INDIA: Opportunities and Challenges in Private Equity and

1
INDIA Opportunities and Challenges in Private
Equity and Venture CapitalHarpal S.
RandhawaThe 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
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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
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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
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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
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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
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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.

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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.

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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
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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.

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

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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
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Some other firms with significant investments
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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
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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
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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
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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
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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
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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
Thank You.