Private equity roundup

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1 1Q 201 is a quarterly newsletter on trends and prespectives related to private equity (PE) activity in India. In this edition Key economic indicators 2 Funds Transactions & Exits 5 Tax and regulatory updates 9 Outlook 11 Foreword There was an improvement in investment activity during the quarter, both in terms of value and volume, as compared to the last quarter. The total deal value stood at US$2.2b, spread across 110 deals, as compared to US$1.8b from 88 deals in Q 2013 and US$1.1b from 82 deals in 1Q Deal value in (Canadian institutional investor Indo-Infra Inc. and IDFC s investment in two hydro assets of Jai Prakash Power Ventures with Abu Dhabi National Energy TAQA, which is owned by Abu Dhabi Water & Electricity Authority ADWEA). Deal volumes were driven by early stage activity and PIPE deals. Growth stage deals declined by 33% from the last quarter (22 deals in 1Q 201, as compared to 33 deals in Q 2013) the lowest in terms of volume since The national elections have led to an overall slowdown in deal-related The slowdown has been clearly evident in the case of exits. There were 21 exits during the quarter, with no PE-backed IPOs, as compared to 30 exits in the last quarter. Open market deals and strategic exits constituted a major portion of exits in the quarter. The largest exit during this quarter was an open market in secondary exit activity (PE to PE deals). Fund-raising has been more encouraging with an improvement in amounts raised and new announcements. As witnessed during the last few quarters, there was a clear bias toward track records and experience. Successful fund raising was led by Westbridge, expanding its current pool by US$325m, and with IDFC

2 Key economic indicators Production (IIP), was not encouraging, there were some and the rupee also remained relatively stable through the quarter. With crude continuing to be range bound and gold imports under check, there was not much stress about the Figure 1: FII Flows (Net) compared to the last quarter, as overseas investors committed capital to Indian markets, taking the capital market barometer Q Figure 2: Rupee movement US$m ,638 1Q 10,357 8,10 12, ,331,159 9,15 2Q 3Q Q 1Q 2Q 3Q Q 1Q Rupee Value Jan-1 01-Feb-1 01-Mar-1 31-Mar-1 US Dollar Euro Source: SEBI website Figure 3: FDI Flows Figure : BSE Sensex US$m 10,000 8,18 8,000 7,197 5,83 6,000 5,77 5,397,28,100 3,966,000 2,189 2,017 2, Q 2Q 3Q Q 1Q 2Q 3Q Q Jan Feb ( 00) 23,000 22,500 22,386 22,000 21,500 21,10 21,000 20,500 20,000 19,500 19, Jan-1 01-Feb-1 01-Mar-1 31-Mar-1 Source: BSE website 2

3 Figure 5: Index of Industrial Production (IIP) y-o-y change (percentage) YoY % change of IIP Jan Feb Mar Apr May Jun Jul Aug SepOct Nov Dec Jan Feb Mar Apr MayJun Jul Aug Sep Oct Nov Dec Jan Feb Mar Source: CMIE online database Figure 6: GDP growth rate y-o-y change (percentage) 10% 10% 8% YoY % for components of GDP 6% % 2% 0% 5.1% 5.% 5.2%.7%.8%.%.8%.7% 6% 2% YoY GDP growth % -2% 1Q 12 2Q 12 3Q 12 Q 12 1Q 13 2Q 13 3Q 13 Q 13-2% GDP Growth % Agriculture (%) Industry (%) Services (%) Source: CMIE online database 3

