EY India's Transaction Advisory Experts Talk about Private Equity Investments in India

1. Capital Matters September 2018 Transactions India If it matters to you, it matters to us Private Equity Special Stressed assets market set to expand Maximizing value from carve-outs Decoding ways to scale new heights In conversation with Sanjay Nayar CEO, KKR India

2. 04 In this issue 06 04 The road ahead for private equity in India Understanding the key trends and challenges in PE investments 06 Decoding ways to scale new heights Sanjay Nayar talks about his outlook on the Indian private equity landscape and KKR’s journey in India 10 Well begun is half done Accelerating value creation at private equity investments through a 180-day plan 10 14 Insights from our recent Global Capital Confidence Barometer The 18th CCB indicates that global M&A appetite remains healthy despite geopolitical uncertainty 14 18 Setting the wheels in motion The next 12-18 months are expected to be a strong period in terms of M&A and PE in the automotive sector in India 22 Maximizing value from carve-outs Carve-outs offer a better opportunity for PE on the buy-side to extract maximum value from these assets post acquisition 24 Stressed assets market set to expand 18 The success of IBC hinges upon the successful resolution plans being finalized and their implementation Write to us with feedback/suggestions and contributions at transactions.ey@in.ey.com 22 Editorial Himanshu Goyal Pooja Bhalla Mathur Mansi Gupta Ashish George Kuttickal Yashaswita Gawade Dhriti Gandhi 24

3. Foreword W leaders in decision-making. elcome to the inaugural edition of the Capital Matters magazine that we have developed with a view to share insights on a broad range of subjects which are pivotal to driving the capital agenda of corporate organizations. The publication features industry points-of-view and select topical articles contributed by our colleagues that we hope will help transaction This edition has a special focus on Private Equity (PE) and as the cover story of this inaugural issue, we are delighted to bring to you an exclusive conversation with Sanjay Nayar, Chief Executive Officer, KKR India. As part of the discussion, Sanjay shares his views and insights on aspects like PE investments, private debt, KKR India’s plans in the short-term, and market expectations over the next few months, among other things. The magazine also features articles that talk about accelerating value creation at PE investments through a 180-day plan, the evolving face of the Insolvency and Bankruptcy Code, the traction expected in the auto sector, maximizing value from carve-outs, tracking and forecasting of the PE landscape. I hope you enjoy Capital Matters and would welcome your feedback. Should you have any questions or wish to discuss any of the issues raised in the magazine, please do contact me at amit.khandelwal@in.ey.com. Amit Khandelwal Managing Partner, Transaction Advisory Services, EY

4. September 2018 The road ahead for private equity in India Vivek Soni Partner and National Leader, Private Equity, EY P rivate Equity (PE) investments hit record levels of US$26.5 billion in 2017 and witnessed nearly 50% increase to US$15.2 billion in the first half of 2018 as compared to 2017. This spectacular run is expected to continue through the rest of 2018 driven by strong GDP growth rate, enabling policy changes and growing investor interest. It is pertinent to note that since the last 2 years, India has been among the top two most attractive emerging markets for PE investments as per the two previous EMPEA surveys of global LPs. Investments and exits • Limited Partners (LPs) making direct investments in India: Traditionally, LPs invested into PE funds and remained as the only financial investors. However, of late, LPs such as pension funds, sovereign wealth funds, family offices, etc. are looking to invest either directly or in partnership with their General Partners (GPs), giving them a closer sense of the market as well as increasing their potential returns. Canadian pension fund CPPIB has made many such investments in India last year, as also funds like GIC, ADIA and others. • Increasing size and complexity of deals: While high valuations can be cited as one of the reasons, the participation of big pension funds, sovereign wealth funds and large buyout funds, who have an access to large pools of capital and greater flexibility in writing big checks for valuable business, is strongly fueling the trend. We can expect to see many such mega deals given the strong PE interest in India as well as the growing acceptance of buyouts as an option by Indian promoters. • Exit options: From an exit perspective, IPOs continue to be an important exit route for the PE community. However, given the recent volatility in the midcap/small cap space, there could be some delays in IPOs of PE-backed companies as market conditions are not ideal for some issues. Nonetheless, secondary sale could also see traction as new investors lap up businesses that have proven to have growth potential and shaped up well under early investors. 4 Capital Matters

