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Get savvy about the biggest private equity deals over the last year, the biggest dealmakers and what Venture Capitalists look for when zeroing in on potential start-ups! Also in this package, meet the stalwarts at Saif Partners and Bessemer Venture Partners to get a grip on their India strategy. Plus, columns by entrepreneurs who made it big with timely PE investments...

Remember the March 2005 $560 million Warbug Pincus – Bharti Tele-ventures deal? In total, Warbug Pincus infused $300 million into the company and by the time the Private Equity (PE) firm exited Bharti Tele-ventures, it had mopped up a staggering $1.3 billion. Overnight this deal thumb tacked India as a Mecca for global PE investments. Not that PE players did not operate in India before this, but Warbug’s bulging back pocket at the time of exit did take the lid off India as a hot PE destination. If the proof of the pudding is in the eating, merely glance at how the value of PE deals skyrocketed between 2005 and 2007. From $2,183 million in 2005, total value of deals jumped to a staggering $17.4 billion in 2007 (see table), an increase of a jaw dropping 744%.

Interestingly, while PE investments and Venture Capital (VC) funding are clearly demarcated propositions in the USA (where VC funding only refers to investments in early stage and expanding companies); in Europe, VC funding covers all stages. Traditionally, PE players can be described as firms that invest in companies, which already have some revenue base and have future growth potential via restructuring or bringing in new products, services and technology.

However, a cross-section of market watchers opine that in emerging markets like India, the distinction between the two is increasingly blurring and both these terms are used synonymously and as proxies. According to Harish H V of Grant Thornton, “In India, PE is understood as capital being invested typically through a LP (Limited Partnership) structure by domestic and international institutions to take reasonable stakes in unlisted and listed companies through private placement and also buyouts.” For the purpose of this listing of the biggest deals in India over the last year, we will use the term Private Equity to describe the industry in its entirety.


Interestingly, the Warbug deal in 2005 not only rocked the Indian streets by being the biggest stock trade, but also sent shivers to the boardrooms of global PE firms. SMC, a Private Equity firm reckons, “It (Warbug-Bharti) was a landmark deal suggesting the absorption depth of Indian corporate at the investment stage and hence, bringing India on the global radar of PE Funds.” In fact, in 2007, India raked in the highest amount of Private Equity, comprehensively outstripping China, which attracted only $8.3 billion PE investments during the same period. The future seems even more enticing.

Evalueserve forecasts show that by the year 2010, India will see a staggering $20 billion worth of PE receipts. “Our research also shows there are more than 366 firms currently operating in India and another 69 are planning to start their operations soon. In total, they seem to have amassed $48 billion earmarked for investments in India during the next three and a half years, (July 2007 – December 2010),” says the latest Evalueserve report. As of today, ‘shooting northwards’ is how one can easily describe the gargantuan increase of PE investments in India. As discussed earlier, PE investments are not an alien phenomenon and have been quite prevalent in the country for more than three decades, even playing a significant role in the Silicon Valley story. It was in 1975 when Risk Capital Foundation become the first VC-PE to kickstart its operations in India. After that, many Indian institutions like Industrial Financial Corporation of India (IFCI), ICICI, among others, started mushrooming all over the place. There was no considerable action in the Indian VC-PE space until the end of the mid and late 90s. With the dot-com boom, the VC-PE phenomenon got a shot in the arm and in 2000, the value of deals skyrocketed to $1.16 billion. Then post the dot-com bubble bust, investments plummeted and reached a low of $470 million in 2003. But since 2004, there has been a secular rise in PE inflows.

The broad umbrella of Private Equity also encompasses some new deal variants that perhaps need mention. Consider the case of Bennett, Coleman & Co. Ltd., which has bought stakes in different companies in consideration for modest cash payment along with branding and advertising agreements with the investee company. These fall under Private Treaties. There are many big names like that of Dainik Jagran, HT Media, Dainik Bhaskar and Network 18, which are known to be associated with Private Treaties (by already having or planning to spin off new departments for the same).

