PE/VC Agenda-1H18. India Trend Book - Jan to Jun 2018

Transcription

1 PE/VC Agenda1H18 India Trend Book Jan to Jun 2018

2 Foreword The Indian economy has expanded in the last quarter at its fastest pace in recent times with the GDP growing at 8.2%. While the growth is increasingly broad based, the companies operating in the Financial Services sector across lending, microfinance, insurance, payments and such have contributed towards fostering entrepreneurship, creating jobs and bringing the masses into the banking and organized fold. These firms are playing a key role in pushing forward one of the key objectives of the Government and the RBI financial inclusion. However, a 2017 study by EY and the Associated Chambers of Commerce and Industry of India, found 19% of the population still lacks access to the formal credit system.* Steps like demonetization, GST and digital governance continue to act as a catalyst to move beyond cash and adopt the digital economy framework. Private Equity (PE) and Venture Capital (VC) funds are changing the landscape of the Indian economy by providing new and large investments into the Indian companies. In terms of high quality governance, consistent performance and growth, job creation and taxes, the companies backed by PE/ VC funds have shown better performance visàvis other companies. According to some estimates, approximately 70% of the companies that went for an IPO in 2017 were backed by PE/ VC funds. Currently, PE/VC funds are providing the right momentum to the Indian economy where the companies backed by them are creating new jobs, mentoring new entrepreneurs, and bringing the right solutions to help promote financial inclusion in the Indian economy. The first half of 2018 continues to show positive trends in investments and economic activity. This report gives insight into the PE/VC activity in the Financial Services industry and highlights investments, exit trends, and the sector outlook. I congratulate the EY team for putting together this insightful report and for their detailed work. I thank you for your support and hope all of you will continue to participate in IVCA initiatives to further strengthen the private equity and venture capital ecosystem. Padmanabh Sinha Chairman IVCA Managing Partner, Tata Opportunities Fund * 2 PE/VC Agenda 1H18

3 Contents 1 Investment activity Continuing the 06 2 Sector insights 21 3 Exits Highlights and trends 27 4 Sector spotlight Financial Services 34 5 Service spotlight Operational Due 60 6 Outlook 64 momentum set in 2017 Diligence PE/VC Agenda 1H18 3

4 Preface After a record year in 2017, we had forecasted in our PE/ VC Agenda, India Trend Book that PE/VC investments in 2018 could well exceed the 2017 record highs of both investments and exits. With eight months of 2018 behind us, we took stock and it appears that the current trajectory of PE/VC activity is on track to beat the 2017 highs by a wide margin. In 1H18, India received US$15.2 billion in investments, surpassing the previous 1H high of US$10.2 billion seen in 2017 by 49%. 1H18 also witnessed significant additions to the existing high level of dry powder with India focused funds raising US$3 billion in 1H18, 50% higher compared to the corresponding period last year. Despite volatility in the stock markets, 1H18 recorded US$5.5 billion in exits, a 17% increase in value compared to 1H17. This was on the back of a strong show by strategic and secondary exits. IPO activity, however, was not completely dampened by the volatility in markets, with 1H18 recording eight PEbacked IPOs, which is possibly a reflection of the increasing confidence of the investor community in PEbacked companies. A recent report by EY on performance of PEbacked IPOs 2 analyzed that on an average, PEbacked IPOs have outperformed nonpebacked IPOs, compared to their offer price across time periods. Like in 2017, large deals continued to dominate the deal landscape in investments and exits. From a sector perspective, Financial Services, Real Estate and Infrastructure recorded a significant increase in value of investments. Financial Services, in particular, has witnessed significant interest from PE/VC investors over the past three years, receiving close to US$16.6 billion in investments since Given the vast unbanked population and low penetration of financial products, coupled with a diversity of investment options available across banks, NBFCs, microfinance institutions, insurance companies and payment companies; the Financial Services sector is expected to continue attracting PE/VC investments. We have dedicated a separate chapter in this report to dwell deeper into the PE/ VC deal activity in the Financial Services (FS) space. A related insight worth looking into is the significant difference in equity market returns of PEbacked IPOs in the Financial Services sector across various time periods versus the benchmark index for the sector. Average absolute performance of IPOs in the Financial Services (FS) sector (2015 to 1H18) 335% 285% 289% 336% 304% 267% 235% 185% 135% 122% 153% 85% 35% 15% 66% 67% 48% 48% 31% 21% 6% 1% 3% 3% 1% 6% 11% 16% 24% 29% 37% 42% 39% 42% 44% 47% 10% 1 month 1qtr 2qtrs 3qtrs 4qtrs 5qtrs 6qtrs 7qtrs 8qtrs 9qtrs 10qtrs 11qtrs 12qtrs NonPEbacked IPOs PEbacked IPOs Nifty FS Index PE/VC Agenda 1H18

5 This confidence of investors in the Indian Financial Services Sector is expected to be further bolstered by two marquee deals announced in August 2018, one involving perhaps the most successful investor of all time, Berkshire Hathway investing a reported US$300US$400 million into Paytm 3 and the other involving a buyout of Star Health Insurance by Westbridge / Rakesh Jhunjhunwala / Madison Capital consortium for a reported US$1 billion. 4 Overall, while there has been an improvement in corporate earnings, Indian macros are now facing some headwinds. The IMF has, in its recent Update of World Economic Outlook, trimmed India s growth projection to 7.3% for and 7.5% in , reducing its earlier forecasts for these years by margins of 0.1% and 0.3% points, respectively. While FDI inflows have remained positive, these have been overtaken by significant levels of net FPI outflows, turning overall FII flows negative in June CPI inflation reached a fivemonth high of 5.0% in June 2018 driven by rising fuel prices. With the looming trade war between the US and China and interest rate tightening by the US Federal Reserve, Emerging Market currencies have seen significant depreciation / volatility. The Indian Rupee depreciated to below INR 70/US$ for the first time in August Nonetheless, India is expected to remain the fastestgrowing economy among large nations in and India s macros underpinned by a more prudent fiscal position and high forex reserves should enable it to convincingly withstand the shocks of rising bond yields and capital outflows. We continue to maintain our position that the next five years will be the Golden Age for the Indian PE/VC industry. We hope you find this report to be an enjoyable and useful read. Do share your feedback with us. Happy investing. Vivek Soni Partner and National Leader Private Equity Services, EY India PE/VC Agenda 1H18 5

6 1 Investment activity Continuing the momentum set in PE/VC Agenda 1H18

7 After reaching record highs in 2017, PE/VC investments in India are off to a strong start in 2018 as well, notching up investments worth US$15.2 billion across asset classes in 1H18. This surpasses the previous 1H high of US$10.2 billion seen in 2017 by 49%. From a quarterly performance perspective, 2018 recorded the best ever 1Q and 2Q performances in terms of value of investments, with 1Q18 recording a growth of 89% over 1Q17 and 2Q18 recording a 21% growth over 2Q17. The year 2017 had seen a significantly stronger second half for PE/VC investments and as projected in our 2017 annual review, the momentum has continued into the first half of Like last year, the strong growth continues to be driven by large deals. 1H18 recorded 36 deals of value greater than US$100 million aggregating US$11.5 billion vs 19 deals greater than US$100 million aggregating US$6.4 billion in 1H17. With 23 deals, 2Q18 recorded the highest number of deals of value greater than US$100 million in any quarter. Growing interest by PE funds in the Infrastructure and Real Estate asset classes has also been a major contributor to the rise in investments. While dissecting the 49% growth recorded in PE/VC investments in 1H18 further; data suggests that, while pure play PE/VC investments grew 32% in 1H18 compared to 1H17 (US$11.3 billion in 1H18 vs US$8.6 billion in 1H17), investments into Infrastructure and Real Estate have more than doubled (US$3.9 billion in 1H18 vs US$1.6 billion in 1H17), accounting for 26% of all PE/VC investments in 1H18 compared to 16% in 1H17. The first half of 2018 saw US$3 billion in fund raise, 50% higher compared to 1H17, mainly on account of a strong fundraise in 2Q18 of US$1.7 billion compared to US$719 million raised in 2Q17. Almost a third of these funds are for real estate investments. At US$13.6 billion, new fund raise plans announced in 1H18 have already reached the levels recorded in entire Exhibit 1: Total PE/VC investments (US$m) halfyearly trend 15,000 10,000 5, ,172 7,511 8,589 11,046 7,968 8,235 10,193 15,861 15,191 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H Value (US$m) # of deals PE/VC Agenda 1H18 7

8 Exhibit 2: Total PE/VC investments (US$m) quaterly trend 9, , ,000 5,139 6,003 5,043 4,310 3,658 3,097 5,138 4,179 6,014 8,686 7,379 7,916 7,273 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q Value (US$m) # of deals Exhibit 3: PE/VC investments (US$m) split across asset classes (halfyearly trend) US$m 15,000 12,000 9,000 6,000 3, ,634 3,694 2, ,957 1, ,451 1,467 1,321 1, ,280 5,714 7,061 8,402 6,149 6,195 8,586 11,565 11,317 1H2014 2H2014 1H2015 2H2015 1H2016 2H2016 1H2017 2H2017 1H2018 Other sectors (US$m) Real Estate (US$m) Infrastructure (US$m) 8 PE/VC Agenda 1H18

9 Exhibit 4: PE/VC investments (US$m) split across asset classes (quaterly trend) US$m 9,000 6,000 3, , , , , ,440 1,634 1, ,608 4,687 3,715 3,071 3,078 2,154 4,041 3,874 4,694 6,130 5,639 4,831 6,484 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Other sectors (US$m) Real Estate (US$m) Infrastructure (US$m) Exhibit 5: Fund raise (US$m) halfyearly trend 4,000 3,000 2,000 1, ,861 1,749 3,830 2,610 3,017 1,296 2,006 3,768 3,005 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H Total funds raised (US$m) Total # of funds raised PE/VC Agenda 1H18 9

10 Exhibit 6: Fund raise (US$m) quaterly trend 2,000 1, ,938 1,285 1,325 2, , ,234 1,533 1,304 1, Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q Total funds raised (US$m) Total # of funds raised Exhibit 7: Top PE/VC investments in 1H18 (excluding investments in Infrastructure and Real Estate) Company PE investors Sector Stage HDFC Limited Larsen & Toubro s Electrical & Automation business GIC, KKR, OMERS, Carmignac Group, Premji Invest Investment month US$m Stake (%) Financial Services PIPE Jan 18 1,731 4 Temasek Industrial Products Growth capital May Vishal Mega Mart Private Limited Partners, Kedaara Consumer Products and Retail Buyout May Greenko Energy Holdings Continental Warehousing Corporation (Nhava Sheva) Limited GIC, Abu Dhabi Investment Council Hindustan Infralog Private Limited (DP World, NIIF ) Power and Utilities Buyout Jun Logistics Buyout Mar Paytm Ecommerce Private Limited SoftBank Ecommerce Growth capital Apr PE/VC Agenda 1H18