5. Issue 1 Sector trends • Financial services has overtaken the traditional favorites like real estate and e-commerce to become the most favored sector for investments. With the government mulling over the possibility of increasing the cap on FDI in private banks and other financial sector reforms, we see the flow of funds into the sector getting even stronger in the coming year. Also, as the government pushes for digitization of financial transactions, new-age Fintech (technology- enabled financial services) companies may see large funding rounds, as they look to capitalize on the opportunity to improve penetration and grow their subscriber base. However, like e-commerce, the fintech sector too is expected to take time before there is value creation for the investors and will continue to have a high rate of cash burn amidst intense competition in the meantime. • Barring a few stray instances of large funding rounds, e-commerce may continue to see lower levels of investment as the market matures and valuations rationalize. Nonetheless, India will continue to offer an attractive field of play for consumer-led investments in sectors such as fintech, healthcare, and education as well as other tech sectors like big data and analytics. e • The other sectors that are expected to see traction include infrastructure and logistics. With the government making infrastructure spending a priority, and also LPs like pension funds looking at infrastructure investments as a favorable theme to generate steady and risk adjusted yields, the infrastructure sector is expected to see continued traction. After the implementation of GST, logistics has gained prominence for many industry players be it in e-commerce or manufacturing. The government has also recognized the importance of the sector to facilitate trade and commerce and granted it an infrastructure status. As a result, both these sectors are witnessing an increased investor interest. Challenges and opportunities • Certain challenges in the form of geopolitical tensions, vulnerability of the financial markets and an uptick in interest rates, etc. could put a squeeze on the liquidity that has fueled the traction to a large extent. While global LPs show no signs of cutting back on investment plans, concerns remain high around valuations, with significant capital chasing fewer opportunities, which makes the environment cautiously optimistic in the second half of 2018 as well. • As the government tries to continue its reform agenda, having successfully navigated hurdles of demonetization and GST implementation, ensuing political compulsions as the ruling establishment prepares for impending general elections could potentially slow the reforms process. Also, global headwinds in the form of higher crude oil prices and fed rate hikes could potentially impact domestic inflation and fiscal deficit, putting a spanner in the domestic growth story. • The above concerns notwithstanding, with the IMF growth forecast of 7.3%, India is poised to regain the tag of the fastest-growing major economy. Coupled with prospects of long-term structural changes in the economy, driven by improvements in the ease of doing business (Indian entered top 100 “Ease of Doing Business” ranking in 2017), tax and regulatory reforms like GST, RERA, Insolvency and Bankruptcy Code, etc. and a strong entrepreneurial environment, we could see India’s share in the global PE pie grow bigger. Capital Matters 5

6. September 2018 Sanjay Nayar CEO, KKR India this savings-investment gap through a combination of private savings locally (such as local capital markets, local mutual fund, insurance, etc.) and foreign investments. The last year has been a fairly busy one for KKR. What is your view on the Indian Private Equity sector for the medium to long-term? Can you describe KKR’s evolution in India and why you have built the firm the way you have? KKR, in the last 8-9 years, has established four businesses in India backed by foreign investments. We have an Asia PE fund, which focuses on PE investments in companies needing capital for growth and transformation. Second, we have a Non-Banking Finance Company (NBFC), which is backed by the KKR balance sheet and some of our shareholders like Abu Dhabi Investment Authority (ADIA) and a real estate NBFC backed by our balance sheet, GIC and Townsend.Finally, we have the distressed fund, which is a foreign fund as well. So we have different vehicles for diverse classes of savings coming into India to tackle problems or situations with different risk rewards. There is enough deal activity for all asset classes in India and the more pockets of excellence we create, the more solutions we can give to India Inc. Foreign investments channelled into India have been growing and have made our capital markets more robust. The increasing volumes of private equity and FII inflows are all ways of bringing in private savings and foreign investments. With lesser tax issues, more policy certainty, steadier currency and better corporate governance, we are going to see more investors of different types willing to invest in India. I think foreign investments will keep coming into India as investors become more and more comfortable with the Indian market. India is expected to witness a steady growth for several years to come. However, given the fiscal deficit, the country will continue to have a savings-investment gap. Therefore, there is a need to bring in more private savings to cope with the burgeoning investment needs. Even if there is no new capex, just refurbishment/maintenance of existing infrastructure like the modernization of airports, widening of roads, renovation of existing plants, etc., will require a tremendous amount of investment. In the current backdrop, I think the next two years are not going to be dramatic for the economy. But even in a non-dramatic year, to achieve 6%-7% GDP growth, the Indian economy will only be able to bridge In a nutshell, all indicators seem to point towards a bullish outlook for the Indian private equity sector in the medium- to long-term. 6 Capital Matters

