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Title: INDIA: Opportunities and Challenges in Private Equity and


1
INDIA Opportunities and Challenges in Private
Equity and Venture Capital Harpal S.
Randhawa The Gem Group
2
  • Overview of Indian Economy
  • Private Equity / Venture Capital Investments in
    India
  • Risk factors

3
Robust Macro Economic Trends A Large and Rapidly
Growing Economy
  • .
  • One of the fastest growing economies in the
    emerging markets, India is expected to become the
    third largest economy behind United States and
    China by 2025.
  • Indias growth potential is evident from the real
    gross domestic product (GDP) growth of 8.5
    during 2005.
  • In nominal terms, Indias GDP has grown at a CAGR
    of 13.6 since 2001 reaching US 796 billion in
    2005.
  • Going forward, nominal GDP is expected to grow at
    a CAGR of 10.0, reaching US 1.1 trillion by
    2009.

Nominal GDP (US bln.) Real GDP Growth ()
1,166
1,038
929
855
796
692
595
506
478
8.5
8.5
8.3
7.4
7.6
7.2
6.9
5.3
3.6
2001
2002
2003
2004
2005
2006E
2007E
2008E
2009E
Nominal GDP (US billion)
Real GDP Growth ()
4
Robust Macro Economic Trends A Large and Rapidly
Growing Economy
  • .
  • India has the fourth largest GDP in the world in
    terms of purchasing power parity (PPP). Indias
    per capita real GDP has consistently improved
    during the last four years leading to a rise in
    per capita income and consumer spending, thus
    contributing to growth in the long term. GDP per
    capita (PPP) is expected to continue to grow at a
    CAGR of 9, to reach US 4,930 by 2009.
  • Indias robust growth story is driven by strong
    domestic consumption, an investment cycle upturn
    as well as increasing integration with the global
    economy.
  • This growth and investment has led to increased
    competitiveness and resilience of the economy
    supported by the reform-oriented and stable
    policies of the Government.

GDP per capita (US PPP)
4,930
4,540
4,160
3,810
3,490
3,170
2,890
2,670
2002
2003
2004
2005
2006E
2007E
2008E
2009E
5
Robust Macro Economic Trends Growth is
underpinned by the dynamism in the services and
industry sectors
Sector Contribution ( of GDP)
  • The Indian opportunity is primarily a reflection
    of the robust domestic consumerled growth. This
    domestic demand growth is in contrast to the
    export driven model of many South East Asian
    nations.
  • Indias service industry, the largest contributor
    to GDP at 53 in 2005, continues to grow
    strongly.
  • India ranks first as a preferred outsourcing and
    off-shoring destination, leading to its emergence
    as a global outsourcing hub. Validating the
    global interest in the services sector, the
    countrys IT and BPO market was worth US 35
    billion in 2005 (having grown at 23 per annum
    between 1999 and 2005), and is expected to reach
    US 57 billion by 2007.

Agriculture
Industry
Services
53.7
53.7
53.2
53.6
53.8
53.6
52.5
50.7
49.2
30.9
30.0
29.1
28.5
27.3
26.4
26.8
27.4
25.7
24.3
21.0
22.5
19.6
19.0
17.9
17.1
15.4
16.3
2001
2002
2003
2004
2005
2006E
2007E
2008E
2009E
6
Robust Macro Economic Trends Growth is
underpinned by the dynamism in the services and
industry sectors
  • Industry, the second largest contributor to GDP
    in 2005 at approximately 27, has been on a
    recovery path since 2003, driven primarily by the
    manufacturing sub-segment.
  • Manufacturing activity, which contributes more
    than three-quarters of total industrial output,
    has been backed by robust demand for capital and
    consumer goods. Going forward, the sector is
    expected to continue to grow in value and as a
    percentage of GDP.
  • The economys dependence on agriculture will
    further decline as a percentage of GDP from the
    current 19.0. Although reducing in overall
    importance, the agriculture sector in value has
    grown at a CAGR of 6.7 between 2001 and 2005.