11 Exhibit 8: Top fund raises in 1H18 Status Fund US$m Strategy Investment month Raised Godrej Fund Management 600 Real Estate Mar 18 Raised SeaLink Capital 315 Sector Agnostic Mar 18 Raised Nexus Venture Partners 313 Sector Agnostic Jun 18 Raised Morgan Stanley 300 Real Estate Jun 18 Raised Everstone LightSource JV 297 Renewable Energy Apr 18 A deeper analysis of the investment activity in 2018 and the underlying data indicates the following trends: 1. Significant uptick in Infrastructure and Real Estate investment activity Investments in Infrastructure and Real Estate by PE/VC funds in 1H18 added up to US$3.9 billion, accounting for 26% of all investments in 1H18. A major portion of this investment came in 1Q18: US$3.1 billion. Total investments in Infrastructure and Real Estate in 1H18 are already more than 60% of the total PE/VC investment received in 2017 (US$5.9 billion). In 2017, Sovereign Wealth Funds and Pension Funds stepped up their investments in Indian infrastructure and real estate, investing close to US$2.4 billion of the total US$5.9 billion PE/ VC investment in these asset classes. However, in 1H18, a larger proportion of PE/VC investments in Indian infrastructure and real estate was made by GP s like Macquarie, Blackstone, Xander, Brookfield, etc. and investments by Sovereign and Pension Funds were comparatively lower. Nonetheless, Sovereign and Pension Funds continue to be prominent investors in Indian infrastructure and real estate given their preference for stable yield generating assets. 1Q18 recorded the largest single PE/VC investment in the Indian infrastructure asset class, with Macquarie Asia Infrastructure Fund 2 (MAIF2) wining the tolling rights to 648 kms of national highways from the NHAI for US$1.5 billion. This is India s first tolloperatetransfer (TOT) deal and is also one of the largest foreign investments in Indian public infrastructure. PE/VC Agenda 1H18 11

12 Exhibit 9: Top PE/VC investments in Infrastructure and Real Estate sectors in 1H18 Company PE investors Sector Stage Investment month US$m Stake (%) Select NHAI road assets MAIF2 Infrastructure Buyout Mar 18 1, Equinox Business Park Brookfield Real Estate Buyout Jan Indiabulls Properties Private Limited Blackstone Real Estate Buyout Mar The Wadhwa Group Piramal Real Estate Credit investment Jan NA Island Star Mall Developers Private Limited (Phoenix Mills JV) Shriram Properties Private Limited CPPIB Real Estate Growth capital Apr NA ASK Property Investment Advisors Real Estate Growth capital Feb NA 2. Large deals continue to dominate the deal landscape There were 36 deals of value greater than US$100 million in 1H18, aggregating to US$11.5 billion and accounting for 76% of total PE/VC investments made in 1H18. Of this, 11 deals worth US$3.4 billion pertained to the Infrastructure and Real Estate asset classes. In terms of quarterly performance, with 23 deals, 2Q18 recorded the highest number of deals of value greater than US$100 million in a given quarter ever. The largest deal in 1H18 saw GIC, KKR and others invest US$1.7 billion into HDFC Limited, the largest PIPE investment since Temasek invested ~US$2 billion in Bharti Airtel in Macquarie Asia Infrastructure Fund 2 wining the tolling rights to 681 kms of national highways from the NHAI for US$1.5 billion was the largest deal in the Infrastructure sector. 1H18 also recorded the first investment by National Investment and Infrastructure Fund (NIIF), India s sovereign wealth fund, wherein Hindustan Infralog Private Limited, a JV between NIIF and DP world, bought a 90% stake in Continental Warehousing Corporation (Nhava Sheva) Limited. This deal provided an exit to a clutch of early investors including Warburg Pincus, IFC and others. The share of large deals in total PE/VC investments has been significantly higher over the recent four quarters, as compared to earlier periods, accounting for almost 2/3rd of all the value invested. As a consequence, the average deal size has also been increasing. Many of these large deals were buyouts, which is another major trend that has emerged quite strongly in PE/VC Agenda 1H18

13 Exhibit 10: Quaterly trend of deal share by size of investment (US$m) US$m 100% 80% 60% 40% , ,123 1, % 0% 3,241 3,665 3,077 2,332 1, ,024 2,450 3,977 6,990 5,456 5,673 5,797 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 >100m 50100m 2050m 1020m <10m Exhibit 11: Average and median deal size trend (US$m) Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Average Median PE/VC Agenda 1H18 13

14 Exhibit 12: PE/VC deal size analysis 1H18 1H17 PE/VC deals (other sectors) By value invested (US$m) PE/VC deals (Infrastructure and Real Estate) 8,059 5,325 1,264 1, > US$100m US$50m US$100m US$20m US$50m US$10m US$20m < US$10m ,102 3,411 Exhibit 13: PE/VC deal size analysis 1H18 1H17 PE/VC deals (other sectors) By number of deals PE/VC deals (Infrastructure and Real Estate) > US$100m US$50m US$100m US$20m US$50m US$10m US$20m < US$10m PE/VC Agenda 1H18

15 3. Buyouts emerge stronger As mentioned in our 2017 annual review, notwithstanding the minor decline in 2017, buyouts are expected to be one of the major trends of the Indian PE/VC sector in the years to come. The first six months of 2018 recorded 23 buyouts aggregating to US$5 billion, surpassing all the previous year highs 2017 recorded 24 buyouts worth US$3.1 billion and 2016 recorded 29 buyouts worth US$3.9 billion. In 1H18, buyouts accounted for 33% of all investments received, compared to 11% in From a quarterly perspective, 1Q18 emerged as the best quarter for buyouts in terms of both value and volume, with US$2.8 billion recorded across 13 deals. 2Q18 wasn t far behind with US$2.1 billion recorded across 10 deals. Out of the 23 buyout deals in 1H18, seven deals worth US$2.3 billion were in the Infrastructure and Real Estate asset classes. Exhibit 14: Buyout deals in India quarterly trend 3,000 2,500 2,000 1,500 1, ,330 1, , , ,830 2,149 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q US$m # of deals Exhibit 15: Top buyout deals in 1H18 Target Amount (US$m) Stake% Investment month Sector Investors Select NHAI road assets 1, Mar 18 Infrastructure MAIF2 Vishal Mega Mart Private Limited May 18 Consumer Products and Retail Partners Group, Kedaara Greenko Energy Holdings Jun 18 Power and Utilities GIC, Abu Dhabi Investment Council Continental Warehousing Corporation (Nhava Sheva) Limited Mar 18 Infrastructure Hindustan Infralog Private Limited (DP World, NIIF) Equinox Business Park 383 NA Jan 18 Real Estate Brookfield Healthium Medtech Private Limited 350 ~100 Apr 18 Healthcare Apax Partners PE/VC Agenda 1H18 15

16 4. Credit deals record robust investment flows In 1H18, there were 26 credit deals worth US$1.3 billion, 33% higher than 1H17. In fact, aside from the subdued 2Q18, credit deals have consistently recorded a sequential quarteronquarter increase in value invested since 1Q17, with 1Q18 recording US$873 million across 15 deals, the second highest quarterly value of credit investment in the past four years. As noted in our 2017 annual review, credit investment has emerged as a viable alternative for PE/VC funds to invest in the Indian market, taking advantage of a lower risk and an assured return. PE/VC funds are better placed to structure credit transactions that are a winwin for both the investor as well as the investee, which is not possible through the regular banking channels, given various regulatory constraints, for e.g., funding land purchase by real estate firms, funding of promoter groups to carryout buybacks, etc. Exhibit 16: Credit deals in India quarterly trend Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q US$m # of deals Exhibit 17: Top credit deals in 1H18 Target Amount (US$m) Investment month Sector Investors Max Group 314 Jan 18 Financial Services KKR The Wadhwa Group 235 Jan 18 Real Estate Piramal Sintex Plastics Technology Limited 184 May 18 Industrial Products KKR Aurum Platz Private Limited, Co Developer Entities MedPlus Health Services Private Limited 138 May 18 Real Estate Ascendas India Trust 115 Jan 18 Consumer Products and Retail Goldman Sachs 16 PE/VC Agenda 1H18

17 5. PIPE deals continue to grow with direct investments by large LPs PIPE deals recorded US$2.4 billion in investments in 1H18, 29% higher than the same period last year. This increase was mainly driven by large PIPE deals in 1Q18, which was also the best quarter for PIPE investments in over a decade. Significant weightage was accounted for by a single deal that saw GIC, KKR, and others invest US$1.7 billion in HDFC Limited, India s largest mortgage lender. With large LPs investing directly in the Indian market, PIPE investments have witnessed a strong growth, with majority of the investments flowing into the Financial Services (FS) sector, which is considered by many investors to be a good proxy for the India growth story. The FS sector also provides a diverse universe of investment opportunities, with companies ranging across the value chain, including banks, NBFCs, microfinance companies, life and general insurance companies, payment intermediaries, asset management companies, etc. However, 2Q18 did not see much traction in PIPE deals due to volatility in the stock markets, recording just US$516 million in PE/VC investments across 13 deals. Exhibit 18: PIPE deals in India quarterly trend 2, ,500 1, , , ,272 1, Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q US$m # of Deals Exhibit 19: Top PIPE deals in 1H18 Target Amount (US$m) Stake% Investment month Sector HDFC Limited 1, Jan 18 Financial Services Godrej Properties Limited Investors GIC, KKR, OMERS, Premji Invest, others May 18 Real Estate GIC AU Small Finance Bank Limited May 18 Financial Services Temasek Religare Enterprises Limited Feb 18 Financial Services Bay Capital Partners, others Future Lifestyle Fashions Limited May 18 Consumer Products and Retail L Capital PE/VC Agenda 1H18 17

18 6. Growth and startup investments record steady performance In 1H18, growth investments recorded US$5.1 billion in terms of value, an increase of 20% over 1H17, albeit recording a 44% decline from the spectacular performance recorded in 2H17 (US$9.1 billion). While growth capital still continues to be the leading mode of investment by value, its percentage share of overall PE/VC investments has declined to around a third compared to earlier years when it used to account for more than 50% of all PE/VC investments. This is primarily on account of the rise in buyout deals that have seen an increasing traction. In terms of volume, however, growth investments recorded the highest number of deals ever for any halfyear period in 1H18 (118 deals), 53% higher than 1H17 and 42% higher than 2H17. While on a sequential basis, startup funding has declined to US$1.4 billion, a drop of 40% compared to 2H17, investments in startups has increased by 20% compared to 1H17. In general too, 2H17 was a strong period for PE/VC investments, receiving a record level of inflows across deal categories. Exhibit 20: Growth deals in India quarterly trend 6,000 5,000 4,000 3,000 2,000 1, ,114 2,637 2,015 1,348 1,155 1,171 1,417 2,778 5,703 3,391 1,601 3,503 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q Q Q Q US$m # of deals Exhibit 21: Top growth deals in 1H18 Target Larsen & Toubro s Electrical & Automation business Paytm Ecommerce Private Limited Amount (US$m) Stake% Investment month Sector Investors May 18 Industrial Products Temasek Apr 18 Ecommerce SoftBank Mankind Pharma Limited Apr 18 Pharmaceuticals ChrysCapital, GIC, CPPIB UST Global May 18 Technology Temasek ReNew Power Ventures Private Limited 247 NA APR 18 Power and Utilities CPPIB 18 PE/VC Agenda 1H18

