India: Opportunities and challenges in private equity

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India Opportunities and challenges in private
equity
Richard Laing, Chief Executive 6 November 2006
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CDC mission

• Our mission is to generate wealth,
• broadly shared,
• in emerging markets, particularly in poorer
  countries,
• by providing capital for investment
• in sustainable and responsibly managed
• private sector businesses.

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Corporate overview
CDC provides capital for investment in private
sector businesses in the worlds poorer countries

• CDC is a vital element of the UK Governments
  developing world poverty reduction strategy
• Oldest DFI, founded in 1948
• Net worth of 1.6bn (3.0bn)
• Investments focused on Africa and South Asia

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Corporate overview
CDC provides capital for investment in private
sector businesses in the worlds poorer countries

• Objective is to make a developmental contribution
  by growing professionally managed profitable
  businesses
• Invest through private equity funds
• Invested into over 70 funds, 25 fund managers
• Each fund manager must follow our business
  principles
• Encourage other investors through demonstration
  effect

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The development process
CDC capital
Investee companies
Fund managers
Economic growth
Stimulate economic growth by investing
successfully in the private sector
We place our funds with skilled and experienced
private equity fund managers in our target markets
Fund managers deploy CDCs capital in profitable
private sector companies, across a range of
sectors
Successful companies stimulate economic growth
the only sustainable antidote to poverty
The only antidote to poverty is the generation
of wealth
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So why private equity?
Private equity funds are the most effective way
of getting our capital to work.

• There is no conflict between our development and
  financial objectives.
• Indeed, financial success is the best sign that
  the underlying businesses are sustainable and
  successful.
• We invest in best of breed funds and pioneer
  funds.
• Best of breed maximise financial returns in
  relatively mature markets.
• Pioneer maximise financial returns but within a
  specific arena (eg SME funds, first time fund in
  a new market, etc)
• We therefore always seek to maximise the returns
  of any one fund.

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Corporate overview
2005 was an exceptional year in terms of
financial results with a 35 return on net assets

• Total return of 426m (800m)

• Helped by strong performance on legacy portfolio,
  good exits and stock markets (eg Sensex up 42)
• 232m new commitments 156m new investments
• Total net assets of 1.6bn (3.0bn)

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Corporate overview
2005 was an exceptional year, compensating for
under performance in 2003.
MSCI return vs. CDC portfolio return
42
MSCI
22
CDC return
10
Dec 2005
Dec 2003
Dec 2004




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CDCs fund managers
10
CDCs Indian fund managers
Plus 3 more in active due diligence and expected
by 31 Dec 2006
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What are the challenges in India?
The main challenge in India is the same as
anywhere else select the right team.

• The discussions we have at screening meetings
  and at investment committee are virtually
  identical to those we had at xxxx when looking
  at European and US funds.
• Team, track record, team, dealflow, team, exits,
  team, governance of the fund, team, terms, team.

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So is anything different in India?
There are opportunities and threats, strengths
and weaknesses.

• Valuation. Is the Sensex overvalued? Too many
  momentum players?
• Why the rush? Some funds investing too fast.
  Competition for deals.
• Hot market. Poaching of staff between GPs. Cost
  of running a GP.
• Infrastructure. Mumbai airport to South Bombay.
  Hotels in Bangalore. China vs India.

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So is anything different in India?
There are opportunities and threats, strengths
and weaknesses.

• Regulation. Foreign investor rules on some
  sectors (retail, banking, insurance, etc)
• Bureaucracy at investee company level. Red tape
  for GPs. Federal government. Local government.
  Corruption.
• Democracy. Alliances puts strain on government.
• Economic or political blip. Consequential
  withdrawal of fickle capital would severely
  reduce valuations.

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So is anything different in India?
There are opportunities and threats, strengths
and weaknesses.

• Market matured immeasurably. Large cadre of GPs
  (CDC had contact with gt75 in 2006). More
  experienced LPs.
• A reverse brain drain. Top quality people
  returning to India (but expensive).
• Deal flow increasing. 5.4bn in 246 deals in 1st
  9 months of 2006 (2.8 times 2005 for 3rd
  quarter)1. Families now accepting other equity
  owners.

1. Source Venture Intelligence India Roundup
Quarterly Jul-Sep 2006
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So is anything different in India?
There are opportunities and threats, strengths
and weaknesses.

• Financial markets good. Increases deal flow,
  exits, debt availability, etc.
• Domestic market. China vs India.

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