7. Issue 1 Decoding ways to scale new heights S by bringing in the right corporate governance structures and required capital solutions. Sanjay Nayar, CEO, KKR India, in conversation with Vivek Soni, Partner and National Leader Private Equity Services, EY, shares KKR’s journey in India along with his views on the potential opportunities for foreign investors. ince opening its India office in 2009, KKR has invested close to US$8 billion. The investment firm is bullish on India and is committed to its role of a key stakeholder in the Indian PE ecosystem, supporting policy makers and India Inc. Because of these changes and many more supplementary factors, I think we are over the first hurdle and have moved perception of foreign institutional capital from “can I get that money out of India” to “can India deliver the returns”. The challenge now for managers who either represent foreign money (like us) or domestic capital, is that we must show and make returns. We have to hunt for better ideas, deals and situations. When an asset manager shows good deal flow, makes decent returns and get the money back to LPs, then more money will follow. In my view, the amount of foreign capital that can come into India, a country which has a massive demography to play on, is enormous. We believe that all these vehicles have a promising future because our thesis is that Indian local savings, while high, are very little in financial assets. Most long duration savings get preempted by government bonds/ securities, leaving very little for the real sector. When LPs allocate to private capital, they do so viz-a-viz their own internal benchmarks, which can range from 3%-6%, a range that India can very easily deliver on. As the uncertainty caused by constant alteration in rules, regulations, tax issues, etc. is now eliminated, the Indian market has become more attractive for foreign capital. Another reason is that Indian investments have now actually given back money, which is a big change from the past. During 2015-2017, PE/VC exits amounted to almost US$26 billion and that’s a huge positive. Nine years ago, KKR India began with a two-member team including me. Today, with 41 people, we are a much bigger unit managing four businesses. According to the 2018 EMPEA-LP Survey, India is now among the top emerging markets in terms of attractiveness. Additionally, with ageing populations around the developed world, pension funds are reportedly increasing their allocation for emerging markets. What do you think has changed in the past 2-3 years to merit this shift in perception? Thirdly, I think India now represents a more stable macroeconomic environment and has a dynamic government that wants to promote growth. Governance has improved across the board from public to private sector. Additionally, softer factors like reduced crony capitalism and reduced corruption are positives for foreign money inflow. Capital Matters 7