4 Funds closed US$0.9b in investor commitments almost double the amount (US$325m) was raised by WestBridge Capital s public market-focused fund, followed by IDFC s Real Estate Fund (US$12m). In terms of the number of funds, the quarter saw the previous quarter. The quarter also saw the focus returning to the real estate of funds raised were real estate-focused. These real estate funds are attracting a mix of domestic and foreign investors. Figure 7: Quarterly fund-raising (US$b) Q 11 2Q 11 3Q 11 Q 11 1Q 12 2Q 12 3Q 12 Q 12 1Q 13 2Q 13 3Q 13 Q 13 1Q 1 Announced Raised Source: Venture Intelligence, Factiva and EY analysis Figure 8: India-focused funds raised during 1Q 201 Name Fund focus Value (US$m) New/Follow-on fund WestBridge Capital Sector-agnostic 325 Follow-on fund Real Estate 12 Follow-on fund of US$22m in February 201) Sector-agnostic 108 Follow-on fund Logistics 80 Follow-on fund CX Partners - Mezz Fund Sector-agnostic Follow-on fund The ASK Group offshore real estate-focused fund Real Estate 50 Follow-on fund Motilal Oswal Real Estate (MORE)- India Realty Excellence Fund (IREF) II Real Estate Follow-on fund close of US$9m and US$83m announced in August 2013 and November 2013, respectively) Real Estate 29 Follow-on fund Infuse Ventures Cleantech 18 New fund Residential Opportunities Fund I-Jones Lang LaSalle Real Estate 10 New fund Source: Venture Intelligence, Factiva and EY analysis The quarter saw eight new fund-raising plans, totalling Sequoia Capital announcing its plans to raise US$500m for its India Fund IV and US$300m by IDFC Alternatives (Foreign Rental Yield Fund).

5 Transactions & Exits Transactions Deal activity has improved in terms of value and volume compared to the last quarter. While activity was largely driven by early-stage deals, the increase in deal value was Prakash Power Ventures two hydro power plants by Canadian institutional investor Indo-Infra Inc. and India Infrastructure the balance amount was invested by TAQA. In terms of big ticket transactions (US$100m or above), deal activity declined with the quarter only witnessing three deals compared with six in the previous quarter. Overall, the quarter saw US$2.2b invested in 110 deals, with an average deal size of US$2.5m, compared to US$1.8b in 88 deals and an average deal size of US$29.m in the last quarter. The median deal size in the quarter declined from Figure 9: Trend in PE investments Q 11 2Q 11 3Q 11 Q 11 1Q 12 2Q 12 3Q 12 Q 12 1Q 13 2Q 13 3Q 13 Q 13 1Q 1 Value (US$b) Volume Source: VCCEdge, Venture Intelligence, VCCircle, Factiva and EY analysis Figure 10: Composition of PE deal volume by deal size Q 11 2Q 11 3Q 11 Q 11 1Q 12 2Q 12 3Q 12 Q 12 1Q 13 2Q 13 3Q 13 Q 13 1Q 1 < $10m $10m - $20m $20m - $50m > $50m NA Source: VCCEdge, Venture Intelligence, VCCircle, Factiva and EY analysis 5

6 In addition to the investment in Jai Prakash Power Venture s two hydro power plants, other major investments during the quarter included a US$13m investment in Jasper Infotech (Snapdeal.com), led by ebay with existing investors including Kalaari Capital, Nexus Venture Partners, Bessemer Venture Partners, Intel Capital and Saama Capital, and an investment of US$100m in CitiusTech Solutions (health care technology contributed around 5% of the total deal value during the quarter. Figure 11: Top 10 PE investments in 1Q 1 Target Investor Sector Deal Value (US$m) Two hydro power plants of Jai Prakash Power Ventures Indo-Infra Inc., India Infrastructure Fund II (IDFC) Infrastructure Jasper Infotech (snapdeal.com) Multiple investors 1 Retail and consumer products 13 CitiusTech Solutions General Atlantic Technology 100 Quikr India Multiple investors 2 Technology 90 Varroc Group Tata Opportunities Fund Automotive LiquidHub ChrysCapital IV Technology 53 Page Industries Cartica Capital Retail and consumer products 51 Global Beverages and Foods Goldman Sachs (Principal Investments), Mitsui Global Investment Food and agriculture 51 Myntra Designs Multiple investors 3 Retail and consumer products 50 Inesh Realtors (Mantri group) Real Estate, Hospitality & Construction Q 11 2Q 11 3Q 11 Q 11 1Q 12 2Q 12 3Q 12 Q 12 1Q 13 2Q 13 3Q 13 Q 13 1Q 1 Buyout Growth PIPE Early Stage Source: VCCEdge, Venture Intelligence, VCCircle, Factiva and EY analysis 6