Growth of Services and Industry Sector (), 2005
Services Sector
Industry Sector
11.7
9.8
9.7
9.0
8.0
5.8
5.7
4.5
4.2
3.0
India
China
Indonesia
Thailand
South
Korea
7
Robust Macro Economic Trends Though largely
driven by local demand, increased exports have
also contributed to the flourishing Indian
economy
Exports (US billion)
  • Increase in exports reflects the growing
    international competitiveness of the
    manufacturing sector.
  • The countrys integration with the global
    economy, a supportive domestic policy framework
    and the sustained recovery in global demand are
    other key factors driving foreign trade.
  • Non-oil exports have always contributed a major
    portion of total exports, with growth recorded
    across most product categories in 2005.
  • Due to the expansion in domestic refining
    capacity (India is one of the worlds top five
    petroleum refining countries) and higher
    international prices of refined products, exports
    of petroleum products also surged by 86.1 to US
    6.6 billion in fiscal year 2004 2005.
  • Although exports have increased at a CAGR of
    23.7 between 2001 and 2005, they remain low as a
    percentage of GDP compared to other regional
    economies.

115.8
102.7
83.5
63.8
52.7
43.8
2001
2002
2003
2004
2005
2006E
Exports ( of GDP), 2005
108.0
62.3
54.8
33.7
30.1
12.9
India
Indonesia
China
Taiwan
Thailand
Malaysia
8
Robust Macro Economic Trends Creation of an
enabling environment for local and foreign
investors
FDI (US billion)
  • In an effort to attract private capital, the
    Indian government in the past two decades has
    been changing its role from an investor to a
    facilitator of private investment by creating an
    enabling environment for local and foreign
    investors.
  • It has encouraged unrestricted foreign direct
    investment (FDI) and foreign portfolio
    investments in most sectors by either eliminating
    or reducing foreign ownership limits.
  • In addition, initiatives like the automatic
    route allow investments across various sectors
    without the need for any prior regulatory or
    government approval.
  • These liberalization steps have assisted India in
    emerging as an attractive FDI destination within
    the global investment scene, ranking second only
    to China in a foreign investment attractiveness
    index published by AT Kearney.
  • Though Indias FDI inflows as a percentage of GDP
    are still low as compared to regional economies,
    they are expected to increase substantially with
    the improving economic environment and
    liberalization and privatization initiatives.

9.5
6.6
5.6
5.5
5.5
4.3
2001
2002
2003
2004
2005
2006E
FDI ( of GDP), 2005
3.5
3.1
2.1
1.8
1.4
0.9
India
Pakistan
Indonesia
Thailand
Malaysia
China
9
Robust Macro Economic Trends External debt as a
percentage of GDP has gradually declined
External Debt ( of GDP), 2005
External Debt ( of GDP)
  • While growing domestic and foreign trade and FDI
    inflows are expanding Indias GDP, the reduction
    of external debt as a percentage of GDP and
    accumulation of foreign exchange reserves are
    creating a more resilient economy, and should
    help the Indian Rupee stabilize over the
    long-term.
  • Although external debt accounts for a small
    percentage of total government debt (23 in
    2005), it increased 3 during 2005, reaching US
    126.8 billion. However, this external debt
    decreased as a percentage of GDP to approximately
    16.
  • In comparison to other growing economies,
    external debt as a percentage of GDP is low.

Source Economic Intelligence Unit, Pakistan
Ministry of Finance
10
Robust Macro Economic Trends Lower interest
payments on debts, strong remittance flow from
overseas residents, FDI inflow and improvements
in exports have all contributed to the increase
in reserves
Foreign Exchange Reserves (US billion)
  • Foreign exchange reserves have maintained their
    upward trend and have grown at a five-year CAGR
    of 32, reaching US 165 billion in August 2006.
  • The Indian foreign exchange market has been
    widened and deepened with the transition to a
    market-determined exchange rate system with a
    number of steps taken to liberalize the capital
    account covering foreign direct investment,
    portfolio investment, and outward investment
    including direct investment as well as depository
    receipt and convertible bonds.
  • In recent years, the Reserve Bank has liberalized
    exchange control procedures to a large extent and
    these reforms are reflected in the vibrant
    activity in various segments of the foreign
    exchange market with daily turnover crossing US
    33 billion.
  • The Central Bank of India employs a managed float
    policy within a system of limited convertibility
    and full interest rate autonomy. India is trying
    to move towards full convertibility due to a
    comfortable level of foreign exchange reserves,
    smaller deficits at state and federal levels, and
    lower inflation.