8. September 2018 therefore, our strategy in PE has also moved from doing 10%-15% minority deals to 60%-70% or even 100% buyout deals. Our real-estate NBFC is separate from the corporate NBFC and focusses on commercial and residential financing with structured debt. With RERA and other reforms, there is now a clarity on regulations not just for the customers and developer communities but also for investors. Market perception is that KKR is more active on the credit side than the PE side, what is your reaction to that? Corporate India is changing as well. Earlier the top 10 companies were conglomerates but that isn’t the case anymore. In the next 10 years, PE firms as well as the HNIs will take on these companies, govern better, manage better, give ESOPs, diversify shareholding base, have better management, make companies less personality driven and get them listed. If Indian markets pick up and the economy keeps looking better than other markets, then more companies will start getting listed. This is what the US went through in the 1970s and 1980s. We have put more dollars in private equity than in any of our other businesses and our core business is private equity. Alternate finance becomes critical when the market is dependent on bank finance and the corporate bond market is lacking. It is the best performing asset class in the last couple of years as you have a good title over the base underlying asset. As risk levels go down, foreign investments coming into the Indian real estate sector are expected to grow through private capital. Pure play real estate private equity seeks 20%-22% net dollar return and is still hesitant to come into the real estate sector after what happened in the 1990s and 2000s. While alternate finance models have been in India for a long time through asset-based finance, Alternate Investment Funds (AIFs) are a new play with multiple players entering the segment. We are developing our business to service the needs of clients who have an actual gap because of a squeezed capital structure, delayed working capital, delayed exports, factory shut down or loan rejection from banks. We are seeing a high number of such deals in the market. While these deals get talked about and are higher in volume, in value terms, our PE franchise is very significant. Over a period, we have realized that simple deals are very expensive. We, therefore, go for complex situations, complex cap structures, complex governance issues, and try to make things simpler. Additionally, now developers have significant equity of their own and can raise mezzanine debt from NBFCs to tide their way through and don’t need to share these kinds of returns with PE. Instead, I think private equity will come in the form of developing ground-up platforms for making three star or four star hotels, hospitals, warehouses and anything that involves land acquisition and significant development risk. At KKR India, we are constantly thinking of ways to provide solutions to clients on their financing and monetization needs. We bring all our businesses together to look at a company to identify different needs and then cross-sell. For us, our businesses are like four asset classes under one umbrella looking to resolve any capital structure problems of the client. What are the sectorial spots you see where PE intervention could lead to the birth of new platforms? I would look at financial services because buying into existing ones is very expensive. One can’t possibly build a pharma or IT platform as they are already built. Financial services can be used to create different types of platforms for example fintech payment systems, etc. What is your view on the emergence of buyouts in India? All our four verticals are getting institutionalized, even the PE side. For the first time, there are real buyout opportunities, either because of the leverage on the top, family member disputes, succession planning issues or need for conglomerates to de- consolidate. Today, we are tackling more buyout opportunities than we are tackling growth opportunities and Another sector we have invested in is media. Today, media is all about new media content. We committed US$300 million in Emerald Media that is being built by two professionals. We’ve got about eight good assets On real-estate financing, is there a possibility of equity deals happening and do we have the quality of RE developers, where we can move beyond project financing into funding/ creating a large platform? 8 Capital Matters

9. Issue 1 For the first time, there are real buyout opportunities, either because of the leverage on the top, family member disputes, succession planning issues or need for conglomerates to de-consolidate. Today, we are tackling more buyout opportunities than growth opportunities and therefore our strategy in PE has also moved from doing 10%-15% minority deals to 60%-70% or even 100% buyout deals. in this sector. Healthcare services and logistics are also interesting plays for building PE-backed platforms. Around the digital and tech side, we have been consciously lagging because we didn’t have much expertise in this space and we are waiting for stabilized/tested models at more reasonable valuations. We don’t back new businesses easily as we need to know where the cash flows come from. In the US, KKR has created a new tech fund called the “New Growth Tech Fund” and we are putting US$50- 100 million in new tech companies and start-ups early on. because regulators for multiple financial segments have different definitions for the same subject. For example, RBI, IRDAI, SEBI, pension funds, etc. have their own definitions on partnerships, ownership, management, etc. A lot of LPs now are wanting to co-invest with general partners (GPs) in India. How do you see this trend from where you are? Sovereign funds have a lot of capital to deploy and when they co- invest or invest directly, they have no fee and carry drag so I see an economic incentive behind this trend. I see a lot of big LPs and sovereigns consolidating their vendors and fund managers. They are hiring good people, building good offices, investing in the market and have done some big deals globally. But this trend is yet to be seen in India. When we as GPs make mistakes, we learn and move on quickly. But if they make a mistake, they may pull back faster. I don’t see them as a threat but as partners, as they will partner with us in bigger deals. Also, I don’t see them competing with us head-on in the segments we are in. As I said, we make complex big tickets deals that involve control situations. LPs are not vying for control and are mainly looking to either co-invest with their GPs or when they invest directly, be a minority stakeholder. As a country, we are very innovative and have great ideas but are sometimes marred by poor coordination. We need a real decision maker like a CEO or a Treasury Secretary, like in the US. Maybe the Financial Sector Legislative Reforms Commission (FSLRC) could be that empowered body to take decisions or even a committee but they ought to have a decision maker to expedite the process. Mergers and acquisitions do get stuck at times due to indecision. A lot of good policy decisions have been taken like Insolvency and Bankruptcy Code, Make in India, etc. What is your wish list on critical reforms that need to be done? For banking reforms, there are various committees that are being setup to address different issues. From my point of view, I see a case for the Government of India to revisit its 70% ownership of the banking system. Banking reforms are critical, and the Naik committee has considered many relevant areas, from the board to management, compensation and ownership. I think more than introducing new reforms, it is important to implement existing reforms efficiently and take firm decisions in situations where confusion reigns. In such a system, the finance minister must be the chief executive who makes the trade-offs and takes the calls. Another reform close to my heart is the need for a consolidated financial architecture. In India, there are so many financial rules, regulations, exceptions, etc. being discussed Capital Matters 9

