Our key findings from the study are: •Private Equity firms are gaining more confidence in India, primarily driven by high economic growth and a potential to add value to businesses in various phases of their life cycle. •Financial, IT and Industrial were the top sectors to attract PE investment between 2005 and 2010; however healthcare has gained momentum in 2010. •Deals below $10 Mn have dominated Indian market over the years. The deal size has started picking up again in 2010. •Open market has become a preferred exit route over last two years while the share of M & A in total number of exits has gone down. •Private Equity firms bring a number of advantages to investee companies, however, they need to be looked at in light of existing shareholders’ goals and management style. •Companies need to answer questions ranging from their goals to cultural fit and right time to exit route before going for Private Equity.

1. PRIVATE EQUITY - The new face of capital in India
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2. Contents Page
A. Private Equity - An overview 3
B. Evolution of PE investments in India 9
C. Exit routes for PE 25
D. Roadmap for companies seeking PE 29
2

3. A. Private Equity - An overview
3

4. Private Equity is defined as a form of equity capital that is not quoted on a
public exchange
• Private Equity is a form of equity capital that is not quoted on a public exchange.
• It consists of investors and funds that make investments directly into private companies or conduct
buyouts of public companies that result in a de-listing of public equity.
• Capital for private equity is raised from retail and institutional investors, and can be used to fund
new technologies, expand working capital within an owned company, make acquisitions, or to
strengthen a balance sheet.
• The majority of private equity consists of institutional investors and accredited investors who can
commit large sums of money for long periods of time.
• Private Equity firms are generally organised as limited partnerships where private equity firms serve
as general partners and large institutional investors and high net worth individuals providing bulk of
the capital serve as limited partners.
• Private equity investments often demand long holding periods to allow for a turnaround of a
distressed company or a liquidity event such as an IPO (Initial Public Offering) or sale to a public
company.
• The seeds of the Indian private equity industry were laid in the mid 80’s. The first generation
venture capital funds, which can be looked at as a subset of private equity funds, were launched by
financial institutions like ICICI and IFCI.
4

5. PE funds raise money from long term investors and invest them in
operating companies
An overview of PE operations
Makes
Invest Invest way for
money money PE exit
• Buyback
through
• IPO
Private Investee •M & A
Investors
Equity funds company • Open market
• Secondary
sales
• High Networth • Funds can be Receives
Individuals open-ended or funds for
• Institutions close-ended1
(Bank,
company etc.)
• Fund of funds
• Seed capital2
• Start up3
• Expansion
• Replacement
capital
• Buyouts
Note: 1
Closed ended funds are formed for a period of 1 to 3 years while open ended have a time period of over 3 years.
2
Seed capital is used to provide small sums of money necessary to develop a business idea.
3
Start up funding is provided for new product development or initial marketing activities.
5

6. PE can involve different categories of investors depending on risk profile,
stage of funding and investment size
Risk Stage of Size of
Definition Example profile funding funding
• Typically invest in well
established business with a
proven track record
Private • Commit large funds for Growth/
Equity expansion and growth Mature
• Take well defined risks
• Have reasonably good view of
exit strategy
• Provide funds for early stage
companies
• Typically made for scaling up
operations by developing or
Venture launching new products or
Start-up
capital services
• Provide entrepreneurial
support and guidance in
developing business strategy
• High net-worth individuals
who have been successful
entrepreneurs
• Invest in new ideas which
Angel have not been proven yet
• Take significant risks and Idea
investors
invest a lot of time in
mentoring and guidance
• Driven by entrepreneurial
spirit
Low High 6

7. Private Equity is a very important source of capital worldwide however it
has been impacted severely by global economic crisis
Share of PE deals across key geographic
areas, $ bn, percent
100% = 332.4 718.9 716.1 215.1 95.5 • During 1970 to 2009, $ 3.9
trillion of transactions of
leveraged buyouts (LBOs) in the
form of Private Equity
34% 33% 35% investments have taken place
47%
48% globally.
6% 7% • More than $ 2.1 trillion of
18% transactions took place only
6% during 2005 to 2009 and more
14% than $ 1.4 trillion of transactions
have taken place only in two
60% 60% years 2006 and 2007.
47% 47%
38%
• During 2005 to 2009 more than
$ 1.1 trillion worth deals have
happened in US alone which is
more than 50% of the global PE
2005 2006 2007 2008 2009
investments.
America Asia Pacific EMEA
Source : The new demography of private equity, per Strömberg, Swedish Institute for Financial Research, Stockholm school of
economics, CEPR and NBER presented at the World Economic Forum in 2008, Dealogic, Kanvic analysis. 7