7 Early-stage investing continued to dominate deal volumes, reaching the highest quarterly total ever witnessed and deals. Furthermore, the quarter saw a two-fold improvement in PIPE deals, compared to the last quarter. This was also hand, growth deals declined by 33% from the last quarter the lowest recorded in terms of volume since Figure 13: PE investments in 1Q 1 by sectors Volume Value (US$m) Technology 28 Infrastructure 78 Others 17 RCP 363 RCP 15 Technology 303 Financial services 11 Others 182 Healthcare 9 Financial services 106 Food and Agriculture 9 RHC 103 Education 6 Automotive 90 Industrial products 6 Food and Agriculture 90 RHC Business services 9 Business services 3 Industrial products M&E 2 Healthcare 3 Source: VCCEdge, Venture Intelligence, VCCircle, Factiva and EY analysis Abbreviations: Real Estate, Hospitality and Construction (RHC), Retail and Consumer Products (RCP), Media & Entertainment (M&E) The quarter saw the technology sector witnessing the largest number of deals (28) with an aggregate value of US$303m [deal value disclosed for only 18 two-thirds of the deals]. The top three deals in this sector, General Atlantic s US$100m investment in CitiusTech Solutions, US$90m investment in US$53m investment in LiquidHub (provider of customer engagement services), accounted for nearly 80% of the total value during this period. In terms of deal volumes, activity was mainly driven by angel networks and VC funds, which made early-stage investments (23) in start-ups across segments including online web portals, software solutions and data analytics. Retail and consumer products continued to attract PE interest, space, was the US$13m investment by ebay in Jasper Infotech (Snapdeal.com). In addition to this, the quarter witnessed investments in other e-commerce companies such as Flipkart, Myntra, Jabong and apparel company Page Industries (Jockey licensee), clearly indicating the continued is also attracting the interest of investors. Moreover, while the Retail & Apparel segment, the space is clearly witnessing aggregating US$90m (50% of the value driven by a single deal Goldman Sachs and Mitsui Global Investment s US$51m investment in Global Beverages and Foods. Investments were made in this sector across various segments including packaged foods, dairy services and restaurants. 7

8 Exits With 21 exits, deal activity declined by one-third of that witnessed in the previous quarter (30). Open market exits The largest exit of the quarter was Chryscapital exiting HCL exits (PE to PE), possibly due to the general elections in India. Figure 1: PE exits in 1Q 1 by type (volume) Q 11 2Q 11 3Q 11 Q 11 1Q 12 2Q 12 3Q 12 Q 12 1Q 13 2Q 13 3Q 13 Q 13 1Q 1 Buyback Open Market Secondary Strategic IPO/FPO Source: Venture Intelligence, VCCircle, Factiva and EY analysis The quarter saw no IPO exits. While the number of open market exits remained the same as US$39m to US$233m, primarily driven by HCL Technologies two exits other than the Technology, which saw six exits that contributed nearly 29% in terms of volume. Figure 15: Select non-ipo exits during 1Q 201 Target Seller Exit Type Value (US$m) Buyers HCL Technologies Chryscapital Open Market - Cyberoam Technologies Carlyle Asia Growth Partners Strategic 80 Sophos Tirumala Milk Products Carlyle Asia Growth Partners Strategic Lactalis Group Bharti Infratel Goldman Sachs (Principal Investments) Open Market - Sterling Holiday Resorts India India Discovery Fund Bay Capital Strategic 28 Thomas Cook Insurance Services (India) 8