10. September 2018 Akhil Puri Partner, Private Equity Value Creation, EY Well begun is half done Accelerating value creation at private equity investments through a 180-day plan A pursuing the asset and then a few months in diligence with significant amounts of time and money exhausted in the same. Post signing, till close, they will in most cases spend a few months in finalizing the paperwork, solving for capital call and regulatory issues. Then after it is closed, typically another six months on tackling reporting and governance challenges. This is roughly nine months out of a three to five year investment horizon that in my view, is not being efficiently utilized for value creation purposes and instead, is being spent on process and paper-work related issues. This is clearly a lost opportunity. Fast start A structured 180-day plan aligned with the management’s key performance indicators (KPIs) for the first year launched immediately on closing of the deal helps get it off to a fast start. Any debates, if at all, related to relevant KPIs have happened prior to close, thereby, the productive post close period is dedicated on creating value. s I write this, most of my acquaintances from PE firms are probably close to signing a deal. Some of them would have spent almost a year in Deep insight on what matters A structured 180-day plan tracks and enables initiatives that matter i.e., those that move the needle. The initiatives are typically segmented into strategic, operational and process initiatives. The objective here is to have teams focused on driving what matters versus being busy. So what can be done to better utilize this window? 180-day plan A 180-day plan is an effective means of accelerating value creation during the first six months post close. Its typical benefits are: Faster immersion of investors in business A typical 180-day plan has an operating rhythm requiring a Steering Committee (SteerCo) review every two weeks. These fortnightly reviews on specific KPIs give an operationally rich environment for the PE teams to get immersed into the business and get a real feel of its operating aspects. 10 Capital Matters

11. Issue 1 Choosing the right plan I have a significant experience in implementing both 100-day and 180-day plans. After it is closed, it usually takes a few weeks to get the operating rhythm going and hence the balance of approximately one quarter out of a 100-day plan timeframe left is too short of a time to thoroughly evaluate key hypotheses. Many times there are quarterly challenges like seasonality, market disruptions, and regulatory aspects, pricing actions by competition, etc., which do not allow for a thorough review of business issues within a timeframe of 100 days. Validation of approach Base cases for PE investments typically focus on a few key themes such as optimizing the capital structure; EBITDA expansion (via growth and cost initiatives) and EV/EBITDA multiples expansion (via strategic levers). These initiatives usually involve new ways of doing things, which the management team may not always be comfortable embracing. The 180-day plan window allows for a focused testing of many of these hypotheses in a structured environment. As an example, ideas like a new go-to-market or channel engagement model may be piloted in certain geographies before deciding on a broader roll-out. Further, 180 days is roughly half of the first year. Hence, the 180-day plan framework allows for a structured engagement of investors during the very critical first year of the deal. The 180-day SteerCo, in addition to monitoring an effective roll-out of the pilot, would allow the investors to also observe softer issues which come to the surface, e.g., organizational challenges and roadblocks; top management alignment to the cause; cultural issues; structural and process aspects. In a typical board or ExCo-level operational governance model, the PE firm may get blind sided on many of these softer issues. They would typically be at the mercy of the CEO for the feedback received, someone who might also be struggling with internal resistance to change. The SteerCo allows for a dispassionate observation of these issues and hence react appropriately. Starting the preparation process The ideal time to start planning for the 180-day plan is at signing. While each deal is unique and brings with it its own set of dynamics, it is recommended that the new investors armed with data from diligence have an open conversation with the management on the concept of a 180-day plan. Any productive time after closure is thereby prioritized on focused value creation efforts. Real-time management assessment Through the deal process, the investors usually have an access to mainly the CXO suite, and that too in a controlled sell-side environment. The 180-day plan SteerCo allows for fact-based dialog on real business issues and an opportunity for new investors to observe management in action. This opportunity is priceless during the early stages of the deal since investors still have time to course correct management bench and or cultural issues that might have got missed during the diligence. Minority, consortium or majority deals: Does it matter? Minority or consortium deals are slightly more complex to navigate than majority or control investments. However, it is usually difficult for any of the stakeholders (management, other investors, etc.) to effectively argue against an operationally biased 180-day plan that is in the interest of all the stakeholders. This plan is only meant to accelerate performance. Further, the SteerCo could have participation from all the investors. Hence, I feel that irrespective of the type of deal, investors should push for a 180-day plan at the signing phase. Accelerated governance The age old saying of “Whatever gets measured…gets done” holds relevance, more so today in the world of real- time connectivity and data overload. Time and again, we have seen that board governance packs run into hundreds of pages and each page has multiple KPIs. The 180-day plan framework allows for investors to get immersed in the business and then co-develop relevant KPIs (including forward looking ones). Further, the SteerCo allows for a better observation of assumptions behind the data being shared. While the article highlights benefits of a fast start from a private equity perspective, the concept is equally relevant for enabling accelerated value extraction post acquisition by a non-PE/promoter-led company. Capital Matters 11

