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.

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. 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
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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.
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India Model Market Exit Returns Challenges Angles Summary

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%
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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%+
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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%
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary

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
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India Model Market Exit Returns Challenges Angles Summary