19 Exhibit 22: Startup deals in India quarterly trend 2,000 1,800 1,600 1,400 1,200 1, ,650 1,282 1, , Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q Q Q Q Q US$m # of deals Exhibit 23: Top startup deals in 1H18 Target Bundl Technologies Private Limited ( Swiggy ) Bundl Technologies Private Limited ( Swiggy ) Amount (US$m) Stake% Investment month Sector 210 NA Jun 18 Ecommerce Investors DST Global, Naspers 100 NA Feb 18 Ecommerce Naspers Lendingkart Technologies Private Limited Locodel Solutions Private Limited (Grofers) 87 NA Feb 18 Financial Services 61 NA Mar 18 Ecommerce India Quotient Fund, Saama Capital, Mayfield, Sistema Asia Fund Tiger Global Management, Softbank PE/VC Agenda 1H18 19

20 Exhibit 24: PE/VC deal type analysis 1H18 1H17 PE/VC deals (other sectors) By value invested (US$m) PE/VC deals (Infrastructure and Real Estate) Credit investment ,263 4,055 2, ,296 1,833 1,360 1,164 Buyout PIPE Startup/Early stage Expansion/Growth ,059 2,316 Exhibit 25: PE/VC deal type analysis 1H18 1H17 PE/VC deals (other sectors) By number of deals PE/VC deals (Infrastructure and Real Estate) Credit investment Buyout PIPE Startup/Early stage Expansion/Growth PE/VC Agenda 1H18

21 2 Sector insights PE/VC Agenda 1H18 21

22 As projected in our 2017 annual review, the momentum in PE/VC investments set in the previous year has continued into 2018 helped by high levels of dry powder at hand as well as enabling policy measures taken by the government. On a yearonyear basis, in 1H18, most of the prominent sectors like Financial Services, Real Estate, Ecommerce, Retail and Industrials recorded a significant jump in terms of both value and volume of PE/VC investments. Exhibit 26: Top sectors for investment in 1H18 1H18 1H17 Top sectors by value (US$m) Top sectors by # of deals Financial Services Real Estate Infrastructure Ecommerce Industrial products Consumer Products and Retail Technology Healthcare , ,240 1,287 1,634 1, ,084 4,166 3,209 Financial Services Technology Ecommerce Real Estate Healthcare Education Food and Agriculture Consumer Products and Retail Logistics Others 2,481 2,737 Others Financial Services Continuing the trend seen in 2017, the Financial Services sector garnered the highest share of PE/VC investments in 1H18, with US$4.2 billion invested across 74 deals, the highest ever halfyearly PE/VC investment into the sector. 1H18 recorded one of the largest deals in the Financial Services sector with GIC, KKR and others investing US$1.7 billion in HDFC Limited, India s largest mortgage lender, for a 3.9% stake. Since 2017, Financial Services has emerged as a key sector of interest for PE/VC investments, with investments made across all the varied business models ranging from pure play banks to specialized NBFCs, small finance banks, online credit platforms, insurance companies, and payment solution companies. With a significant section of the Indian population still unpenetrated by financial services, there is a huge growth potential for the financial services industry as the Indian economy continues to grow at a healthy rate of close to 7%. We have covered the Financial Services sector in greater detail in the Sector Spotlight section of this report. 22 PE/VC Agenda 1H18

23 Exhibit 27: Financial Services sector quarterly trend 3,500 3,000 2,500 2,000 1,500 1, ,253 1, ,357 1,359 2,458 2,943 1,222 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q Q Q Q Q US$m # of deals Exhibit 28: Top Financial Services deals in 1H18 Target Amount (US$m) Stake% Investment month Financing HDFC Limited Jan 18 PIPE Investors GIC, KKR, OMERS, Premji Invest, others Max Group 314 NA Jan 18 Credit investment KKR PolicyBazaar 200 NA May 18 Growth capital Softbank International Asset Reconstruction Co (IARC) AU Small Finance Bank Limited Pine Labs Private Limited 15 NA Apr 18 Buyout Blackstone May 18 PIPE Temasek 125 NA May 18 Growth capital Temasek, PayPal IIFL Wealth Management Jun 18 Growth capital General Atlantic, Ward Ferry Management, Amansa Capital, Steadview Capital PE/VC Agenda 1H18 23

24 Real Estate Real Estate sector witnessed a significant interest from PE/VC funds in the previous year and the momentum has continued into 2018 recording US$2.2 billion in investments across 25 deals in 1H18, compared to US$1.3 billion across 19 deals in 1H17. Except for 2Q18, the sector has been consistently receiving over US$1 billion in investments since 2Q17, with 1Q18 recording US$1.5 billion in investments, the highest in any quarter so far. This has largely been driven by investments in yield generating commercial assets by large global funds like Blackstone, Brookfield etc., a vast majority of which are buyout transactions. With the Indian economy growing at ~7%, the commercial real estate space has seen lot of takers and we are also seeing new funds being raised for investment in the sector. Almost a third of all fund raises in 1H18 have been by real estate focused funds. Recently, Godrej Fund Management (GFM), the realestate privateequity arm of the Godrej Group, announced a first close of its US$450 million office development fund and a first close of its US$150 million office investment fund. Jointly, the funds can invest/develop office assets worth over US$1 billion in value. Exhibit 29: Real Estate sector quarterly trend 2,500 2, ,500 1, , , ,033 2,254 1,440 1, Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Exhibit 30: Top Real Estate deals in 1H18 US$m # of deals Target Amount (US$m) Deal stake % Investment month Financing stage Investors Equinox Business Park 384 NA Jan 18 Buyout Brookfield Indiabulls Properties Private Limited Mar 18 Buyout Blackstone The Wadhwa Group 235 NA Jan 18 Credit investment Piramal Island Star Mall Developers Private Limited (Phoenix Mills JV) 185 NA Apr 18 Growth capital CPPIB Godrej Properties Limited May 18 PIPE GIC 24 PE/VC Agenda 1H18

25 Ecommerce After witnessing large deals (greater than US$1 billion) in 2H17 on account of investments by Softbank, Ecommerce recorded a significant decline in value of investments in 1H18. However, compared to 1H17, investments in Ecommerce recorded an increase of 85% in terms of value. 1H18 saw followon funding rounds by some of the marquee names in the Indian ecommerce ecosystem like Swiggy, Groffers, Lenskart and Pepperfry. Moreover, with the large WalmartFlipkart deal in the works, there is a renewed enthusiasm in the Indian Ecommerce space. Successful closure of this deal is expected to reenergize the Indian startup investing ecosystem. Exhibit 31: Ecommerce sector quarterly trend 3,000 2,500 2,000 1,500 1, , ,849 1, Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q Exhibit 32: Top Ecommerce deals in 1H18 US$m # of deals Target Paytm Ecommerce Private Limited Amount (US$m) Deal stake % Investment month Financing stage Investors Apr 18 Growth capital SoftBank Bundl Technologies Private Limited (Swiggy) 210 NA Jun 18 Startup/early stage Coatue Management, DST Global, Naspers Bundl Technologies Private Limited (Swiggy) 100 NA Feb 18 Startup/Early stage Naspers Lenskart Solutions Private Limited Locodel Solutions Private Limited (Grofers) 62 NA Mar 18 Growth capital 61 NA Mar 18 Startup/Early stage TR Advisors, PremjiInvest Tiger Global Management, Softbank PE/VC Agenda 1H18 25

26 Other sectors that received close to a billion dollars in PE/ VC investment were Infrastructure, Consumer Products and Retail and Industrials, mainly on the back of some large deals. Infrastructure sector received US$1.6 billion in investments in 1H18 compared to US$338 million in 1H17, mainly on account of MAIF2 s US$1.5 billion win of toling rights to 681kms of national highways from the NHAI. Consumer Products and Retail sector received investments worth US$901 million in 1H18 compared to US$269 million in 1H17, primarily on the back of the US$734 million buyout of Vishal Mega Mart Private Limited by Partners Group and Kedaara. Industrials sector received US$1.1 billion in investments in 1H18 compared to just US$63 million in 1H17 largely due to the US$761 million investment in Larsen & Toubro s Electrical & Automation business by Temasek for a 35% stake. 26 PE/VC Agenda 1H18

27 3 Exits Highlights and trends PE/VC Agenda 1H18 27

28 After a great 2017, exits in 1H18 were marred by volatility in the global capital markets, which were spooked by fears of a trade war between the US on one hand and China/the EU on the other. Nonetheless, a strong show by strategic and secondary exits helped offset the decline in open market exits. 1H18 recorded US$5.5 billion in exits, a 17% increase in value compared to 1H17, despite a 24% decline in volume (99 deals vs 131 deals in 1H17). Compared to 2H17, however, exits were lower by 33% in terms of value. The largest exit in 1H18 saw TPG exit its stake in Vishal Mega Mart Private Limited for US$769 million to Partners Group and Kedaara followed by Actis US$692 million exit from Ostro Energy Private Limited to ReNew Power Ventures Private Limited. In terms of sectors, Financial Services (19 deals) and Technology (12 deals) recorded the highest number of exits. In terms of value, Power and Utilities was the top sector with exits worth US1.0 billion across four deals. Exhibit 33: Total PE/VC exits (US$m) halfyearly trend 7,500 6,000 4, ,000 1,500 1,322 2,072 3,910 2,564 3,140 3,528 4,714 8,299 5,528 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H Value (US$m) # of exits Exhibit 34: Total PE/VC exits (US$m) quarterly trend 5,000 4,000 3, , ,000 2,749 1,205 1,358 2,067 1,073 2,046 1,483 2,033 2,681 4,550 3,749 1,824 3,705 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q PE/VC Agenda 1H18

29 Exhibit 35: PE/VC exits (US$m) split across asset classes (halfyearly trend) 7,500 6,000 4,500 3,000 1, ,117 1,942 3,799 2,439 2,715 3,087 4,363 7,716 5,191 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18 Other Sectors (US$m) Real Estate (US$m) Infrastructure (US$m) Exhibit 36: PE/VC exits (US$m) split across asset classes (quarterly trend) US$m 4, ,000 2,000 1, ,667 1,165 1,274 1, ,999 1,088 1,793 2,570 4,270 3,446 1,486 3,705 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Other Sectors (US$m) Real Estate (US$m) Infrastructure (US$m) PE/VC Agenda 1H18 29

30 Exhibit 37: Top sectors for exits in 1H18 1H18 1H17 Top sectors by value (US$m) Top sectors by number of deals Power and Utilities RCP Healthcare Technology Financial Services Ecommerce 94 1, ,577 Financial Services Technology Food and Agriculture Healthcare Ecommerce Others 1,666 1,768 Others Exhibit 38: Top exits in 1H18 Company Sector Sellers Buyers Exit type Exit month US$m Stake (%) Vishal Mega Mart Private Limited Consumer Products and Retail TPG, Airplaza Retail Holdings Partners Group, Kedaara Capital Secondary May Ostro Energy Private Limited Power and Utilities Actis ReNew Power Ventures Private Limited Strategic Apr NA Flipkart Private Limited Ecommerce IDG Ventures, SoftBank NA Buyback Apr NA Healthium Medtech Private Limited Healthcare TPG, CX Partners Apax Partners Secondary Apr EInfochips Limited Technology GVFL Arrow Electronics Inc. Strategic Jan PE/VC Agenda 1H18