159.7
131.9
126.6
98.9
67.7
45.9
2001
2002
2003
2004
2005
2006E
Exchange Rate (Year End, INR US)
48.0
48.2
45.1
45.6
43.6
2001
2002
2003
2004
2005
11
Robust Macro Economic Trends The containment of
inflation, and particularly inflation
expectations, has boosted growth prospects in an
environment of stability and confidence.
Average CPI Growth ()
Interest Yield ()
7.5
4.3
7.2
6.9
3.8
3.5
6.0
3.2
FY03
FY04
FY05
FY06
FY03
FY04
FY05
FY06
  • Timely and even pre-emptive monetary measures
    have paid dividends in terms of low and stable
    inflation which, in turn, provided conducive
    conditions for the expansion of economic activity
    within an environment of macroeconomic and
    financial stability.
  • Inflation was contained well within the range
    projected in the monetary policy stance for
    fiscal year 2005 2006 and inflation
    expectations have remained firmly anchored, with
    expectations of 4.3 per annum growth until 2009.
    This has been reflected in the relative stability
    of long-term interest rates.

12
Demographic Trends Favoring Consumption Led
Growth
Age Profile ( of population)
  • Although India occupies only 2.4 of the worlds
    land area, it supports over 15 of the worlds
    population.
  • With a population of 1.1 billion, India is the
    second most populous country in the world after
    China.
  • The Indian population has grown at an average
    rate of almost 1.6 per annum between 2000 and
    2005, and according to estimates is expected to
    reach 1.4 billion in the next 25 years.
  • On the favorable end of the demographic
    transition, Indias age profile shows an
    increasingly young population, of which over 42
    is below 20 years of age.
  • With personal consumption accounting for 67 of
    GDP, much higher than that of China (42) and
    only second to United States (70) , a young
    population presents great opportunity for the
    country, driving demand for a variety of products
    and services and potentially contributing
    significantly to the future growth of the economy.

13
Demographic Trends Favoring Consumption Led
Growth
Number of People in Urban Centers (millions)
  • Indias urban population, growing consistently
    over the past few years, reached 317 million in
    2005 (accounting for approximately 29 of the
    overall population) from only 217 million in
    1990.
  • It is expected that by 2030, approximately 41 of
    the population will be located in urban centers,
    further increasing domestic demand for the
    countrys goods and services.
  • The growth in the overall economy has increased
    wealth levels and has resulted in a larger middle
    class with significantly more purchasing power
    and higher rates of employment. Unemployment is
    expected to decrease from 8.9 in 2005 to 5.8 by
    2010 .

600
527
462
406
359
317
283
249
41.4
217
37.8
34.7
32.2
30.3
28.7
27.7
26.6
25.5
1990
1995
2000
2005
2010E
2015E
2020E
2025E
2030E
Total Urban Population (million)
of Total Population
14
Demographic Trends Competitive Work Force
Labor Force Population (million)
Growth in Years of Education (), 2005-2025
43.0
32.0
28.0
19.0
18.0
India
China
Thailand
Indonesia
Malaysia
  • The demographic profile of the country indicates
    a growing working population (2.6 per annum
    until 2025 ), demonstrating a strong advantage in
    terms of a low-cost, abundant and well educated
    labor force that is expected to account for 50
    of the population by 2025.
  • In addition, with English as the principal
    language of business within India, the country
    enjoys a natural linguistic advantage over other
    emerging economies like China, Brazil and Russia.
  • Many new businesses are now being led by a young
    and educated second generation and the reverse
    brain drain of Indian professionals returning to
    the country has led to an increasing pool of
    quality entrepreneurs and management talent.

15
  • Overview of Indian Economy
  • Private Equity / Venture Capital Investments in
    India
  • Risk factors