8. The strategy and behaviour of PE firms in India is very different from the
global scenario
Average deal size in Differences in Indian and Western PE market
2007, $ Mn
Indian market Western market
Malaysia 227
• Focus on minority • Focus on controlling
investment stake
• Providing growth/ • Providing capital for
expansion capital mature companies
Korea 97
• Limited use of leverage • Leveraged buyout
very common
• Shareholders not willing phenomenon
to give up control
India 47
China 37
Source: Thomson Financial, AVCJ, Venture Intelligence, Kanvic research 8

9. B. Evolution of PE investments in
India
9

10. India represents an attractive opportunity for global investors
Region and countries in emerging markets
viewed as presenting the best opportunities for
investment, % of respondents
China 51
• India’s growth story is a big
attraction for global investors.
Asia 45 • In a recent survey conducted
by Preqin, India is just behind
India 41 China in terms of best
opportunities for investment in
emerging markets.
Brazil 27
• 41 percent respondents found
Russia 16 India as attractive investment
destination.
Latin America 14
• It is way ahead of Brazil,
Russia and Latin America.
CEE 12
Africa 8
Other 2
Source: Preqin 10

11. Private Equity has gained importance in India only in this decade although
its origins go back to 1970s
Key milestones of PE evolution in India
• Government of India
announces guidelines for • Government of India issued
guidelines in September
venture capital funds
A committee on 1995 for overseas venture
(VCFs) in 1988
"Development of Small capital investment in India.
and Medium • TDICI is set up to
encourage private • SEBI issues the SEBI
Enterprises" highlighted (Venture capital funds)
the need to foster investment in technology
regulations in 1996
venture capital sector
as a source of funding • Many international PE/VC
new entrepreneurs and funds enter Indian market
technology.
2000
1984 1989 onwards
1973 1988 1995-2000
PE investment gain
• Regional capital funds momentum during
ICICI decides to APIDC Venture Capital last 10 years with
allocate funds to and GVFL are set up in increasing deal size
venture capital type Andhra Pradesh and and broader sectoral
activity Gujarat respectively coverage
• Lazard sets up Credit
Capital venture fund -
first private sector fund
Note: TDICI- Technology development and information company of India Limited, later renamed as ICICI venture funds
Source: Kanvic research 11

12. PE has grown faster in India than other countries in Asia pacific
Annual growth in private equity investments
(1998- 2007), percent
• India has attracted
maximum investment in
India 72
private equity within Asia
Pacific.
• India’s PE market has grown
Australia/NZ 52 at an annual growth rate of
72 percent over 10-year
period from 1998 to 2007.
Greater China 43
• Compared to India, China
has grown at 43 percent per
annum.
South Korea 24
Japan 10
Source: Thomson Financial, AVCJ, Venture Intelligence 12

13. Private Equity related investments have started picking up again
Value and number of PE related investment in India,
$ Mn., number1
366
346 • During the period 2005 to 2010,
total PE related investments
have taken place to the tune of
$ 45.3 billion - of which a total
253 bulk value of $ 27.9 billion has
235
taken place only during 2007
and 2008.
167
145
16,153 • The drop in the value of
transactions during 2009 is on
11,754 account of the global economic
crisis and the consequent low
6,417 level of business confidence.
4,094 4,832
2,074
2005 2006 2007 2008 2009 2010*
No. of deals Value of deals
Note: 1 Includes only those deals for which value is known.
* The figures for 2010 are till August only.
Private Equity related investment includes private equity, venture capital and angel investors.
Source : VCCegde 13