31 Key trends emerging from detailed analysis of the data: 1. Exits via open market decline sharply; nonetheless, PE/VC backed IPOs flourish Exits via open market in 1H18, at US$681 million, declined by 65% compared to 1H17 and by 84% compared to 2H17, which was a record period for open market exits. In terms of number of deals as well, the decline was ~ 50%, compared to both 1H17 and 2H17. The volatility witnessed in global equity markets on Exhibit 39: Open market exits quarterly trend the back of escalating trade tariffsrelated tensions between the US and other countries as well as volatility in the domestic market due headwinds on the macroeconomic front as well as issues faced by Indian banking sector significantly impacted the environment for open market exits in 1H18. 3,000 2,500 2,000 1, , ,062 1,472 2, Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q Exhibit 40: Exits via IPOs quarterly trend US$m # of deals Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q Q17 7 4Q Q18 2Q US$m # of deals PE/VC Agenda 1H18 31

32 The volatility in the markets notwithstanding, there were eight PE/VC backed IPOs in 1H18. However, with the broader markets losing some steam from last year, especially for mid caps and small caps, the appetite for IPOs in 2H18 could take a hit. Also, the impending general elections may influence public market investors to consider sitting on cash, which could dampen the prospects for IPOs in the second half of Exhibit 41: Top exits via IPOs in 1H18 Target Exit amount (US$m) Exit stake % Sector Sellers Varroc Engineering Limited Automotive TATA Opportunities Fund Bandhan Bank Limited Financial Services IFC, GIC Newgen Software Technologies Ltd SoftTech Engineers Private Limited Technology 1 5 Technology SAP Ventures, Ascent, IDG Ventures Rajasthan Venture Capital Fund E2E Networks Limited 1 5 Technology Blume Ventures Performance of PEbacked IPOs Initial Public Offerings (IPOs)/stock market listings are an important exit route for PEbacked companies. In 2017, Indian companies raised US$11.6 billion across more than 38 IPOs (excluding SME IPOs) making it the best ever year in terms of IPO proceeds. Of this, IPOs by PEbacked companies in 2017 represented 55% by volume and 38% by value. As per the findings of our recently published report on IPOs 5, from a performance perspective, while both PEbacked and nonpebacked IPOs have performed better than the Index (Nifty 500), on an average PEbacked IPOs have outperformed nonpebacked IPOs, compared to their offer price, across time periods. This is not surprising in the emerging markets context, wherein the value add brought in by PE investors comprises of operational improvements, putting in place governance structures and streamlined processes and controls to take care of the pains and complexity that comes hand in hand with growth. Read our report on PE backed IPOs5, India Trendbook 2018 for additional details and insights on performance of PEbacked IPOs. Exhibit 42: Average absolute performance of PEbacked IPOs relative to index (Nifty 500) 70% 60% 50% 40% 30% 20% 10% 0% 60% 48% 51% 53% 52% 47% 46% 44% 40% 41% 35% 32% 34% 29% 28% 29% 28% 21% 14% 16% 19% 21% 10% 7% 1% 1% 1month 1qtr 2qtrs 3qtrs 4qtrs 5qtrs 6qtrs 7qtrs 8qtrs 9qtrs 10qtrs 11qtrs 12qtrs NonPEbacked IPOs PEbacked IPOs Index (Nifty 500) PE/VC Agenda 1H18

33 2. Both strategic and secondary exits record significant growth Exits via secondary sale, at US$2.1 billion, were the highest in terms of value in 1H18, and also the highest ever half yearly value for secondary sales. The largest secondary exit in 1H18, which was also the largest exit in the first half of 2018 saw TPG exit its stake in Vishal Megamart for US$769 million to Partners Group and Kedaara. With the expected volatility in stock markets and macroeconomic headwinds persisting, secondary transactions could potentially gain further momentum as the PE/VC interest in the Indian market is still very strong and the slowdown in the IPO market could result in more deal flow for strategic and secondary exits. Exhibit 43: Secondary exits quarterly trend 1, ,600 1, , , , ,681 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 US$m # of deals H18 recorded US$1.3 billion in strategic exits across 23 deals, 3.6 times the value recorded in 1H17. The largest strategic exit in 1H18 saw Actis sell its stake in Ostro Energy Private Limited to ReNew Power Ventures Private Limited for US$692 million. As more and more investments become buyout transactions, exits via strategic sale is emerging as a strong option with global corporates and business houses looking to get a foothold in the Indian market and willing to give high valuations for quality businesses. Also, large platform plays (such as Renew), backed by deeppocketed PE funds have emerged as a new set of strategic investors, leading the consolidation game in several sectors such as Renewables, Industrial Warehousing, Business Services, etc. Exhibit 44: Strategic exits quarterly trend Q15 3Q15 4Q Q16 2Q16 3Q16 4Q16 1Q17 2Q Q17 4Q Q Q US$m # of deals PE/VC Agenda 1H18 33

34 4 Sector spotlight Financial Services 34 PE/VC Agenda 1H18

35 Investors turn their gaze towards Financial Services Investors turn their gaze towards Financial Services The Financial Services sector is the fuel to any economy s growth and should generally grow at 34X of its GDP growth rate i.e. at 28% to 30%. However, we have seen a relatively lower growth in India primarily on account of the structure of our Financial Services sector. With approximately 70% of the sector comprising public sector banks and RBI s policy of diversified holding, there are limited avenues for investments. The lack of track record and frequent changes in public sector banks does not provide adequate comfort for investors to do noncontrol transactions. The public sector banking system needs approximately US$30 billion of longterm investments over time to keep pace with the growing economy. Select large private banks get significant PE capital and hence attract good premiums to book value. Small private sector banks struggle as well; though, we have now seen the first controlled majority equity position offered in Catholic Syrian Bank to Prem Vatsa s fund, Fairfax. The NBFC sector, which is about 8% of the total market, has attracted the largest PE funds, mainly because the shareholding in NBFCs is not capped and a significant minority or a controlled transaction is possible. NBFCs have grown well and established their niche over time in segments like housing, SME and retail, which a majority of the banks have not been able to tap as NBFCs have found innovative delivery and credit scoring mechanisms. NBFCs compete with small finance banks, who are expected to expand significantly especially in areas like affordable housing and SME lending. Small finance banks may have an advantage over NBFCs given their ability to accept deposits. RBI has not yet offered ontap small bank licences (though it allows Urban Cooperative Banks to apply for conversion to small banks). Innovation in Fintech, especially payments processing, has been on the rise with the increased usage of mobile phones and social media. The ability of Fintech to transform delivery channels and credit assessments, through analytics and data, has the potential to transform banking completely. On the insurance side, whilst LIC dominates life insurance, we could see consolidation in the PSU general insurance companies wherein they will collectively own a large part of the market. Mature insurance companies who entered in the first phase of licensing are doing very well and have either gone public or attracted PE/VC investments. It s time now for the second tier firms to adopt technology and process transformation to gain profitability. Increase in persistency on the life side and lower combined ratios on the nonlife side, is expected to attract investments from PE/VCs, especially with the cap on foreign investments increasing to 49%. In summary, we will see large growth in private sector banking, insurance and technology driven companies but the largest investments would come when the PSU banking sector is able to raise external capital. However, this would require a significant mindset change at the government level. Abizer Diwanji Partner and National Leader Financial Services EY India PE/VC Agenda 1H18 35

36 Banking Sector overview The Banking sector in India is large, mature and competitive with the presence of established public (where Government holds significant equity and management control) and private sector banks. Notwithstanding the recent rise of NBFCs, banks remain the main source of credit for corporates, SMEs and retail borrowers. As of March 2018, banks had an outstanding loan book of ~US$1.3 trillion, which has grown at a CAGR of ~10%. 6 The economic slowdown subsequent to the 2008 financial crisis resulted in slower credit offtake, deterioration in asset quality and a buildup of NonPerforming Assets (NPAs). This problem has lingered for almost a decade and it is only now that banks (largely public sector) have started taking corrective measures to deal with their NPAs. This enthusiasm to deal with the NPA problem has been catalyzed by the new regulations/ reforms by the RBI and the government. Starting from the RBI s Asset Quality Review to the introduction of the IBC Code and subsequent tribunal proceedings, the Banking sector has taken critical measures to clean up balance sheets and tackle NPAs. The Government has also announced a recapitalization program of INR 2.11 trillion for public sector banks. Investors have also turned their gaze towards alternate banking structures such as Small Finance Banks (SFBs) which can stimulate credit flow to Micro, Small and Medium Enterprises (MSMEs) as well as promote financial inclusion. Deal activity The Banking Sector witnessed 28 transactions in 16 targets during the period 2015 to 1H18. A bulk of these deals (15) occurred in 2017 compared to three in 1H18, six deals in 2016 and four in The total PE/VC investment in the sector during the period 20151H18 amounts to ~US$2.9 billion, excluding deals for which the deal value was not disclosed, with ~US$1.9 billion coming in was the year when banks began to show signs of recovery and this was especially seen in the case of the larger private sector banks. The sector saw a high average deal value of ~US$105 million during this period. Deal value (US$m) Exhibit 45: Investment trend Banks 2,000 1,800 1,600 1,400 1, , , H2018 Total investment (US$m) # of deals 10 No. of deals Deal Value (US$m) Exhibit 46: Average deal size of investments in Banks 2015 to 1H Private Banks 14 SFBs RBI data release 36 PE/VC Agenda 1H18

37 Keen interest of PE funds in the Banking sector is evidenced by large investments/topup investments into some of the leading private sector banks. Select transactions in the space include investments by Chrys Capital in The South Indian Bank, CPPIB in Kotak Mahindra Bank, IFC & GIC in Bandhan Bank and CDC Group in RBL Bank. Bain Capital s investment of US$795 million in Axis Bank was the largest investment in the sector. Exhibit 47: Top PE/VC investments in Banks 2015 to 1H18 Target Amount (US$m) Deal stake % Investment month Investors Axis Bank Limited Dec 17 Bain Capital Kotak Mahindra Bank Limited Mar 17 CPPIB, CDPQ RBL Bank Limited Jul 17 Bandhan Bank Limited May 15 CDC Group, ABG Capital, Multiples, Others International Finance Corp (IFC), GIC, SIDBI Kotak Mahindra Bank Limited Dec 15 CPPIB AU Small Finance Bank Limited May 18 Temasek Janalaxmi Small Finance Bank Limited 100 NA Jan 18 HarbourVest, other investors Investment rationale PE/VC investments in the banking sector highlight two clear trends firstly, there is ample confidence regarding the future of large private banks, which have traditionally been wellcapitalized and have performed well across economic cycles and secondly, PE/VC investors have backed new private sector banks/small finance banks such as Bandhan, Ujjivan, Equitas, etc., which have good management and continue to grow fast. By and large the significant underpenetration of financial services in India continues to be the main investment thesis underpinning a sustainable growth scenario for many years to come. Major private banks, including ICICI Bank, Axis Bank, Kotak Mahindra Bank, and RBL Bank have all seen PE investments over the last three years. The banks that have seen PE investment are also listed. Average ticket size of PE deals involving private sector banks is much larger, indicative of the established nature of the banks and their current size. PE/VC Agenda 1H18 37