16
Commitments in India by some Major Firms
Estimated amount Invested (US mln)
Estimated Commitment (US mln)
Firm
1,000
2,000
Warburg Pincus
1,500
2,000
Temasek
1,000
1,500
CVC
750
1,500
ICICI Ventures
500
1,500
GA Partners
200
1,000
3i
NA
1,000
Blackstone
100
1,000
Carlyle
500
750
ChrysCapital
250
500
Newbridge
17
Some other firms with significant investments
18
Recent Deals
PE Investor
Amount US Million
Industry
Company
New Bridge Capital
100
Financial Services
Shriram Group
CVC, GW Capital, Chryscapital, ICICI Ventures
200
Financial Services
Centurion Bank
BlueRidge/ ChrysCapital
36
Financial Services
Bajaj Auto Finance
Farallon Capital
25
Financial Services
Indiabulls Housing Finance
Warburg Pincus
21
Financial Services
Kotak Mahindra Bank
General Atlantic
230
Healthcare Life Sciences
Jubliant Organosys Ltd
Citigroup/ ICICI Venture
45
Perlecan Pharma Pvt Ltd
Healthcare Life Sciences
3i Group
40
Farm Equipment
International Tractors
Temasek
24
Healthcare Life Sciences
Medreich Group
Carlyle Group
20
Healthcare Life Sciences
Claris Lifesciences
Warburg Pincus
50
Healthcare Life Sciences
MAX Healthcare
KKR
900
IT Telecom
Flextronics Software
GA Partners/ Oak Hill
500
IT Telecom
GECIS
Temasek
320
IT Telecom
Tata Teleservices
ICICI Ventures
62
IT Telecom
Scandent
General Atlantic
67
IT Telecom
Hexaware Technologies
This is not a comprehensive list
19
Recent Deals
20
Recent Exits
21
Conducive Business Environment
  • Successive governments have followed a fairly
    consistent economic policy in recent years.
    Consequently, there has been a steady improvement
    in the countrys macro economic indicators.
  • In comparison with other emerging economies,
    India has the benefit of an independent judiciary
    and a legal system which provides a significant
    level of comfort to investors.
  • The Indian government has opened many sectors to
    foreign investment (increasing the ceiling of
    foreign ownership to between 74 and 100 in most
    cases) enabling greater participation within the
    Indian economy.
  • With the easing of transfer restrictions and with
    several procedures falling under the automatic
    route, the Indian economy offers private equity
    investors viable entry and exit route across most
    sectors.
  • The process of economic liberalization has
    triggered a fundamental shift in the competitive
    forces shaping Indian industry. Large
    conglomerates and diversified family businesses
    have been compelled to become more competitive.
  • Consequently, business houses have restructured
    themselves, with an increased focus on core
    competencies, asset productivity and a trend of
    divestiture of selected business units.

Investment Policy Environment
Source Team Analysis
22
Conducive Business Environment
  • Most progressive and dynamic Indian companies are
    manifesting increasing levels of global presence
    through acquisitions and higher outward foreign
    direct investment. The attainment of domain
    knowledge and best practices through such
    activities, along with other benefits such as
    economies of scale in marketing will further
    enhance the productivity growth.
  • Evidence of increasing business confidence can be
    measured by the results of business expectation
    surveys and improvements in the investment
    climate.
  • Moreover, the robust performance of Indian
    merchandise exports in recent years also
    testifies to the attainment of higher
    competitiveness of Indian manufacturing, which
    itself promotes business confidence.
  • It is noteworthy that Indian businesses have
    managed to exhibit high growth in recent years in
    terms of most parameters despite the presence of
    significant constraints from poor infrastructure.
  • This continued growth has also demonstrated
    Indias resilience in terms of the ability to
    cope with adverse developments such as oil price
    increases and exchange and interest rate changes.

Investment Policy Environment
Source Team Analysis
23
Greater Deal Flow Three key drivers combined with
the growth potential within India will lead to a
range of opportunities
  • The country has already created a niche for
    itself in a range of knowledge based industries
    including business process outsourcing,
    information technology, biotechnology, research
    and development and financial services.
  • These industries are able to cater to the needs
    of the domestic market as well as the larger
    international export markets, and may therefore
    present attractive investment opportunities.
  • Aided by the countrys reforms program, domestic
    consumption and outsourcing and exports
    potential, India has emerged as an economy with
    strong growth momentum.
  • With the economy operating near optimum capacity
    (high utilization rates) and projections of
    robust demand for consumer and capital goods,
    there is a significant requirement for capital
    investment across many industries, including
    sugar, textiles, paper, steel, petroleum
    refining, cement and automobiles, a large part of
    which is expected to come from the private
    sector.

Development of Knowledge Based Industries
Growth Capital
Source Team Analysis, Indian Ministry of Finance
Department of Disinvestment
24
Greater Deal Flow Three key drivers combined with
the growth potential within India will lead to a
range of opportunities
  • The countrys privatization program gained
    momentum during the early 1990s with successive
    governments embarking on reform plans and
    utilizing proceeds from privatizations to fund
    budget deficits.
  • From 1991 to date, a total of 136 full or partial
    privatizations have raised US 11.1 billion .
  • The current government has gone slow on
    privatization and is in the process of refining
    the divestment process to make it more
    transparent with an announced deal pipeline of 13
    transactions across the transportation and ports,
    power and telecommunication sectors.
  • Moreover, diversified conglomerates and family
    run businesses are being compelled to restructure
    and focus on core competencies, asset
    productivity and efficient capital allocation.