12. September 2018 Understanding the issues and overcoming them While most of the PE firms have started recognizing the need to better utilize this post close nine months period for value creation, the concept of a 180-day plan is still in its infancy. Some of the common issues observed that lead to its sub-optimal application are: Not enough senior leaders’ participation To ensure sustained momentum on the plan, senior leadership participation is a must. Many times it is observed that junior teams from PE firms start attending the SteerCo, which eventually leads to CXO-suite reprioritizing their time and thereby giving the SteerCo a slip, eventually leading to a decline in interest. It is imperative that the right teams from investors and management attend the SteerCo. Penny-wise but missing the big picture Expecting only the deal team to lead the development of the 180-day plan Engaging an external support in developing and supporting the plan requires investors and management to spend valuable resources and approve the related expenses. It is recommended to review the RoI on these with a multi- year view. Some of the smartest brains in the industry are present in the deal teams. Period. However, many of them come into such situations with a general handicap of not having run companies or having managed large teams i.e., the basic ingredients required to successfully understand the nuances of delivering real P&L impact. It is important that those working with the management on developing the plan have an operational bias. The ideal scenario Utilization of sign-to-close phase for necessary debates and development of the plan Expecting the management to lead the development of the 180-day plan Engagement of an external service provider at the signing stage. The service provider is someone who has an experience of working with PE firms; has an operational bias and sector specific experience During the early stage of relationship with investors, it is rare to see management teams raising their issues with PE firms. Hence, it is recommended that PE firms and management teams engage external resource(s) to support in the development and delivery of the plan. It is critical that a neutral team of external change agents be engaged in rolling out and monitoring of pilots so as to ensure that a dispassionate review gets conducted on the tested hypothesis. At times for a failed hypothesis, the challenges are more internal, which a neutral partner can help uncover. Aiming for a 1:3 ratio on expense to value delivered, it has been observed that PE firms incentivize management towards the 180-day plan’s efforts by keeping the related expenses below-the-line while calculating the earn-outs Launch of a 180-day plan on day one of close Fortnightly SteerCo reviews with senior leadership engagement and participation Lack of adequate management bench Final word Many times, mid-market deals face challenges of a relatively shallow management bench. This is normal for a company that has grown rapidly. In such cases, the time and resource burden of a 180-day plan could be a showstopper for an already stretched team. Herein, it’s recommended to hire external advisors so as to provide leverage and avoid loss of momentum on key operational levers. In fact, on-boarding talent could be one of the key initiatives that gets tracked rigorously as part of the 180- day plan thereby, improving the chances for timely closure on some of the openings. The 180-day plan is a key enabler in ensuring that a deal gets off to a fast start. It is also an effective tool for galvanizing the management teams towards achievement of very critical first year targets. The author hopes more and more PE firms will embrace this concept to extract value from their deals especially in today’s full-priced valuation environment. 12 Capital Matters