38 Investors have also backed the growth of SFBs. SFBs will continue to primarily cater to their existing microfinance customers, while a bank structure will allow them to massively increase their scale and accept deposits and hence gain access to a cheaper source of funding. SFBs have received investments during this transition from MFI to SFB as well as afterwards. This has helped them consolidate their positions and rapidly scale up. All the SFBs that have received PE investment, with the exception of Janalakshmi SFB, and AU SFB, are unlisted. Recent successful IPOs of AU SFB, Equitas SFB and Ujjivan have also demonstrated an attractive exit route, thus giving additional comfort to PE investors. Most SFBs are currently small in size and have a significant scope for growth. Exhibit 48: Top PE/VC investments in SFBs 2015 to 1H18 Target Amount (US$m) Deal stake % Investment month Investors Bandhan Bank Limited 260 NA Jan 15 IFC, GIC AU Small Finance Bank Limited May 18 Temasek Janalakshmi Small Finance Bank Limited Janalakshmi Small Finance Bank Limited 161 NA Sep 17 Tree Line Asia, QRG Enterprises, Morgan Stanley PE, TPG Asia, GIC, Others 100 NA Sep 17 HarbourVest, other investors Fincare Business Services Limited (Disha Microfin) 75 NA Mar 17 SIDBI Venture Capital, Leapfrog Investments, Tata Opportunities, TA Associates, Others Bandhan Bank Limited Feb 16 IFC, GIC, SIDBI Ujjivan Financial Services Limited 33 5 Nov 17 Creador Trading comparables The mean P/E (trailing) of large private sector banks has gradually increased from 18.9 to 30.2 from FY15 to FY18. These values are high compared to large public sector banks which trade in a P/E (trailing) range of Similarly, the large private banks also trade at a P/B (trailing) range of compared to for the large public sector banks. Thus, the market attaches a clear premium to the performance of private sector banks. A similar observation can be made while comparing smaller private and public sector banks. The recent bank recapitalization plan could provide a much needed boost to their book value as well as drive up the market sentiment. Further, smaller private banks trade at lower multiples as compared to their larger peers due to the smaller scale of operations and lower growth prospects/ higher risk premium. 38 PE/VC Agenda 1H18

39 Exhibit 49: Price/Book ratio Small PSU Large PSU Small private Large private Mar'15 Mar'16 Mar'17 Mar'18 Jun'18 Source: moneycontrol, NSE Transaction comparables Transaction comparables have been considered for deals valued at US$50 million or above. Small private banks including SFBs had premoney P/B multiples of while the large private banks had premoney P/B multiples of around 2.8 on average. In comparison, the former traded at P/B (trailing) multiples of around while the latter trade at P/B (trailing) multiples of 2.3 to 2.9. Clearly, investors are willing to pay a premium in order to obtain stakes in wellestablished private banks or smaller SFBs. Future trend Private sector banks have started gaining market share from their public sector peers and this is expected to continue in the foreseeable future. Wellrun private sector banks with their growth and profitability track record are expected to remain investor favorites. There were speculations during the beginning of the year that the Government is considering increasing the FDI limit to 100% for private sector banks and 49% for public sector banks from the current FDI limit of 20% and 74% respectively. Though the Government has clarified that there are no such plans/proposals in the offing, such a development could trigger more investment from foreign PE funds in the Banking sector, particularly in private banks. Investor interest has remained subdued for public sector banks, which primarily rely on Government fund infusion for maintaining capital requirements and funding growth. Consolidation of public sector banks has emerged as a possible scenario with the recent merger of SBI and its six associate banks. Successful consolidation could create larger public sector banks that are more attractive investment bets for PE investors, particularly if the Government continues its disinvestment program and makes banks truly autonomous. PE/VC Agenda 1H18 39

40 Exhibit 50: Key transactions in Banking sector (2015 to 1H18) AU SFB (May'18) Kotak Mahindra Bank (Mar17) P/B Bandhan Bank (Feb'16) RBL Bank (Jul'17) Axis Bank (Dec'17) 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% ROE Source: EY analysis of company data from BSE, NSE and financial reports Non Banking Finance Company (NBFC) Sector overview NBFCs have played a key role in meeting middle India s rising financial needs. They cater to unbanked population in rural, semirural and semiurban areas and also provide financial services to the informal sector and individuals with no credit histories. Higher cost of servicing, collection inefficiencies, inadequate liquid collateral and higher risk makes these customer segments unviable for banks to serve. Servicing these segments also requires a specialized approach to underwriting and development of customized credit assessment tools and methodologies. Since NBFCs have a widespread presence beyond Tier II cities and understand the local market better, they are able to customize products according to customer needs. The overall sector has been growing at a CAGR of 19% since FY2012, with MSME and microfinance subsectors demonstrating exponential growth at a CAGR of 39% and 42% respectively over the same period. Other subsectors that have grown well are LAP (31%), housing (21%) and automotive (19%). Construction equipment and gold finance have witnessed marginal growth. Since FY2012, NBFCs have approximately doubled their market share in upcoming segments of wholesale and SME finance. 7 7 CRISIL research report 40 PE/VC Agenda 1H18

41 Exhibit 51: Banks vs. NBFCs market share PSBs Foreign banks 3% 4% 5% 6% 8% 23% 23% 25% 28% 71% 70% 67% 63% 59% Source: RBI, DRHPs of recently listed NBFCs Private sector banks NBFCs 30% FY14 FY15 FY16 FY17 FY18 Provisional Exhibit 52: Investment trend NBFCs Deal value (US$m) # of deals Deal value (US$m) 1, , , H18 5 Number of deals Deal activity The NBFC sector attracted 107 PE/VC investments during 20151H18. This sector has witnessed a sustained PE interest with 24 deals in 2015, 26 deals in 2016, 26 deals in 2017 and 31 deals in 1H18. The MSME finance and MFI subsectors saw 26 transactions each during 20151H18, making them the most soughtafter subsectors. Emerging business models such as online lending platforms also attracted PE investments. The average deal size reflects the developmental stage and potential size of the respective subsectors. The average deal size for the SME subsector was US$99 million. Due to the vast diversification potential within the sector, PE funds are able to undertake varied investments in specific subsectors. Key active investors in NBFCs include Temasek, Morgan Stanley PE, Apax Partners, SSG and Aspada. The largest investment in the sector was Apax Partners US$370 million in Shriram City Union Finance in May 15. Exhibit 53: NBFCs sub sectors for 2015 to 1H18 Deal value (US$m) 1, , MSME NBFC MFI Online Lending 26 Deal value (US$m) 20 Structured Finance 10 MSME Fintech # of deals Venture Debt Agri Finance Education Vehicle Number of deals PE/VC Agenda 1H18 41

42 Exhibit 54: Top PE/VC investments in NBFCs 2015 to 1H18 Target Shriram City Union Finance Limited Amount (US$m) Deal stake % Investment month Investors May 15 Apax Partners GE Capital Services India Limited 330 NA Mar 16 AION Capital Partners Small business loan portfolio of Karvy Group 200 NA Nov 17 Arpwood Partners Profectus Capital Private Limited 200 NA Nov 17 Actis L&T Finance Holdings Limited Sep 15 Bain Capital India Infoline Finance Limited Jul 16 CDC Group AU Small Finance Bank Limited May 18 Temasek Hero Fincorp Limited Sep 16 Credit Suisse, Chrys Capital Spandana Sphoorthy Financial Limited RattanIndia Finance Private Limited Lendingkart Technologies Private Limited 100 NA Apr 17 Kedaara Capital, OTPP 100 NA Mar 18 Lone Star 88 NA Feb 18 India Quotient Fund, Saama Capital, Mayfield, Others Magma Fincorp Limited Mar 15 KKR, Leapfrog Financial Inclusion, Indium Fund Five Star Business Credits Finance Limited Aug 17 Morgan Stanley PE, Matrix Partners, Sequoia Capital, Norwest Venture Partners Capital First Limited Nov 16 GIC IFMR Capital Finance Private Limited 50 NA Dec 16 Standard Chartered PE Future trend Strong PE activity is expected to continue in the NBFC space in the near to midterm. Many small and midsize NBFCs continue to grow fast, and newer NBFCs are entering the fray. Acquisition of online customers through innovative business models has enlarged the market pie with room for additional players to enter. The abundance of alternative business models has allowed PE funds to cherrypick and take on specialized bets. 42 PE/VC Agenda 1H18

43 Investment rationale The vast addressable market, banks inherent disadvantage to cater to certain customer segments/products and historical high growth continues to attract PE investments in the NBFC sector. Retail focused, smaller ticket size and higher yielding NBFCs are attracting consistent PE interest since banks are unable to compete in that segment. Foreign investors have been very active and taken large stakes in NBFCs since 100% FDI is permitted through the automatic route, while there is a 5% single party limit for banks. NBFCs have also demonstrated high profitability and loan book growth, making them attractive investment targets. NBFCs such as MAS Financial Services Limited and Indostar Capital Finance Limited completed IPOs in 2017 and 1H18 respectively, while several others including Arohan Financial Services Private Limited plan to list on the bourses soon. Trading comparables The NBFC sector trades in a wide P/B (trailing) range of ~14 and a P/E of ~1525. This is due to the varied business models, wide range of product offerings and target customer segments catered to by various NBFCs. SME and vehicle finance NBFCs trade at a P/B (trailing) range of ~2 4 while diversified NBFCs usually trade at a P/B range of The variation in range exists due to the different makeup of each of their loan books. Higher exposure to sectors such as housing could increase P/B while sectors such as infrastructure could have the opposing effect. For example, infra NBFCs such as SREI Infrastructure Finance trade at a significantly lower P/B range of NBFCs have chosen to diversify their loan book to include housing in order to diversify risk and increase profitability. P/E (trailing) multiples for vehicle finance NBFCs are in a much wider range of while the same are lower for diversified NBFCs in the range of Exhibit 55: Price/Book ratio NBFC Vehicle Diversified Mar'15 Mar'16 Mar'17 Mar'18 Jun'18 Source: EY analysis of company data from BSE and NSE PE/VC Agenda 1H18 43

44 Transaction comparables The NBFC sector typically saw premoney P/B deal multiples of , although higher multiples were seen for transactions in smaller NBFCs. However, premoney P/B for diversified NBFCs was slightly lower at Due to high interest in the sector and higher growth for smaller NBFCs, PE deals are occurring at a higher valuation than trading multiples. Deal multiples have consistently stayed higher throughout the analysis period, indicating sustained investor interest. Exhibit 56: Key transactions in NBFC sector P/B Thirumeni Finance (Apr'18) Hero Fincorp (Sep'16) Capital First (Nov'16) Five Star (Aug'17) L&T Finance (Sep'15) IIFL (Jul'16) SCUF (May'15) 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% ROE Source: EY analysis of company data from BSE, NSE and financial reports Insurance Sector overview The Insurance sector in India underwent a threephase growth pattern. The first phase, between 2001 and 2005, included the opening up of the sector and slow growth as new entrants settled in the industry. In the next phase, between 2006 and 2011, the insurance sector witnessed a rapid growth due to the rush of ULIPS and banks foray into the sector. Post 2011, the sector has stabilized and matured. Underpenetration of market, increasing disposable incomes, rising awareness and high medical costs have supported the strong premium growth witnessed across general, health and life insurance. Private insurers have consistently gained market share in both general and life insurance. Recent developments in the sector include the rise in the FDI cap to 49% and a spate of IPOs that occurred toward the end of The Government has also announced a National Healthcare Protection Scheme that will provide health insurance to over 100 million families. Financial institution backed insurance companies such as ICICI Lombard, ICICI Prudential, HDFC Ergo, HDFC Standard Life, SBI Life, etc. have emerged as key players due to the large and efficient distribution reach of the mother institutions. 44 PE/VC Agenda 1H18