14. Growth of Private Equity related investments has been in line with stock
market sentiments and GDP growth
Private Equity investment in India, $ Mn
9.3 9.8 9.5 7.4 6.7 8.4
17,210
15,211 14,933
13,396
11,250
8,995
16,153
11,754
6,417
4,094 4,832
2,074
2005 2006 2007 2008 2009 2010*
Average Sensex Private Equity related Investment GDP growth in %
Note: GDP for 2010 is provisional. * The figures for 2010 are till August only.
Source : www.tradingeconomic.com, CSO 14

15. VC firms’ share has been increasing as a percentage of total number of
deals struck by PE related investments, however their value share is still
very low
Number of PE related deals1 , percent Value of PE related deals, $ Mn
100% = 145 253 346 366 235 167
3% 2% 3% 3% 3%
14% 19% 18% 2005 2006 2007 2008 2009
21%
27%
1,941 6,016 15,719 11,044 3,761
83% 79% 79% 76% 125 388 421 700 331
70%
8 13 12 9 3
2005 2006 2007 2008 2009
Private Equity Venture Capital Angel Investing
Note: 1
Includes only those deals for which value is known.
Source : VCCegde 15

16. Deals below $10 Mn have dominated Indian market over the years
Number of deals1 between $ 0-10 Mn and above $10 Mn
% of deals
59 51 42 43 64
below $10 Mn
400
300
206
200
200 123 85
59
100
146 160 150
130
86
2005 2006 2007 2008 2009
Deals between $ 0-10 Mn Deals above $10 Mn
Note: 1Includes only those deals for which value is known.
Source : VCCegde, Kanvic analysis 16

17. The unknown value deals have decreased in recent years
Number of PE deals
100% = 195 354 493 510 276
15%
26% 29% 30% 27%
85%
74% 71% 70% 73%
2005 2006 2007 2008 2009
Deals with value known Deals with value unknown
Source : VCCegde, Kanvic Analysis 17

18. Financial sector has attracted more investment while IT sector attracted
maximum number of deals in last six years
Average deal size
Deal value in $ Mn. from No. of deals1 from
from 2005-2010*,
2005 - 2010* 2005 - 2010 *
$ Mn
Financial 13,480 281 48
Industrials 6,108 255 24
Telecom 5,903 28 211
IT 5,801 334 17
Consumer Discretionary 5,687 313 18
Utilities 2,655 44 60
Healthcare 2,124 133 16
Energy 1,704 20 85
Materials 1,126 59 19
Consumer Staple 737 45 16
Note: 1
Includes only those deals for which value is known. * The figures for 2010 are till August only.
Source : VCCegde, Kanvic analysis 18

19. Healthcare and consumer staples have been major gainers in 2010
Deal value Deal value
2009, $ Mn 2010*, $ Mn % change
Financial 843 1124 33
Industrials 826 618 -25
IT 667 253 -62
Consumer
503 703
Discretionary 40
Utilities 459 945 106
Telecom 326 415 27
Materials 238 114 -52
Healthcare 122 386
216
Consumer 74 220 197
Staples
Energy 40 52
30
Note: 1
Includes only those deals for which value is known. * The figures for 2010 are till August only.
Source : VCCegde, Kanvic analysis 19

20. Average size of deals has picked up in 2010
Average deal size by type of investment,
$ Mn
• The average size of Private Equity
1.2 deals used to hover between $ 16 to
7 $ 58 million, dropped to $ 23 million
during 2009 and has increased
again to $ 39 million in 2010.
0.8
9
0.9 • The average size of Venture Capital
2.7
6 deals used to hover between $ 6 to
$ 9 million from 2005 to 08,
8 dropped to $ 5 million in 2009 and
58 0.3 has increased to $ 6 million in 2010.
5
1.9
6
40 39 • The average size of Angel Investing
30
deals used to hover around 0.8 to
23 2.7 million during 2005 - 08,
16 dropped to $ 0.3 million in 2009 and
it has increased again to $ 0.9
million in 2010.
2005 2006 2007 2008 2009 2010*
Private Equity Venture Capital Angel Investing
Note: 1
Includes only those deals for which value is known. * The figures for 2010 are till August only.
Source : VCCegde, Kanvic analysis 20