13. Issue 1 How do you spot a growth opportunity you can’t see? Our strategic capabilities help you see beyond the obvious to enable you to realize your full potential. ey.com/transactions #BetterQuestions © 2018 Ernst & Young LLP. All Rights Reserved. ED None. Capital Matters 13

14. September 2018 The 18th EY Global Capital Confidence Barometer indicates that Global M&A appetite remains healthy despite geopolitical uncertainty D espite deal levels above their pre-financial crisis highs in 2007, global appetite for mergers and acquisitions (M&A) shows no sign of waning, according to the 18th EY Global Capital Confidence Barometer (CCB), a biannual survey of more than 2,500 executives across 43 countries. Rising economic and corporate confidence and the drive for innovation and growth are outweighing geopolitical and regulatory concerns as more than half of respondents (52%) indicate that they plan to acquire in the next 12 months. Nearly two-thirds of executives expect the number of deals in their M&A pipeline to increase over the next 12 months – up from 36% in April 2017. The number of executives expecting to complete more deals in the next year has more than doubled (67% in April 2018 versus 33% in April 2017). In addition, an overwhelming majority of executives (86%) expect the global M&A market to grow further over the coming 12 months – a significant increase from last year (39%). And, more than three-quarters of executives predict increased competition for M&A assets in the next year, with most of those respondents citing PE as the biggest competitor. Strong dealmaking intentions are supported by positive macroeconomic and capital market factors. The majority of executives (73%) believe global economic growth is improving. Three-quarters (77%) of respondents also believe corporate earnings are set to improve, while just 2% predict a decline in valuations. Similarly, only 2% see any potential for market stability to deteriorate. In contrast to current market sentiment among many commentators, the survey found that executives are looking at their own fundamentals and seeing a brighter outlook for capital markets. 14 Capital Matters

15. Issue 1 Geopolitical and regulatory uncertainties are not deterring dealmaking prospects While the US continues to top executives’ investment destinations, both the US and global respondents do not believe that the US tax reform will significantly boost dealmaking – contrary to market sentiment. A small number (4%) expect to use any financial gains for inorganic growth or acquisitions, while proceeds from repatriation are expected to be invested in organic growth (77% of US respondents) or returned to shareholders (19%). Despite current geopolitical tensions, a majority of executives surveyed (75%) expect governments to increase infrastructure spending over the next 12 months, and almost two-thirds (64%) of those executives say that the increased government investment would support their own corporate growth. Deals to drive further sector convergence However, executives also recognize that geopolitical uncertainty poses challenges, with close to half (43%) seeing it as a key risk. Changes in policy and protectionism are also seen as risks that could hamper growth among more than a third of respondents (36%). As cross-border dealmaking has increasingly become the norm, cross-sector M&A is also becoming more commonplace. Almost a fifth (18%) of global executives see an increase in cross-industry acquisitions to be the hallmark of M&A in 2018 – fueled by the need to adopt new technology and digital capabilities. Portfolio transformation and the quest for digital skills driving deal activity In terms of acquisition appetite of executives, the top five sectors are oil and gas, telecommunications, automotive and transportation, consumer products and retail, and mining and metals. Almost three-quarters (70%) of respondents see portfolio transformation as the top priority on the boardroom agenda, as companies look to remain agile, alert to new opportunities and need to quickly respond to a fast-moving market environment. Executives will walk away from deals despite market highs Companies are increasingly using data analytics and artificial intelligence (AI) to make better informed decisions about their portfolios. AI and robotic process automation (RPA) are most prominent for almost half (46%) of respondents’ boards, followed by cloud computing and big data (38%) and blockchain (15%). A strong deal appetite in an already heightened M&A market might raise speculation about the longevity of the current market. Yet despite rising competition for assets, there are no signs that the market is overheating, with executives indicating that they are prepared to pull-out of deals. Nearly three-quarters (73%) say they have walked away from a deal in the past 12 months, and of those, more than half (58%) say it was due to competition from other buyers or disagreement on price/valuation. As more companies adopt new technologies, more than half of executives (55%) indicate that they are struggling to hire people with the right skillset and 67% cite talent acquisition as a main strategic driver for pursuing M&A. “Whereas the global M&A market highs of 2000 and 2007 were followed by falls, we are optimistic about the sustainability of the current M&A market – supported by our latest findings. Disciplined dealmaking is now a cornerstone of M&A. Greater availability and transparency of data is allowing executives to make better informed investment decisions. Executives will continue to look to M&A as a growth engine, but in contrast to the less-disciplined approach to acquisitions seen before the financial crisis, they are comfortable in walking away from transactions when the strategic sums do not add up.” Cross-border deals firmly on the agenda amid rising globalization While identifying growing protectionism and geopolitical uncertainty as threats, executives are confident that these will not deter international dealmaking. More than three-quarters (81%) plan cross- border M&A in the coming 12 months as access to new markets in different geographies continues to be a growth priority. Steve Krouskos EY Global Vice Chair – Transaction Advisory Services Capital Matters 15