45 Exhibit 57: Life Insurance new business premium (US$b) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Source: IRDAI Exhibit 58: General Insurance gross direct Premium (US$b) Exhibit 59: Health Insurance Premium (US$b) FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY17 FY18 Source: IRDAI FY08FY09FY10FY11FY12FY13FY14FY15FY16FY17FY18 Source: IRDAI Deal activity The Insurance sector received a total of 29 PE/VC investments during 20151H18. The average ticket size for investments in insurance underwriting companies is high: US$226 million for life insurance and US$60 million for general and health insurance. PE funds, which demonstrated the most interest in this space, were Temasek, KKR, Warburg Pincus, Softbank and PremjiInvest. PE/VC Agenda 1H18 45

46 Exhibit 60: Investment trend Insurance Deal value (US$m) # of deals Deal value (US$m) H18 Number of deals Exhibit 61: Insurance sub sectors for 2015 to 1H18 Deal value (US$m) 1,800 1,600 1,400 1,200 1, Deal value (US$m) , Life insurance General and health insurance # of deals Other insurance sector Number of deals Exhibit 62: Top PE/VC investments in Insurance underwriters 2015 to 1H18 Target ICICI Lombard General Insurance Company Limited (Listed) HDFC Standard Life Insurance Company Limited (Listed) Amount (US$m) Deal stake % Investment month May NA Nov 17 Investors Warburg Pincus, Clermont Group, IIFL Special Opportunities Fund UCRNT Fund, other anchor investors Max Group 314 NA Jan 18 KKR ICICI Prudential Life Insurance Company Limited (Listed) SBI Life Insurance Company Limited (Listed) Max Financial Services Limited (Listed) IndiaFirst Life Insurance Private Limited Star Health and Allied Insurance Company Limited Nov 15 PremjiInvest, Temasek Dec 16 KKR, Temasek Feb 16 KKR Jun 18 Warburg Pincus Aug 16 ICICI Venture, Apis Growth Fund Acko General Insurance Limited 30 NA May 17 SAIF Partners, Accel India Management, Catamaran Investments 46 PE/VC Agenda 1H18

47 Exhibit 63: Top investments in Insurance brokers 2015 to 1H18 Target ETechAces Marketing and Consulting Private Limited (Policy Bazaar) ETechAces Marketing and Consulting Private Limited (Policy Bazaar) Coverfox Insurance Broking Private Limited Mahindra Insurance Brokers Limited Skymet Weather Services Private Limited Alliance Insurance Brokers Private Limited Easypolicy Insurance Web Aggregators Private Limited (easypolicy.com) Ideal Insurance Brokers Private Limited Amount (US$m) Deal stake % Investment month Investors 200 NA May 18 Softbank, Others Oct NA Apr'15 Info Edge India, Tiger Global, PI Opportunities, Temasek, True North, IDG Ventures, Wellington Management SAIF Partners, Accel India Management 10 5 Oct 17 Leapfrog Financial 8 27 Dec 17 InsuResilience Investment 8 NA Mar 16 Access Asset Managers 2 NA Jan 16 Unilazer Ventures 1 NA Apr 18 Venture Catalysts Investment rationale Majority of the deals in the sector were driven by the change in FDI limits and involved foreign partners increasing their stake in the insurance JV entities. These stepup transactions left a little scope for PE investors to step in. PE/VC investments were primarily through preipo rounds in ICICI Prudential, SBI Life, HDFC Life and ICICI Lombard. A slew of IPOs have brought HDFC Life, ICICI Lombard, SBI Life, GIC Re and New India Assurance to the market. Since late 2016, wellperforming IPOs have provided a clear path for PE/VC investors to exit, further increasing the attractiveness of the industry. Insurers that are backed by large banks or financial institutions and with an established distribution network attracted PE interest. Exhibit 64: Recent IPOs by insurance companies Company Listing date Listing price Over subscription HDFC Standard Life Insurance Company Limited 17 Nov x SBI Life Insurance Company Limited 03 Oct x ICICI Lombard General Insurance Company Limited 27 Sep x General Insurance Corporation of India Limited 25 Oct x New India Assurance Company Limited 13 Nov x Source: BSE, NSE PE/VC Agenda 1H18 47

48 Future trend The growth potential of the Indian insurance sector is unmatched given its sheer size and underpenetration. With increase in headroom for foreign shareholding and successful listing of general and life insurers, the sector remains attractive for PE/VC investments. In the life insurance sector, bancassurance will continue to play a strong role, giving an advantage to insurers having strategic tieups with large banks. IRDA has recently issued guidelines for PE/VC investments in insurance companies which place certain restrictions on acquiring more than 10% stake, which could dampen some PE/VC interest. However, this is not expected to impact large PE/VC funds with long investment horizons. Trading comparables SBI Life, the largest private life insurer trades at P/B (trailing) of ~11 and P/GWP (trailing) of ~3, which is marginally higher than the P/B (trailing) of ~8 and P/GWP (trailing) of ~2.2 for ICICI Prudential, indicating a premium for size. HDFC Life trades at a significant premium to its peers with P/B (trailing) of ~17 and P/GWP (trailing) of ~3.7. In the general insurance space, ICICI Lombard trades at a P/B (trailing) of 7 and P/GWP (trailing) of 2.9, while New India Assurance trades at P/B (trailing) of 1.4 and P/GWP (trailing) of ~2. Transaction comparables PE interest was witnessed across life, general and health insurance. Life Insurance saw PE investments in all top four underwriters at rich valuations. General insurance witnessed two transactions one in ICICI Lombard, the market leader and another in Acko General a new leader in digital insurance space. In Health Insurance, PE/VC investors took a significant interest in acquiring Religare s health insurance business and also invested in Star Health for a minority stake. Online distributors like Policybazaar also attracted interest with PE funds picking a minority stake. Exhibit 65: Key transactions in Life Insurance 4.5 P/EV SBI Life (Dec'16) 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% RoEV Source: EY analysis of company data from BSE, NSE and financial reports HDFC Standard (Nov'17) ICICI Prudential (Nov'15) 48 PE/VC Agenda 1H18

49 Housing Finance Exhibit 68: # of housing units (in million) E 46.0 Sector overview With fastgrowing cities and Government initiatives to enhance affordable housing, HFCs have witnessed significant rise in disbursements. The demand for housing is mainly driven by rising income levels, growing population and nuclearization of families. This has led to a growth at a CAGR of 22% in AUM of housing finance companies from FY2012 to FY The real estate industry has been adjusting to RERA, which has resulted in fewer new residential properties being launched, in turn affecting the disbursement growth rate of HFCs in the recent past. Source: NHB 19.0 Urban Exhibit 66: Average urban household size (#) Exhibit 69: Overall HFCs loan book (US$b) (home loans + nonhome loans) FY15 FY22e Source: NHB Exhibit 67: Population (in million) and urban % Source: NHB Exhibit 70: Overall HFCs share of loan book Rural Urban 50% Affordable HFCs Large HFCs 26% 32% ~2X % 63 78% e 14% FY % FY22e Source: NHB Source: NHB 8 Data released by National Housing Bank PE/VC Agenda 1H18 49

50 Deal activity The sector witnessed 18 transactions in 20151H18 with total deal value of US$2.3 billion and average deal size of US$135.5 million, mainly skewed by a single large deal of US$1.7 billion wherein GIC, KKR and others invested in HDFC Limited for a 3.9% stake. Excluding this large deal, the average deal size over the same period works out to US$40 million (not including the deals with undisclosed values). Affordable housing finance companies (AHFCs) emerged as frontrunners compared to large HFCs. AHFCs are key to the Government s vision of Housing for All and this translated into high PE/VC interest and deals in this space. This is highlighted by Kedaara Capital s acquisition of AU Housing for US$139 million and True North s acquisition of Home First Finance for US$100 million. Some of the PE funds active in the sector include Westbridge Capital, GIC, True North, Keedara Capital, General Atlantic, and PremjInvest. Exhibit 71: PE/VC investment trend Housing Finance Companies Deal value (US$m) Deal value (US$m) # of deals , H18 Exhibit 72: Top PE/VC investments in HFCs 2015 to 1H Number of deals Target Amount (US$m) Deal stake % Investment month Investors HDFC Limited 1, Feb 18 GIC, KKR, PremjiInvest, Others AU Housing Finance Limited Feb 16 Kedaara Capital Can Fin Homes Limited Mar 17 GIC Home First Finance Limited 100 NA Mar 17 True North PNB Housing Finance Limited Nov 17 General Atlantic Shubham Housing Finance Limited Sep 17 PremjiInvest, Elevar, Helion Aptus Value Housing Finance India Limited Sep 16 Westbridge, India Financial Inclusion Fund 50 PE/VC Agenda 1H18

51 Investment rationale The untapped large addressable market, growing urbanization, increasing nuclearization of families and rising income levels make housing finance an attractive segment. HFCs have a proven track record of fast growth, stable asset quality and high profitability, which has caught PE/VC interest. The growth trajectory of disbursements by housing finance companies is projected to continue, drawing interests of PE/VC investors. Encouraged by the support of the Government, investors are willing to help the HFCs grow deeper into nonmetros and build their book and distribution network. PE/VC transactions of varied nature from minority stake acquisition to buyout were seen in the sector. PE investors have cut small cheques in early stage AHFCs and large cheques for established and fastgrowing HFCs. Trading comparables HFCs typically trade in a P/B (trailing) range of with certain outliers such as GRUH Finance trading much higher in the range of Larger and smaller HFCs such as DHFL and GIC Housing Finance show very little variation. Market sentiment and high valuations have pushed up the price of new listings such as PNB Housing Finance. Future trend In our view, as long as there is a housing shortage in India, there will be a need for HFCs as well as for programs such as PMAY. The 2022 deadline for the PMAY program is on the horizon and demand for housing finance may be directly driven up by it in the coming years. HFCs require capital in order to scale quickly and PE/VC funds are a reliable source of investment in the sector. PE/VC interest may continue to remain focused on retailfocused low ticket size HFCs. In the recent past, Banks have become more active in addressing this market segment, which could become a competitive challenge to the growth of HFCs. Exhibit 73: Price/Book ratio Mar'15 Mar'16 Mar'17 Mar'18 Jun'18 Source: EY analysis of company data from BSE, NSE and financial reports PE/VC Agenda 1H18 51

52 Transaction comparables The HFC sector has typically seen premoney P/B multiples in the range of Investors are willing to pay a premium to obtain a stake in an HFC. Exhibit 74: Key transactions in Housing Finance sector 7.0 P/B Aptus Value (Sep'16) PNB Housing (Nov'17) HDFC Ltd (Jan'18) Can Fin Homes (Mar'17) AU Housing (Feb'16) Shubham Housing (Sep'17) 0% 5% 10% 15% 20% 25% 30% RoE Source: EY analysis of company data from BSE, NSE, and financial reports Payments Sector overview India has traditionally been a cash economy with cash in circulation as a percentage of GDP being in the range of 12%, one of the highest in the world. 9 Increasing digital penetration, nofrill bank accounts and development of payment acceptance infrastructure has resulted in a significant uptick in digital payment transactions, backed by a young, techsavvy population. customers and transaction volumes. The payment acceptance infrastructure was ramped up with many new merchants accepting digital payments through online and offline channels. Recent technological advancements supported by the Government like UPI/BHIM and platforms like Google Pay, Phone Pe, etc. promoted by private players have further given a boost to digital payments. The recent demonetization drive launched in November 2016 significantly drove up the number of digitally transacting 9