21. Venture capital and Angel investing are concentrated in their top three
sectors
Top three sectors for investment in 2010*
Private Equity Venture Capital Angel Investing
1
Financial Information Healthcare
Technology
2
Utilities Consumer Information
Discretionary Technology
3
Consumer Utilities Consumer
Discretionary Discretionary
Top 3 sectors’
contribution to
the total 59% 93% 99%
investment in
2010
Note: * The figures for 2010 are till August only.
Source : VCCegde, Kanvic analysis 21

22. Financial services sector has increased its share of PE investment over
last five years
Sector-wise share of PE investment Sector-wise share of PE investment
in 2005, percent in 2010*, percent
100% = $ 1,941 Mn 100% = $ 4,564 Mn
4% 12%
12% 11%
24%
8%
18% 9%
30%
14% 21%
14%
24%
Financial Consumer Discretionary Financial Utilities
Industries Healthcare Consumer Discretionary Industries
IT Others Telecom Healthcare
Others
During 2010, Financial, Utilities Financial has been the most
A B
and Consumer discretionary favourite sector of Private Equity
have attracted significant Private Investors during 2005 to 2010.
Equity investment.
Note: 1
Includes only those deals for which value is known. * The figures for 2010 are till August only.
Source : VCCegde, Kanvic analysis 22

23. Venture capital firms have moved beyond predominantly IT to cover more
sectors including consumer discretionary and financial in 2010
Sector-wise share of VC firms’ Sector-wise share of VC firms’
investment in 2005, percent investment in 2010*, percent
100% = $ 125 Mn 100% = $ 264 Mn
5%
16.8%
2%
18%
0.1%
52%
23%
83.1%
IT Consumer Discretionary
IT Financial
Financial Healthcare
Healthcare
Others
Information Technology, Consumer Information Technology has been the
A discretionary and Financial are the B most favourite sector of Venture
favourite sectors among the Venture Capital Investors from 2005 to 2010.
Capital Investors in 2010.
Note: 1
Includes only those deals for which value is known. * The figures for 2010 are till August only.
Source : VCCegde, Kanvic analysis 23

24. Portfolio of angel investors has done an about turn from IT to healthcare
Sector-wise share of Angel Sector-wise share of Angel
investors in 2005, percent investors in 2010*, percent
100% = $ 7.6 Mn 100% = $ 4.32 Mn
0.2%
6% 10.2%
6%
10.2%
79.4%
88%
IT Healthcare Healthcare IT
Financial Consumer Discretionary Industrials
A Healthcare, Information Technology B In 2010 Healthcare has been the
and Consumer discretionary most favourite sector investors.
continued to remain the favourite
sectors among the Angel Investors.
Note: 1
Includes only those deals for which value is known. * The figures for 2010 are till August only.
Source : VCCegde, Kanvic analysis 24

25. C. Exit routes for PE
25

26. PE exits have picked up in 2010 with value of deals already crossing last
year’s
Number and value of PE exits1, $ Mn
107
3,823 3,837 103
3,187
2,856 2,868
78
2,429 78
60
50
56
2005 2006 2007 2008 2009 2010*
No. of deals Value of deals
Note: 1
Includes only those deals for which value is known.
Source : VCCegde 26

27. Open market sale has become a prominent exit route over last two years
while the share of M & A in total number of exits has gone down
Type of exits, number of deals1
100% = 50 60 107 56 103 78
3.3% 6.4%
10.0% 9.3% 7.8%
17.9%
23.3%
20.0%
30.8%
23.2%
51.3%
67.0%
50.0% 56.7%
50.5% 48.2%
19.2%
16.5% 9.0%
12.0%
10.0%
3.6% 2.9% 14.1%
5.6%
8.0% 6.7% 7.1% 5.8%
3.7%
2005 2006 2007 2008 2009 2010
Buy Back IPO M&A Open Market Secondary Sales
Note: 1
Includes only those deals for which value is known.
Source : VCCegde 27

28. Buyback and IPO have picked up in terms of deal value
Value of deals by type of exit, $ Mn
118
672
1,046
282 121
55
155
621
503
105 552
116
605
2,944 1,429
2,141 1,497
1,945
209
1,440
186
518 788
353 500
33
67
2005 2006 2007 2008 2009 2010
Buy Back IPO M&A Open Market Secondary Sales
Source : VCCegde 28