9 Tax and regulatory updates changes in India, with the Ministry of Corporate Affairs (MCA) notifying 183 sections of the Companies Act, 2013 (effective from 1 April 201), the Reserve Bank of India (RBI) introducing the framework for investments under SEBI s Foreign Portfolio Investment Regulations, the Finance Minister presenting the Interim Union Budget in the Parliament and the Government releasing the revised draft of the Direct Taxes Code for public discussions. Tax updates The Finance Minister of India presented the Interim Union Budget (Interim Budget) for in the Parliament and sluggish growth. The Interim Budget did not propose any changes to direct tax laws. However, the Government has made some changes in indirect tax rates with the intention of giving a stimulus to the manufacturing sector. Furthermore, the Finance Minister announced the following key commodity derivative markets: Revamping of the American Depository Receipt / Global Depository Receipt Scheme and enlarging the scope of depository receipts Liberalization of the rupee-denominated corporate bond market Facilitation of clearing and settlement procedures for international investors looking to invest in Indian bond markets Deepening and strengthening of currency derivatives market to enable Indian companies to fully hedge against foreign currency risk Amendment of Forward Contracts (Regulation) Act, 1952 to strengthen the regulatory framework of the commodity derivatives market The Finance Minister also proposed placing the revised draft of the Direct Taxes Code for public discussion. This was subsequently released. There have been no changes made to direct tax laws in the Interim Budget. Existing Income-tax rates and surcharge are to apply until changes are made in the regular Budget, which is expected after the formation of the new Government. However, due to deferral of amendments made in the Interim Budget, e.g., a tax holiday for the power sector and a concessional tax rate of 15% on dividends received from overseas subsidiaries. Source: The Direct Taxes Code is an attempt made by the Government to revise, consolidate and simplify direct tax laws in India into a single legislation. To follow up on this initiative, DTC 2013 was released for public discussion (as stated by the Finance Minister in the Interim Union Budget Speech in February 201), after taking into account the recommendations of the Standing Committee on Finance. Broadly, DTC 2013 aligns many of its key provisions with the current provisions of Indian tax laws, with many of the key proposals contained in earlier versions of the Direct Taxes Code having already been introduced as amendments in Indian tax law. DTC 2013 proposed certain amendments to earlier versions of the Direct Taxes Code, e.g., to reduce the threshold for indirect transfer provisions being triggered from 50% to 20%, and provided for proportionate taxation in the event indirect transfer tax is triggered. Among its amendments, it excludes small shareholders (up to 5%) from being levied Indirect Transfer Tax and empowers the Government to notify a white list of jurisdictions for which Controlled Foreign Company rules is not triggered. It is pertinent to note that while the fate of DTC 2013 is uncertain at present, one can hope for more certainty once a new Government is formed after the elections in June/July 201. Nevertheless, it would be helpful to assess the impact of the proposals on current investment and holding structures. Source: 9

10 The Central Board of Direct Taxes has issued an instruction directing the Indian Revenue Authorities to determine the appropriate portion of payments chargeable to tax in India, and accordingly, a payer can be treated as a defaulter for not withholding tax, but only in respect of the portion of the payment that is chargeable to tax in the country. This is a welcome step for taxpayers. Instruction No. 2/201 [F.No. 500/33/2013-FTD-I] dated 26 February 201 Regulatory updates Currently, the limit for investments in corporate debt in India, made by foreign portfolio investors (FPIs) and long-term investors, is US$51b. Within this, a sub-limit of US$3.5b has been made available for investments to be made by such investors in Commercial Papers (CPs). Considering that this sub-limit has not been fully utilized, the RBI has issued a circular that reduces the sub-limit for investments made in CPs to US$2b. The balance US$1.5b is to be subsumed as part of the total corporate debt limit of US$51b. This restructuring of corporate debt limits will widen the scope for investors to invest in such instruments, since an additional US$1.5b will now be available to them. A.P (DIR Series) Circular No. 10 dated 1 February 201 Exchange Board of India (SEBI) on FPI Regulations, the RBI has issued its framework for investments made by FPIs under its Exchange Control Regulations. The provisions of the Companies Act, 2013 (Cos. Act), which received the President s assent on 29 August 2013, are being implemented in a phased manner by the MCA. The MCA Act and certain sub-sections of the sections that were earlier sections have been effective from 1 April 201. Earlier, 99 sections that have been effective from 1 April 201. It should be noted that key provisions relating to amalgamation and mergers, which would facilitate outbound mergers and relaxed requirements for prior approval of the Tribunal for merger of small companies, as well as certain Source: to withdraw all existing guidelines relating to valuation in the case of acquisition or sale of shares for the purpose of FDI. Accordingly, such transactions will henceforth be based on acceptable market practices. investors in India. Operating guidelines will however be in perspective other regulations such as the Income-tax acquisitions or divestments. Source: EPFS192BE268D98D3.pdf FPI Regulations are similar to the Portfolio Investment Scheme manner in which investors are to be registered or regulated. AP (DIR Series) Circular No 112 dated 25 March