Then there are Buyouts. Harish defines a buyout as an “acquisition of a significant portion or a majority control in a more mature company. The acquisition normally entails a change of ownership.” The Gokuldas Exports-Blackstone deal falls into this category, where the latter bought a 70% stake (includes 20% through open offer) in Gokuldas Exports. Next, is the burgeoning breed of Sovereign Funds. Here, funds are managed by central governments of various countries for picking up stakes in companies. Names like Temasek Holdings and GIC, both managed by the Singapore Government, are the protagonists in this breed of funds.

Of late, especially in India, even Hedge Funds have started functioning as de facto PE players. Traditionally, unlike PE investments, Hedge Funds usually have a very short term horizon. According to Evalueserve, “As per our analysis, currently there are more than 10,200 Hedge Funds worldwide, which cumulatively have more than $1,800 billion under management. Since VC, PE and other alternative investment-related firms also have approximately $1,800 billion under management, together these two groups currently manage approximately 6% of all assets under management worldwide.” Consequently, it is gradually becoming harder for many Hedge Funds to find good opportunities. The aftermath is that many Hedge Funds have therefore begun acting like PE firms investing with a ‘longer time horizon,’ especially in India.

Prime examples of Hedge Funds in India include D. E. Shaw, Farallon Capital Management, Old Lane Management, among others. Moreover, after SEBI’s restriction on Hedge Funds, they cannot freely trade in stocks, giving them less opportunity to bow out quickly. Financing costs are also an exit barrier for Hedge Funds, given that the short positions entail higher financing costs than long positions in India.

But amidst the obvious opulence, certain structural problems shouldn’t go unnoticed. Currently, Private Equity contributes the most to the Indian Foreign Direct Investment kitty. According to Sumant Batra, Kesar Dass B & Associates, “Conservative estimates suggest that PE investment could multiply manifold if the central and state governments were to take some long overdue initiatives to create a friendly public policy environment for PE investments.” He stresses that simplification of procedures, new assessment of archaic and outdated laws et al, are needed to nurture PE investments.

But there is also a sting in the tail. Many PE funds have been coming through the Mauritius route and analysts think that the RBI might tighten norms to stop this inflow of ‘black’ Indian corporate money to come back to India. If that happens, PE deals could be in some trouble. For now, the PE knell is tolling deafeningly for India and despite all hindrances, India seems to be on the forefront of global PE map. The large volume of PE investments in India in 2007 stands quiet testimony to this fact. The $17.14 billion PE deluge last year was overwhelming; and if market watchers are to be believed, deal-sizes and numbers are only set to get bigger in 2008. But before that, here’s your chance to take stock of some of the biggest deals which hogged the limelight in the year gone by…

Investee: Bharti Airtel & its arm

Investor: Temasek Holdings & others

Investment Value: $2.90 bn (cumulative)

Says, Harit Shah, Angel Broking, ”The last few years have seen the telecom infra sector acquire great potential, which is why PE players are falling over themselves to invest in such companies. The deals are meant for multiplying money. While telecom is a capital intensive field, the investment will reap good returns. As for Bharti, it will use this amount in expanding its present network. The risk gets overshadowed as Bharti is an experienced player in the sector and is likely to use the money well. Almost all investors in this club deal are financial investors, and not strategic ones. They will be looking at creating value for the business in the next few years, as was eminently visible when share prices shot up, just after the deal took place.”

What can be bigger than a deal that peddles names like Temasek (Singapore government’s investment arm and the largest PE player in India), Goldman Sachs, Macquarie, Citigroup, India Equity Partners, Investment Corporation of Dubai, AIF Capital and India’s leading wireless company, Bharti Airtel. In December 2007, in the largest ever ‘club deal’ by PE players in India, the seven global investors bought a 9% stake in Bharti Infratel – the hived off tower arm of Bharti Airtel – for a whopping sum of $1billion, valuing the unit at a staggering $12.5 billion. While clubbing gave the PE players the benefit of risk sharing, it reduced needless competition for acquisition targets. Before this deal, in July 2007, Temasek Holdings alone had invested about $1.9 billion in Bharti Airtel (for a 4.99% stake), which ultimately made way into its tower business. Bharti Infratel owns over 20,000 telecom towers and holds about 42% stake in Indus Towers (the recent JV between Bharti, Vodafone and Idea), with over 71,000 sites. Recently, PE firm Kohlberg Kravis Roberts & Co picked up another 2-2.5% stake in the company for $250 million.

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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