Privatizations and Restructuring
Source Team Analysis, Indian Ministry of Finance
Department of Disinvestment
25
Exit Opportunities Viable and clear exit
opportunities for investors either through the
liquid and deep capital markets, a trade sale or
a secondary buyout by financial investors (MA).
Market Capitalization (US billion) PE
Vibrant Capital Markets
  • India has one of the largest capital markets in
    Asia with the market capitalization of the Bombay
    Stock Exchange (BSE) exceeding US 600 billion.
  • The BSE traded an average daily volume of 280
    million shares during 2005, attracting over US
    40 billion of the approximately US 60 billion
    capital inflow into Asia.
  • The Securities and Exchange Board of India
    (SEBI) have made listing requirements few and
    more attractive for prospective companies.

Source Bombay Stock Exchange, India Advisory
Partners
26
Exit Opportunities Viable and clear exit
opportunities for investors either through the
liquid and deep capital markets, a trade sale or
a secondary buyout by financial investors (MA).
M A Activity (US millions)
MA Activity
16,760
  • Mergers and acquisitions are increasingly being
    seen in India as a tool for enabling more
    efficient use of capital, for seizing market
    opportunities that create value and for securing
    market positioning.
  • Multi-national corporations seeking to enter or
    expand in the India market are also actively
    pursuing acquisition opportunities and one focus
    of the Fund will be to identify businesses that
    can be developed to a scale that makes them
    attractive targets for such corporations.

8,900
5,550
5,000
2002
2003
2004
2005
Source Bombay Stock Exchange, India Advisory
Partners
27
  • Overview of Indian Economy
  • Private Equity / Venture Capital Investments in
    India
  • Risk factors

28
Risk Factors
Liquidity Risk
  • A substantial portion of the investments of The
    Fund will be in unlisted Portfolio Companies,
    whose securities should be considered illiquid
  • The focus of the Fund is private equity investing
    in high-growth companies which is a segment of
    the industry that can have a high degree of
    investment risk

Investment Risk
Stock Exchange Risk
  • The Fund may also invest in listed securities
  • No secondary market for the Investors interests
    in the Fund exists, and the Investors will have
    no right to redeem their shares
  • Furthermore, any transfer of shares must be
    approved by the Manager

Limited Ability to Liquidate Interests
29
Risk Factors
  • Risks associated with Managers ability to locate
    suitable portfolio companies on a realistic
    schedule, and on appropriate terms inability to
    make investments could negatively affect the
    performance of the Fund

Ability to Locate Suitable Investments
  • There is no guarantee that the performance of the
    Portfolio Companies will be satisfactory or that
    the Manager will be able to introduce best
    management practices and corporate governance as
    the Manager may have otherwise desired

Poor Performance of Portfolio Companies
  • While The Fund will undertake a comprehensive due
    diligence exercise prior to making any investment
    in such Portfolio Companies, it cannot guarantee
    or certify that the Portfolio Company is or shall
    continue to be fully compliant with all necessary
    laws and regulations.

Regulatory Compliance
  • Macro-economic conditions, such as interest
    rates, the availability of alternate sources of
    financing and participation by other categories
    of investors may impact The Funds level of
    success, including the value and the number of
    investments made by Fund.

General Economic Risk
30
Risk Factors
  • Any change in applicable law, which requires
    changes, including retrospective changes, in the
    structure or operations of The Fund, may
    adversely impact the performance of The Fund.

Change in Law Risk
  • Political, economic and regulatory changes in the
    Indian environment have impact on the investment
    climate and hence may affect the value derived on
    disinvestment, since a number of the investments
    may be in Indian rupees, there would be the risk
    of depreciation of the Indian rupee vis-a-vis the
    US dollar effectively reducing the return to the
    investors

Political and Social Risk
India-Mauritius Double Taxation Treaty
  • Agreement for Avoidance of Double Taxation
    between India and Mauritius may undergo changes
    in the future and impose additional costs or
    burden on the Funds operation

31
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