11 Outlook Over the last six months, the Government has taken several steps to enhance will take time to be implemented and may have a limited impact on related activities, since investors are keenly waiting for the new Government to be installed by June or July 201. PE activity in the near to medium term will depend on the outcome of the general elections and the policy direction of the new Government. There has been much discussion on El-Nino (weather pattern typically associated with low rainfall) in the last month or so, and investors will be closely watching Exits continue to be the focus area for PE funds in India, and we expect the trend to continue, with more and more investors spending considerable time on their exit readiness initiatives and performance improvement agendas to prepare their investees for exits. There are a number of exit options, including strategic sales, overseas and domestic listing, secondary PE, etc., being explored by them. We are also seeing the trend of more entrepreneurs being open to divesting their majority stakes to facilitate the exits of PE investors. In the long term, this should augur well for exits and also lead to increased buyout activity. - India 11

12 About EY EY EY is a global leader in assurance, tax, transaction and advisory shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. In India Hyderabad, Kolkata, Kochi, Mumbai, New Delhi, NOIDA and Pune. Its workforce of more than 9,900* people work toward the organization s vision of being a trusted business advisor that and value. We help our clients achieve their potential through our leading approach, which incorporates various service dynamics, including: An industry-aligned delivery model that harnesses our broad knowledge, skills and our experiences of that industry in India and around the world. This helps us customize our approach to the unique needs of each client. Assurance, Tax, Transactions and Advisory. Each service line is further streamlined into niche competencies and focused groups, which enable us to strengthen our outreach and offer a Each team is built as a multidimensional group of professionals from diverse backgrounds, with a range of perspectives. They understand and address our clients concerns from a variety of standpoints, while using highly evolved tools and approaches to offer inputs in a structured and compelling manner. Values and ethics unite us, ensuring cohesive work toward the shared goal of making a difference. A special energy that we key characteristic. Today, we are recognized as leaders in the professional services industry, and the accolades we receive encourage us to continue striving for excellence. Most Attractive Employer award in the consulting sector by Randstad Euromoney ITR, World Tax Guide 201 Ranked #1 Financial Advisor in India for 12 consecutive years for most number of deals from Bloomberg The most reputed Tax Firm in India, consecutively for four years TNS Global Tax Monitor Survey 2012 M&A Advisory Most Active Transaction Advisor Award, PE and M&A for three consecutive years ( ) Venture Intelligence Financial Advisor of the Year Award, for two consecutive years ( ) Asian Venture Capital Journal, India Awards Financial Advisor of the Year M&A Award India, 2011, 2009 and 2008 Financial Times and Mergermarket Investment Bank of the Year Private Equity, 2011 VCCircle Awards Overall winner consultancy rankings, in survey of risk and compliance professionals OpRisk & Compliance magazine BSE300 companies Excellence in Training award in the Employer Branding Continuous Innovation in HR strategy at work award in the Employer Branding Awards 2011 Methodology is based on EY s analysis of announced PE deal values used in this document are based on those provided in press releases pertaining to deal announcements. prevalent on the dates of the deal announcements. 12

13 EY s Private Equity practice Our teams work closely with you, offering incisive and proven industry experience coupled with integrated, objective practical advice and support to help you meet your needs. It s how EY makes a difference. Partners Fund assurance Personal tax Assurance Fund-raising Tax structuring Audit of fund performance Sell-side advisory Funds Buy-side support Mergers and acquisitions Due diligence Valuations Investment Tax structuring Environmental compliance Human capital Valuations Exit readiness IPO readiness Portfolio services Transition Transaction integration Sale mandates Governance Assurance Assurance Tax compliance Risk management MIS development Process advisory Standard operating procedures Growth Internal audits and fraud reviews Technology security Valuations IT strategy Operational improvement Market entry options Working capital management Contacts Rajiv Memani Country Managing Partner rajiv.memani@in.ey.com Sudhir Kapadia Tax and Regulatory Advisory Services sudhir.kapadia@in.ey.com Arpinder Singh Fraud Investigation & Dispute Services arpinder.singh@in.ey.com Amit Khandelwal Transaction Advisory Services and Transaction Support amit.khandelwal@in.ey.com Amitabh Jhingan Commercial Due Diligence amitabh.jhingan@in.ey.com Narendra Rohira PE Tax Leader narendra.rohira@in.ey.com Mike Rogers Global Deputy Private Equity Leader michael.rogers@ey.com Jeff Bunder Global Private Equity Leader jeffrey.bunder@ey.com Sachin Date EMEIA & UK PE Leader sdate@uk.ey.com For any private equity-related inquiries please contact: Mayank Rastogi Partner Private Equity and Transaction Advisory Services mayank.rastogi@in.ey.com 13

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