Investment Process - Private Equity

8/7/2019 Investment Process - Private Equity

1/32

PRIVATE EQUITYINVESTMENT PROCESS

Presentation for WIRC - ICAI

March 28, 2009


2/32

Structure

of

Presentation IntroductiontoPrivateEquity

Private E uit Placement Process

ApproachestoValuation

Key

Issues

in

DD/

SPA

&

SHA CertainMinimumRightstoPEInvestors

Monitoring

Exit SEBInormsforprivateequity

2


3/32

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


4/32

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


5/32

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


6/32

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


7/32

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


8/32

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


9/32

PE

What

do

they

bring

besides

Capital

9


10/32

Challenges

to

PE

in

India

10


11/32

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


12/32

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


13/32

The

PE

placement

process

Business InitiatingdiscussionwithPEinvestorsandreviewof

Information Memorandum

va uation

FinancialAdvisorscontinuouslykeepintouchwithinvestorsandhelpresolvequeriesoftheinvestors

Furtherinformationflowandclarifications

Marketintelli encecheckonthebusinessandindustr players

Preliminarysitevisitandinitialnegotiations

Wk 2-4

13


14/32

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

14


15/32

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

15


16/32

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

16


17/32

ApproachestoValuation

Differentassetsmaybevaluedusingdifferentvaluationtechniques.

Usuallytherearethreeapproachestovaluationwhichareasfollows:

A roachestoValuation

MarketbasedCostbased Incomebased

NetAssetValue StockMarketQuotes ProfitEarning

CapacityValue

Discounted Cash

PrecedentTransactions

Flows

17


18/32

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

18


19/32

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

19


20/32

KeyIssuesinDueDiligence

AccountingMethodologies

ContingentLiabilities

Clearancesspecifictobusiness

CorporateMIS

20


21/32

KeyIssuesinSPA/SHA

UnusualfindingsfromDD

Reps

&

Warrants BoardResolutions

Indemnification

ConditionsPrecedent

21


22/32

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

22


23/32


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.

23


24/32


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.

24


25/32


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.

25


26/32

Monitoring

TheInvestorpostinvestmentcloselyfollowsthegrowthoftheinvesteecompany

followed

Variouswa sinwhichaPEinvestor la sarole ostinvestment:

Steeringthecompanythroughboardrepresentation

Helpinstrengtheningthemanagementteamwhereverrequired

cross

sell

within

its

investee

companies

26


27/32

Exit ModesAvailable

IPO

Divestment/Secondarybuyout M&A

LeveragedBuyout(LBO)

Bu outs ManagementBuyback

Strate icBu out

ManagementBuyout

27


28/32

MegaExitsThroughIPO

28


29/32

MegaExitsThroughOtherModes

29


30/32

Guidelinesforpreferentialallotment

SpecialresolutionoftheshareholdersmustbepassedunderS.81(1A)oftheCompaniesAct

SEBIGuidelines

Issuepriceshallbenotlowerthanthehigherofthefollowing

Averageoftheweeklyhighandlowoftheclosingpricesoftheshares

. .,meetingu/s.81(1A)oftheCompaniesAct

Averageoftheweeklyhighandlowoftheclosingpricesduring2weeksprecedingrelevantdate

Instrumentsallottedonpreferentialbasisshallbelockedinfor1year

30


31/32

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

31


32/32

Documents

Investment Process - Private Equity