps
&
Warrants BoardResolutions
Indemnification
ConditionsPrecedent
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CertainminimumrightstoPEInvestors
Buybackclause IntheeventofIPOnotbeingundertaken,typicallyin35yeartimeframe,mostinvestors
includebu backclausefortheirinvestmentexit.Suchbu backarran ementscanbewith
either
the
Company;
or
the
Promoter ReturnExpectations:Dependingonspecificsoftheinvestment,mostinvestorstypicallyseek
dollaradjusted1824%p.a.IRR
Informationrequirements Aprivateequityinvestorlooksforseveralinformationrightsincludingaccesstomonthly
MIS,quarterlyfinancialsandotherconfidentialinformationpresentedtotheBoardapartfromAnnualauditedaccount
BoardRepresentation
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CertainminimumrightstoPEInvestors
AntidilutionorRatchetclause Ratchetclausesorantidilutionprotectionrefertomechanismthroughwhichinvestors
rotectthemselvesfromsi nificantdilution.Forexam le,to rotectoneselfa ainsttheriskof
promotersdilutingtofriendsandfamiliesorrelatedentitiesatcheapvaluation,investorstypicallyseekratchetprovisionsbuiltintheconversion/buybackterms,whereintheconversionpriceisadjusteddownwardsorbuybackclausesadjustforsuchdilutiontoallow
.
DragAlong InvestorshallhavetherighttodragalongtheholdingoftheCorePromotersandtheir
RelativesandinvestmentcompaniestotheextentofXX%stakeoftheCompanytofacilitateanexitthroughastrategicsaleoranyothermeans.
TagAlong IntheeventofthePromotersproposingtosell,assign,ortransferanyoftheirequitystakein
,duringthetenureoftheAgreement,inasingletransactionoraseriesofrelatedtransactions,theInvestors,attheiroption,shallhavetherighttoparticipateinthesale,in
proportion
to
their
equity
shareholding
in
the
Company
at
that
time.
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CertainminimumrightstoPEInvestors
CustomaryReps&Warrants Customaryrepresentationsandwarrantiesincluding,butnotlimitedto,organizationand
ualification,financialstatements,accurac andcom letenessof
information,authorization,executionanddelivery,validityandenforceabilityofagreements,issuanceoftheshares,nomaterialundisclosedliabilities,actionspending,compliancewithlawsandenvironmentalregulations,governmental
, , ,provisions,capitalization,taxes,nodefault,causeallemployeesandconsultantstoexecuteanddelivernondisclosureanddevelopmentagreementsforthetermoftheirengagement
withtheCompanyplussixmonthsinaformreasonablyacceptabletotheBoardofDirectorsandnomaterialadversechange.
WhileatypicalinvestorseekssignificantsayintheoperationsandmanagementoftheCompany,webelievethatonaminimalbasisaswell,givenbuybackprovisions,suchinvestorswillliketomonitorthecashflowoftheCompanyandassuchprefertohaveasayinCapita Bu geting
Othercashoutflowrelateddecisionssuchasworkingcapitalmanagement,etc.
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CertainminimumrightstoPEInvestors
VotingRights Termsheetsoftenaddressissuesofcontrolinordertoallowinvestorsina
com an toaddvalueandalsotoexercisecontrolifthin s owron .While
investorsmaynotwantmajorityboardcontrolifthingsaregoingwell,theymaynegotiateprovisionsthatgivethemcontrolifcertaineventsoccur.Thegoldenruleoftena lies:hewhohasthe oldmakestherules.
Covenants Mostpreferredstockissuesanddebtissueshaveassociatedcovenants,orthings
thattheportfoliocompanypromisestodo(positivecovenants),andnottodo(negativecovenants).Theyarenegotiatedonacasebycasebasisandoften
epen onot eraspectso t e ea . a uretocomp yw t covenantscan ave
seriousconsequencestothecompanysuchasautomaticdefaultandpaymentsdue.
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Monitoring
TheInvestorpostinvestmentcloselyfollowsthegrowthoftheinvesteecompany
followed
Variouswa sinwhichaPEinvestor la sarole ostinvestment:
Steeringthecompanythroughboardrepresentation
Helpinstrengtheningthemanagementteamwhereverrequired
cross
sell
within
its
investee
companies
26
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Exit ModesAvailable
IPO
Divestment/Secondarybuyout M&A
LeveragedBuyout(LBO)
Bu outs ManagementBuyback
Strate icBu out
ManagementBuyout
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MegaExitsThroughIPO
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MegaExitsThroughOtherModes
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Guidelinesforpreferentialallotment
SpecialresolutionoftheshareholdersmustbepassedunderS.81(1A)oftheCompaniesAct
SEBIGuidelines
Issuepriceshallbenotlowerthanthehigherofthefollowing
Averageoftheweeklyhighandlowoftheclosingpricesoftheshares
. .,meetingu/s.81(1A)oftheCompaniesAct
Averageoftheweeklyhighandlowoftheclosingpricesduring2weeksprecedingrelevantdate
Instrumentsallottedonpreferentialbasisshallbelockedinfor1year
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SEBItakeovercode
Openoffer
Whentheacquireracquires15%ormoreofshares
Public
offer
should
be
made
for
minimum
20%
of
the
voting
capital
of
thecompany
Offer rice should not be lower than the hi hest of the followin
Negotiatedpriceatwhichtriggerlimitwasreached(15thpercent)
Price
paid
by
acquirer
for
acquisition
of
shares
during
26
week
period
prece ngpu cannouncemen
Averageofweeklyhighandlowoftheclosingpricesofthesharesofthetargetcompanyduring26weeksprecedingdateofpublicannouncement
Averageofdailyhighandlowoftheclosingpricesduring2weeksprecedingdateofpublicannouncement
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