53 Exhibit 75: Number of cards outstanding (million) Credit cards Debit cards Exhibit 77: Transaction value (card usage) (US$b) Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Source: RBI FY14 FY15 FY16 FY17 FY18 Source: RBI PoS terminals Exhibit 76: Prepaid payment instruments Value (US$b) Volume (million) 1, Source: RBI Deal activity The payments sector witnessed 26 transactions in H18. The total amount invested was US$2.4 billion with an average deal size of US$109 million (excluding undisclosed deals). However, the marquee deal of the sector was SoftBank s US$1.4 billion investment in PayTM. Another large ticket size investment was the US$325 million investment by Carlyle in SBI Cards and Payments Services. Excluding these deals, the average deal size falls to US$47 million which is more representative of the investments in the sector. The sector saw a number of investments in 2015 but the bulk of the deals were seen in 2017, postdemonetization, when the digital payment companies had become household names. The PE/VC funds that invested in this sector include Sequoia Capital, TreeLine, SoftBank, Carlyle, Matrix Partners, General Atlantic and Temasek. PE/VC Agenda 1H18 53

54 Exhibit 78: Investment trend Payments sector Deal value (US$m) # of deals Deal value (US$m) H Number of deals Exhibit 79: Top PE/VC investments in Payments sector 2015 to 1H18 Target One 97 Communications Limited (Paytm) SBI Cards and Payment Services Private Limited IndiaIdeas.com Limited (BillDesk. com) Amount (US$m) Deal stake % Investment month Investors 1,400 NA May 17 SoftBank Dec 17 Carlyle 130 NA Dec 15 General Atlantic, Temasek Pine Labs Private Limited 125 NA May 18 Temasek Pine Labs Private Limited 82 NA Mar 18 Actis, Altimeter Capital Yapstone Inc 71 NA Feb 18 PremjiInvest Mswipe Technologies Private Limited Mswipe Technologies Private Limited Citrus Payment Solutions Private Limited Electronic Payment and Services Private Limited One Mobikwik Systems Private Limited 41 NA Jun NA Jul NA Oct 15 Matrix Partners, DSG Partners, Falcon Edge Capital, UCRNT Fund, B Capital Group Partners Matrix Partners, DSG Consumer Partners, Falcon Edge Capital, ANI Technologies, Axis Bank, Meru Capital Sequoia Capital, Econtext Asia, Beenos Asia, Ascent Capital Advisors Jan 16 Apis Partners 22 ~23 Apr 15 Sequoia Capital, Tree Line Asia, Cisco Investments, American Express Company 54 PE/VC Agenda 1H18

55 Deal rationale Demonetization was the trigger that provided the much needed catalyst for these payment companies in India. Payment technology became centerpiece to the Government s vision of a less cash economy. PE/VC interest was seen in both the offline and online payments space. The space saw marquee large ticket size deals as well as small investments in nascent companies. As evidenced by three large ticket size deals and particularly the PayTM deal, PE/VC investors have bet big on the success of large payment companies. Smaller payment gateways and wallet companies have found it hard to raise PE/ VC capital. Standalone payment players, not backed by banks/ telecom parents, may face strong headwinds; their viability and profitability will have to be evaluated on a casetocase basis. A clear trend towards increasing adoption of digital payments has been visible post demonetization. The sector is likely to be driven by the young techsavvy population along with further innovations. Exhibit 80: Investment trend Fintech Deal value (US$m) H18 Deal value (US$m) # of deals Number of deals Fintech Sector overview Increasing mobile and internet penetration has led to newer modes of delivery of financial services. Accordingly, Fintech has emerged as one of the fastest growing segments in financial services with a number of companies with different business models, addressing a niche need/gap. Fintech players have also collaborated with traditional business models to scale up efficiently. Deal activity The fintech sector witnessed approximately 96 deals in the period 20151H18, pointing to the high PE/VC interest in the space. There was a marked spike in the deal count post demonetization as the true potential of digital payments was brought to the forefront. Approximately 70% of the deals in the fintech space during the study period (68 deals) were announced postdemonetization i.e., post November The average deal size remains small at US$7.8 million, given the nascent stage of these companies. Investment rationale Traditional models in Financial Services have certain glaring gaps in terms of reach, customer satisfaction, turnaround time and convenience. Fintech companies are addressing these gaps to grow rapidly and disrupt traditional business models. High business volumes and growth were witnessed in online loan originators, P2P lenders and online distributors of financial products. Accordingly, PE/VC investors were seen backing Fintech players focused on lending (Personal and SME), insurance and mutual fund distribution. Future trend Technology will play a crucial role in increasing the reach and convenience, as well as curbing misselling of products. Fintech players have scope of increasing the market pie with unique offerings and also gaining market share from traditional companies. The sector will continue to see high investor interest, particularly for the larger players. Smaller players, with thinmargin unit economics, may find it difficult to attract investors and will need to be closely evaluated. PE/VC Agenda 1H18 55

56 Exhibit 81: Top Fintech deals 2015 to 1H18 Target Amount (US$m) Deal stake % Investment month Investors PolicyBazaar 200 NA May 18 Softbank, Others Lendingkart Technologies Private Limited Zen Lefin Private Limited (Capital float) 88 NA Feb Aug 17 India Quotient Fund, Saama Capital, Mayfield, Others Ribbit Capital, Sequoia Capital, Saif Partners, Creation Investments Capital Management Chargebee Inc 18 NA Mar 18 Accel India, Insight Venture, Tiger Global NeoGrowth Credit Private Limited Social Technologies Private Limited (Early Salary) Jun NA Jan 18 IIFL Seed Ventures, Omidyar Network, Accion Frontier, Aspada, Khosla Impact Eight Roads Ventures, IDG Ventures, Others CredAble 15 NA Jun 18 Alpha Capital MWYN Tech Prviate Limited (MoneyTap) Wealth India Financial Services Private Limited Indifi Technologies Private Limited OnEMi Technology Solutions Private Limited 12 NA Jun NA Jun ~28 Dec NA Nov 17 Sequoia Capital, New Enterprise Associates, Prime Venture Partners Inventus Advisory Services, Foundation Capital, Faering Capital Accel India, Elevar Equity, Omidyar Network. Ventureast, Fosun International, Endiya Partners 56 PE/VC Agenda 1H18

57 Solution spotlight Analytics driven value creation Analytics: A business enabler for BFSI sector Over the last few years, the Banking, Financial Services and Insurance (BFSI) sector has largely become commoditized. In addition, due to a dramatic increase in regulatory oversight coupled with an informed and nimble customer base, the sector is, as a result, facing headwinds from a rapidly increasing cost of compliance as well as the risk of noncompliance. Furthermore, digital is disrupting the fabric of traditional business models, questioning the medium to longterm solvency of many traditional players. However, there is a silver lining amongst all the mentioned challenges. Many players in the BFSI space have started leveraging the power of analytics to effectively manage and mitigate the above risks. The following are some of the benefits of utilizing analytics within the sector: Evolution of analyticsbased solutions Big data as a concept has been around for years. However, Gary King of Harvard University summarized the power of analytics over the data available as follows: Big Data is not about the data, thereby underscoring the real value of analytics in bringing data to life. Analytics has matured over the years as captured by the model below (based on Gartner s Research). It s worth mentioning that significant advances in technology, including data storage and processing capabilities, have contributed in making it happen. The adoption of analytics within the BFSI sector typically moves along the mentioned continuum Simple MISdashboard Real time reporting Descriptive Analytics Prescriptive Diagnostics Analytics Predictive Analytics Analytics. PE/VC Agenda 1H18 57

58 Application areas and benefits of analytics Analytics is helping BFSI clients effectively manage business challenges. Some of the typical application and benefits observed are: 1. Performance Analytics and Channel Costs Optimization: With BFSI services becoming commoditized, it is becoming increasingly important to keep delivery costs in check and maintain a tight control on operations. Some examples of the use cases for analytics within this context are: a. Monitoring and enhancing branch efficiencies and effectiveness b. Comparing delivery costs and effectiveness of various channels across various product lines 06 Compliance Monitoring & Tracking 01 Performance Analytics & Channel Costs Optimization 02 Fraud and Risk Prevention 05 Growth: CrossSell & UpSell Analytics Driven Value Creation in BFSI 04 Marketing & Campaign Effectiveness 03 Consumer Insight & Segmentation 2. Fraud and risk prevention: This is one of the most common uses today of big data analytics within the sector. Some of the common uses are: a. Proactive flagging of credit risks based on consumer behavior b. Analysis of portfolio 58 PE/VC Agenda 1H18

59 c. Pattern recognition to flag possible fraudulent transactions d. Riskadjusted pricing models for various products 3. Enhanced customer insights and segmentation: Hyper competition is nudging BFSI players to move from a productfocused to a more customerfocused mindset. Analytics here is supporting with a proper market sizing and segmentation so that appropriate products can be developed and optimal ways can be compared for acquiring/serving customers. Analyticsenabled customer loyalty programs have also gained a lot of prominence lately. Based on the author s experience, customer acquisition costs are typically 5x to 8x times the average revenue per customer, hence any effort towards reducing customer churn is worth exploring seriously What happened? (Past) What happened? (real time) What happened? (Analysis) Lagging indicator Real time indicator Detailed analysis into the event Why did it happen? What will happen? How can we make it happen? Diagnosing the root cause Influencing the outcomes in future Scenario planning 4. Marketing & campaign effectiveness: With firms stretched for cash and under constant pricing pressures, analyzing the impact of marketing or promotion of campaigns on top line has become critical for calculating the RoI on marketing expenses. Analytics is being increasingly used in this area to generate targeted realtime offers and personalization of these to allow higher impact; thereby a better RoI on these expenses. In this context, social media analytics is also being utilized to track customer sentiments, trends, brand equity quotients and spot any emerging influencers. These insights help fine tune the campaigns and the product offerings. 5. Crosssell and upsell: Historically, financial institutions sold products from a roster of offerings that they had in their portfolio. This was a productcentric view. Now BFSI players are able to gain consumer insights using analytics (spend habits/preferences/demographics, etc.) to offer a high degree of customized products, thereby shifting to a more customercentric model. Predictive analytics is being used to predict with increasingly higher degree of certainty the likelihood of purchase of a specific services based on customer data available with the firm. Customer service or call centers are fast utilizing these predictive analytic tools to offer tailormade proposals to customers for crossselling or upselling their services. 6. Compliance monitoring and tracking: Visual MIS and dashboards which are enabled by powerful analytics engine on the background allow for ease of tracking compliance on key processes. Global, geographically dispersed businesses or those with a lot of employees find this to be especially useful. Akhil Puri Partner and National Leader Private Equity Value Creation PE/VC Agenda 1H18 59