29. D. Roadmap for companies seeking PE
29

30. PE backed firms have posted better results than those not backed by PE
Performance of PE backed companies compared to other group of companies
Sales growth PAT growth 2000-08, Annual wages growth Annual R & D growth
2000-08, percent percent 2000-08, percent 2000-08, percent
PE backed 24.9 34.6 32.0 45.0
CNX Midcap 20.6 25.4 11.1 29.0
Sensex 20.0 26.0 22.5 32.0
Nifty 19.0 26.4 20.3 30.0
Non-PE backed 15.5 25.3 14.9 21.0
Note: For PAT growth, Nifty 50 companies are considered
Source: Venture intelligence PE impact report 2009 30

31. Private Equity firms bring a number of advantages to investee
companies...
Advantages of PE firms
• A source of risk capital which may not be available through other sources
1 CAPITAL • Help recapitalise the company
• Access to new sources/channels of funding
• Provide strategic inputs for growth
2
STRATEGIC • Help access new markets
SUPPORT • Build a global footprint
• Help find new acquisition targets/strategic partners
• Develop new business models
• Management processes and control
3
OPERATIONAL • Efficiency improvement
MANAGEMENT • Better corporate governance practices
• New ways of management reporting
• Help in improving quality perception of the company
4 BRAND
BUILDING
• Attract talent at senior management level
• A network of contacts
Source: Kanvic research 31

32. ... however, they need to be looked in light of existing shareholders’ goals
and management style
Potential areas of conflict between PE firms and Investee companies
Investee company PE firms
• Companies may find PE firms too • Expect to earn a return on
intrusive in their business affairs investment of 25 percent or more
• Bringing alignment amongst • Push for change in management
family members can be style, business model, cost
challenging to implement changes structure etc.
expected by PE firms
• Set up strict management
• The leadership team may find it information and performance
challenging to work in new ways evaluation system
• Operational excellence takes
longer to achieve, raising the
holding period
Source: Kanvic 32

33. Companies need to answer key strategic questions before going for PE
investment ...
Roadmap for investee companies
1 2 3 4
Set clear goals and Choose the right Plan for exit
Assess cultural fit
expectations time
• Why should we go for • Does the PE firm • Is the time right to • What would be the
PE investment? have a team which go for PE exit strategy for the
can understand us investment? investors?
• Are there other better?
financing options • Are macro indicators • Are we prepared for
available and how do • Are all stake-holders favourable? that or do we have
they stack up? within our company sufficient time to get
in sync with the • Can we get good ready for the exit?
• What else do we investment? valuation for all the
expect from investors hard work done over
other than finance? the years?
Source: Kanvic 33

34. ... and pick the right valuation methodology to arrive at the value of their
business
Valuation methodologies
Price of recent • Applicable when the investment being valued was itself made recently
1 investment
methodology
• Use the cost of investment or the price at which a significant amount of
new investment was made into the company
2
Earnings • Involves use of an earnings multiple
Multiple • Earnings multiple applied to current business earnings to derive value of
the business
• Derives the value of a business by reference to the value of its net assets
3 Net Assets • Appropriate for a business where its underlying value derives from value of
its assets rather than its earnings
• Derives value of a business by calculating present value of its expected
4 Discounted
cash flows
future cash flows
• Cash flows are of ‘underlying business’ and not those of investment itself
Source: International Private Equity and Venture Capital Valuation Guidelines, 2009 34

35. Authors of the report
Ravindra Beleyur
Director
M: +91 94481 46963
E: ravi@kanvic.com
Shiv Kumar Sharma
Associate Consultant
M: +91 75685 21803
E: shiv@kanvic.com
35

36. About Kanvic
Kanvic is a management consulting firm helping businesses develop winning strategies, drive profitable growth and achieve
operational excellence to reap long lasting rewards in fast growing Indian economy. We work with C-level executives to develop
innovative solutions for business challenges of 21st century India by bringing in leading edge management thinking informed by
in-depth research and sound analysis.
Contact
Jaipur Bangalore London
Deepak Sharma Ravindra Beleyur Bharat Vagadia
M: +91 99283 77800 M: +91 94481 46963 M: +44 7711 898089
E: deepak@kanvic.com E: ravi@kanvic.com E: bharat@kanvic.com
12.10
www.kanvic.com