Private Equity-3

coverage
• Nature of PE fund
• PE vs Hedge funds
• Hedge fund vs venture capital
• PE vs Mutual fund
• PE : Valuation approach
• PE: Valuation methods
PE : Nature of PE funds
• Typically, private-equity investment groups are geared towards long-
hold, multiple-year investment strategies in illiquid assets (whole
companies, large-scale real estate projects, or other tangibles not
easily converted to cash) where they have more control and influence
over operations or asset management to ...
• Private equity operates with investors and uses funds to invest in
private companies or buy out public companies. By doing so, general
partners can obtain control over management and other operational
changes to increase profitability in hopes to later sell at a successful
rate.
Hedge fund vs Private equity
Hedge fund Private equity
Time horizon short long
Risk High risk in short term High risk in long term
Lock in period Shorter Longer
Structure Open ended Close ended
Investment strategy Invest in public companies Invest in unlisted companies
Liquidity high low
Involvement in the management Low high
Hedge fund vs Venture capital
Hedge fund Venture capital
Investment selection Publicly traded securities like Young companies , attractive
stocks, bonds, and other growth prospects
financial instruments such as
derivatives
Investment strategy Matured companies Early stage start ups
Risk low high
Involvement in management no high
liquidity high low
PE vs Mutual funds

PE Mutual funds
Investment Strategy Unlisted companies Listed companies
investors Limited partnes General public
Risk high Low
Fee structure Portfolio management Only management fees
fee plus profit sharing
Business structure Partnership Investment Trust
Nature of fund Close ended Open ended
Horizon long short
Liquidity illiquid liquid
PE: Valuation approach
• fair market value; Fair market value (FMV) is an asset's estimated value if
it were sold today in the current market.
• Market value; Listed companies
• Earnings capitalization
• Earnings multiplier
• Cash flow discounting
• Assets base valuation
• Comparative companies
• Book value Method
• intrinsic value: valuation of tangible and intangible value
VC – valuation Methods

Multiplier Approach

EV/ Revenue EV/ EBIT EV/EBDIT Price /Earning

VC – Methods

Discounted cashflow
approach

Estimate future Calculate present value of all

Discounting rate-WACC
cashflows the future years

Weighted Average IRR

Cost of capital
PE: Valuation –Intangible
• Valuation depends on flowing factors
• Promotor vision and reputation
• Quality of management
• Good will
• Social responsibility
• Order book
• Product profile
PE: Investment Process

Define funding strategy Due diligence

Prepare Business plan details Negotiate

Find investors Sign the deal

Presentation road shows

PE : Business cycle

Invest Acquire Build Manage

enhance exit
PE: Business model
Acquiring Business with Equity and debt

B
•U Accept money from accredited investors
S
I
N
Invest in unlisted companies
E
S
S
Acquire controlling interest
M
O
D Turnaround the company
E
L
Exit
 PE: General Business Plan
• Executive Summary. ...
• Business Description. ...
• Market Analysis. ...
• Company Organization. ...
• Products or Services description
• Analyze the competition.
• Develop a marketing plan.
• Investment strategy
• Financial Projections
• Summary.
PE : financial Model
• Income statement.
• Balance sheet. ...
• Cash flow statement. ...
• Debt schedule.
PE: Risk and Rewards analysis
Risk Rewards
Operational Risk Bigger Returns
Liquidity Risk
Funding risk
Market risk
Capital Risk
PE: Business Strategies
• Funding New Venture
• Funding Growth
• Buying out existing PE investor
• Buying out business owned by another PE
• Targeting companies with financial challenges
PE: funding strategies
• Leverage buyout: Part euity – Part Debt
• Equity : Growth capital
• A mezzanine debt : when a hybrid debt issue is subordinate to
another debt issue from the same issuer. Mezzanine debt
bridges the gap between debt and equity financing and is one of
the highest-risk forms of debt—being subordinate to pure debt
but senior to pure equity.
•.
•
VC - Due Diligence- General
• General –
• Location of the startup’s headquarters
• Compliance with statutes and regulations
• Environmental issues
• Risk Management
• Licenses and permits
• Pending litigation
• Articles of incorporation
• By laws and amendments
• Annual reports
• Listing of shareholders and percentages owned
• Any partnership agreements
Pe: Post investment Review
Gap Analysis
Project goals review
Stakeholders satisfaction
Review risks and returns
Lesson learned
Pe: investments in developing market
markets
• High growth potentials
• Diversification
• Govt support
• Political and regulatory risks
• Currency fluctuations
• Lack of infrastructure
• Corporate governance
• Exit challenges
PE; EXIT STRATEGY
• Trade sell
• Partial exit
• Secondary sell out
• Byout by promotor
• IPO
• Bankcrupcy Liquidation
Challenges of exit in india
• Uncertainty and volatility of the market
• Less IPOs
• Difficult secondary buyout
• Alignment of interest of various stake holders
• Willingness to exit- portfolio company
• managing the various tasks and activities required to complete the
exit process successfully.
Promotor buyback
• Buyback of shares definition
• The shares buyback is a corporate event wherein a company offers to buy
back the shares it had issued earlier to the market. This includes the
associated process in compliance with the laws of the land which are
mainly financial in nature.
• The buyback definition has 3 important parts:
1.The company must have issued shares to the market earlier to be able to
buy back shares.
2.Buyback is a corporate event that has an associated process.
3.The process must follow the legal norms of the land or country in which
the buyback of shares is being executed.
PE: Promotors buyback
• Eligibility Criteria for Companies for buyback of shares
• A company wanting to buy back the shares is required to meet the following criteria to be eligible
to think about buyback of shares:
• The company should be a listed company on a stock exchange in India.
• It should have sold its shares while listing through an IPO in compliance with the norms in India.
• The company had sold its shares more than 6 months before.
• The company directors have agreed to buy back shares in a special meeting held to buy back
shares.
• The company complies with the buyback norms of the Companies Act 1956, 1999 as well as the
norms laid down by SEBI.
• The company should have not defaulted in a period of 3 years on shares, debentures, interests,
and dividends.
•
PE: Promotors buyback

• Increase promotor holding

• Surplus cash
• Rectify market value of undervalued stock
• Improve financial ration
• Protect company from hositlw take ovr
• Strengthens capital structure
PE: Secondary Buyout
• In a secondary buyout, the private equity manager sells its stake in
the portfolio company to a different investment manager, keeping the
company in the world of private equity. The PE buyer then starts its
own approach to creating value in the asset. In secondary buyouts,
deal terms are often kept undisclosed.
PE: Sale to other strategic investor
• a strategic investor is a large company in the same
industry as the startup they’re investing in.
• focus on strategic advantages than financial returns.
• Focus on value creation than financial retunes .
• Provides advantages like a wider business network and
more development opportunities. They can also provide
insight to help small businesses grow in all areas,
including sales, marketing, and finance.
PE: Stake swap
• Equity stake refers to an ownership interest in a company. It can be
acquired by buying shares of stock or through the receipt of stock
options, convertible debt, or other instruments.
• Private equity is ownership or interest in entities that aren't publicly
listed or traded. A source of investment capital, private equity comes
from firms that buy stakes in private companies or take control of
public companies with plans to take them private and delist them
from stock exchanges.
• Dalmia Bharat swaps KKR 15% stakes in Dalmia cement @600 cr and
issues 620 cr. Worth shares to KKR in Dalmia Bharat. (8.5%)