60 5 Service spotlight Operational Due Diligence 60 PE/VC Agenda 1H18

61 Operational Due Diligence (ODD) Background Competition for the right deal has intensified and this scarcity of attractive assets has driven up valuations. Against this background, acquirers need to be absolutely sure they can generate incremental value postacquisition before pursuing the deal. Focusing on what can be done after the deal is done is crucial and whilst downside risks continue to dominate diligence, successful acquirers must also evaluate and price upside potential. This shift is changing the way diligence is employed with operational due diligence now core to the value story and focused on understanding: How does the business operate daytoday and what is its cost base? What happens when there are seismic shifts in the operating model or competitive landscape? How can the asset become more flexible adapting to constant internal and external changes? What upside opportunities exist and how does the business compare to peer performance? Service description We can help clients. Identify and validate value creation opportunities, and identify risks early Use a hypothesisled approach to uncover issues, risks and potential additional upsides Ensure clarity on the cost base and its drivers Provide independent review and challenge of management plans Assess effectiveness of current operating processes and systems, including capacity / utilisation / efficiency / capex etc. Identify and mitigate execution risk Identify any oneoff or dual running costs Ensure risks are reflected in the deal valuation EY differentiators Experience: We have a global team with industry professionals with a background in IT and Operations who are serial transaction advisors Market leading: We have the global critical mass to access niche expertise across the team Approach: Our approach is flexible and practical, and our methodologies are built to drive high quality results in a time pressured situations PE/VC Agenda 1H18 61

62 Value proposition to client In general, the purpose of operational due diligence is to drive post acquisition value to our clients. More specifically this means: Operational and industry insight to give clients an edge in the acquisition process Cost reduction upsides that give a potential exit strategy or downside protection if revenue growth fails to materialise Identify areas of risk that the client doesn t have experience in Identification of transaction issues that turn out to be deal show stoppers or cause management teams to adjust unrealistic plans (+) () Target Value Value: Pre acquisition (+) Cost reduction Value creation Scale Pricing Asset rationalisation Ops & supply chain Headcount Product rationalisation Upsides Cross / up sell New products/ markets Post acquisition / integration planning Costs and risks Postdeal Integration Retention Disruption Value created for acquirer Target value Value: Post acquisition Typical piece of operations due diligence work Generally, ODD can be broken down into three key areas: 1. ODD: Diligence Get behind the numbers to understand the business drivers and profitability challenges of the sector Establish if the business s current operational platform and performance is sustainable, identifying risk areas Assess whether operational aspects of business plans are deliverable, determining sensitivities where appropriate Review transaction synergies and identify carveout or integration risks and requirements community can understand 2. ODD+: Efficiencies Apply outsidein, hypothesis approach to identify efficiency upsides Assess how aggressive management s plans are 62 PE/VC Agenda 1H18

63 3. Value Led: Operational Upside Apply top down hypotheses approach to identify business opportunities Identify strategic upside opportunities of the business (not just operations) Assist our client s future strategy (growth / exit) Communicating our opinions in a language the financial community can understand Value delivered Equity Investment Case, Create new operating model Banking Base Case, Diligence the plan ODD Diligence Focus: Approach: Structure: Issues led Strategic Upside Focus: Transformational Change Approach: Hypothesis driven Structure: Issues that matter without regard to specialism ODD+ Efficiencies Focus: Improvements Approach: Opportunity analysis Structure: Integrates specialists (Finance/Tax/Ops) Riskbased Bottomup analysis Separate Specialists (Finance/Tax/Ops) Commoditised DD Offering Differentiated Issues Led DD Akhil Puri Partner and National Leader Private Equity Value Creation PE/VC Agenda 1H18 63

64 6 Outlook 64 PE/VC Agenda 1H18

65 The backtoback years of strong PE/VC investment activity, record levels of dry powder and strong interest from the global LP community have placed India in a sweet spot. Moreover, positive policy measures by the Government, be it the implementation of GST, RERA and the IBC and initiatives like Jan Dhan, National Healthcare Protection Scheme, and Ujjwala Yojana have improved the ease of doing business and also provided opportunities for inclusive growth. Major consumer facing sectors like Healthcare, Financial Services, Consumer Products and Retail and Ecommerce are now well poised for strong growth and are expected to receive strong investment flows from PE/VC investors. The PE/VC activity in 2018 till date has panned out as per our forecast and if the same trend continues, we are well on track to see 2018 eclipse the PE/VC investment and exit highs of On a cautionary note, certain headwinds like high oil prices, depreciating currency and impact of rising tensions in global trade can dampen the investment climate. On the exits front, given the volatility in stock markets, deal activity through open market operations are expected to remain muted for some time. Also, though IPOs continue to be an important exit route for the PE/VC community, and have done well so far, there could be delays in IPOs of some PEbacked companies as market conditions are not ideal due to high levels of volatility in the midcap/smallcap space. Nonetheless, secondary sales should continue to see traction as new investors lap up businesses that have proven their growth potential and scaled up well under early investors. When concluded, the WalmartFlipkart transaction is expected to lead to the rebooting and reenergizing of the Indian startup / early stage investing ecosystem on account of the huge exits it will provide to its PE/VC investors. With technologyled disruptions bringing aspirational products and services within the reach of the Indian population, the Indian market is expanding significantly and accounting for a larger share of global investment pie. The PE/VC activity (investments + exits) in 2017 was more than $39 billion and is on track to exceed this record high in We continue to maintain our position that the next five years will be the Golden Age of the Indian PE/VC industry and Indian PE/VC investment levels in 2018 could potentially be in the range of 1.5x2x the highs of Nifty (January 2016 to August 2018) 14, ,000 11,084 10,000 8,000 6,000 7,791 7,030 8,551 8,033 9,304 9,766 10, ,000 2,000 Jan16 Apr16 Jul16 Oct16 Jan17 Apr17 Jul17 Oct17 Jan18 Apr18 Jul18 PE/VC Agenda 1H18 65

66 Appendix About EY s Private Equity Services EY has been working with the private equity industry for more than 25 years, with approximately 25,000 seasoned professionals worldwide dedicated to the industry and its business issues. EY serves 74% of the top 300 PE firms included in the Global PEI 300 firms list. Private equity firms, portfolio companies and investment funds face complex challenges. They are under pressure to deploy capital amid geopolitical uncertainty, increased competition, higher valuations and rising stakeholder expectations. Successful deals depend on the ability to move faster, drive rapid and strategic growth and create greater value throughout the transaction life cycle. EY taps its global network to help source deal opportunities and combines deep sector insights with the proven, innovative strategies that have guided the world s fastest growing companies. In India, EY is among the leading providers of advisory, tax, transactions and assurance services. The organization is also the number one professional services brand* in India, which is a testimony to our relentless commitment to deliver exceptional client service and create a better working world. EY has 16 offices spread across 10 cities in India. Worldwide, our 247,570 people across 150+ countries and 700+ cities are united by our shared values and their unwavering commitment to quality. EY s India Private Equity Services Practice has been among the top advisors for private equity deals over the past ten years. EY has been awarded the Most Active Transaction Advisor award by Venture Intelligence for and also the Investment Bank of the Year, Private Equity award by VC Circle in 2012 and EY s India Private Equity Services Practice provides value to PE funds and their portfolio companies through its deep sector and service expertise. EY India is organized around key industry verticals in a matrix structure that enables us to offer an unparalleled blend of industry expertise and functional skills. We actively track about 15 sectors with sector leads driving our penetration in each of those sectors. EY has been ranked as #1 Financial Advisor for over a decade across Mergermarket, Thomson Reuters and Bloomberg**. Our position as the foremost M&A advisor in the Indian midmarket enables us to create a robust deal origination pipeline for our PE/VC clients, acting as the tip of the spear of what is India s dominant PE Services practice. Mergermarket Thomson Reuters Bloomberg * as per Global Brand Survey, conducted by an independent research agency commissioned by Ey ** for most number of deals 66 PE/VC Agenda 1H18 EY Closest compete

67 # 1 advisor on deal count in Financial advisory league tables across databases Consistently maintaining a significant lead from closest compete Adjudged as the Investment Bank of the Year at the VC Circle Awards 2017 We offer an array of services to Private Equity funds and their portfolio/investee companies through our various service lines. Partners (Personal tax) Fund raising (Audit of fund performance) Buyside advisory (M&A and valuations, Fraud, Investigation and Dispute Services) Exit readiness (IPO, GAAP Conversion, SOX Compliance, VDD, Sale Mandates, Clause 49) Distressed (Bank intermediary, working capital, cost reduction) Funds Transaction Advisory Services Portfolio Services Assurance (Assurance, Tax Compliance, Risk Management, Corporate Governance Advisory, Internal Audits and Fraud reviews) Fund assurance (Assurance and Tax Structuring) Buyside support (Financial Due Diligence, Tax Structuring and Diligence, Business DD, Environmental Compliance,CDM Human Capital, Valuations) Transition (Transaction Integration, GAAP Conversion, Governance, Controls Assessment, MIS Development, Process Advisory, Standard Operating Procedures) Growth (Strategic Options, Technology Security, IT Strategy, Operational Improvement, Market Entry Options & WCM) PE/VC Agenda 1H18 67

68 Delivering issuebased solutions to the entire PE enterprise EY has established six distinct solutions reflecting the holistic set of challenges that PE firms face across all levels of the organization the management company, the funds, and their portfolio companies. Operating model and automation Alternative asset managers need to drive efficiency through multiyear target operating models and infrastructure strategies to remain competitive. These align with strategic growth plans by leveraging vendor and service provider activities. EY defines and monitors data analytics and key performance indicators to annually assess data governance and risk against these target models. Global compliance and reporting Large asset managers have hundreds of nonus legal entities in multiple countries, and continually create new ones all with different compliance obligations. Many are outsourced and require local knowledge. EY gathers the data, leverages local EY teams familiar with accounting and tax laws, performs data analytics to identify trends, risks and opportunities and monitors filing requirements. Deal origination The intense competition for a limited number of deals raises stakes to win for private equity firms. A proprietary investment approach, driven by sector insights, enables firms to confidently place winning bids that generate appropriate returns. EY s global origination team turns opportunities into actionable strategies. Our proprietary knowledge and advanced analytics help develop strategic capital options to help firms achieve success. Integrated due diligence Private equity firms conduct diligence on assets across strategic, financial, tax, operational and HR issues. Firms historically used issuebased advisors, managing different parties and consolidating findings at the end of the process. Employing EY s integrated diligence approach at the early stages of a transaction provides more effective, comprehensive diligence on an asset, giving firms a distinct competitive advantage. Value creation Private equity firms face increasing pressure to attract fresh capital. This requires generating greater investment returns and demonstrating a consistent track record in creating value in their portfolio. EY s value creation solution addresses these challenges across all five stages of the deal life cycle, including deal origination, diligence, inception, optimization and exit strategy. Exit readiness and IPO Private equity firms must plan exits rigorously in order to successfully monetize their investment during the exit process in today s challenging environment. Executives must identify key shortand longterm priorities prior to undertaking an IPO or alternative transaction. EY can advise deal teams and portfolio companies on exit alternatives, assess exit readiness, prepare a business for exit/ipo and create a value story for targeted buyers. 68 PE/VC Agenda 1H18