16. September 2018 The critical questions executives should ask themselves to drive better M&A in today’s deal economy. Is your portfolio fit for purpose? Buying and selling can be the fastest way to transform your portfolio and reshape the future direction of your business. Being able to proactively respond quickly to emerging opportunities — and threats — is a must in the warp speed world of business today. Can you strategically manage your own ecosystem or will the external environment manage you? The pace of convergence and disruption is compelling companies to look across a broader landscape to understand their relative competitive position. Companies should recognize the new realities of today’s markets and develop new ecosystems to spot future growth opportunities — and identify emerging threats. workers or hiring contingent workers are options. Using M&A to secure talent is another and executives should be sure that integration strategies secure the most value from human capital. Are you actively managing your stakeholders? Are you utilizing tomorrow’s technologies today? Shareholder activists can be viewed as strategic advisors and their investment is often a sign of potential value. Executives should engage with activists and look to leverage valuecreating insights and points of view. Technology is a transformer. The increasing use of AI, RPA and big data is revolutionizing the way boards assess and optimize their operations — and encouraging them to make bold decisions on what to buy and sell to gain prime market position. Companies need to be certain their strategic decision-making processes enable them to take advantage of emerging technologies. Is private equity a competitor or a collaborator? Private equity funds are investing more and more for the medium and long term. They are also returning to the M&A market with significant purchasing power. Corporate executives should be prepared for increased competition for assets — or be open to collaborating with PE on deals, especially when acquired assets may need to be divested to execute the deal. Can your deal strategy navigate the rules or will regulation rule your M&A? The growth imperative means companies will remain focused on accessing new markets or acquiring innovation. An early understanding of regulatory implications in terms of how you shape the deal — such as subsequent asset sales to meet competition/antitrust requirements — could give you a competitive advantage. Does the answer to your growth question lay beyond your national borders? Notwithstanding rising nationalism and protectionism, companies are planning more cross-border deals than ever before. Executives should remain alert to opportunities outside their domestic market and be prepared to reimagine their global footprint. Is walking away the best deal you ever made? Is your future success contingent on your workforce? The deal landscape is highly competitive and the competition looks set to intensify further. But executives are making shrewd judgments based on strategic rationale supported by better information. Today, the use of new tools and technologies to assess available data from multiple sources will determine deal fitness. With record levels of employment in many leading economies the war for talent has never been fiercer. The right skills are often in short supply. Reskilling existing 16 Capital Matters

17. Issue 1 Key survey findings from the 18th CCB M&A outlook Expect their deal pipeline to increase 61% 78% Anticipate an increase in the number of deal completions 67% 95% Mentioned competition from buyer/price disagreement on valuation a primary reason for deal failure 47% 58% Macroeconomic environment Expect corporate earnings to either improve or remain stable 98% 100% Expect credit availability to either improve or remain stable 95% 99% Expect short-term market stability as stable or improving 98% 98% Growth and portfolio strategy Say portfolio transformation is most prominent on boardroom thinking 66% 70% Artificial intelligence and robotics process automation and cloud computing and big data are the most prominent technologies on boardroom agendas 81% 84% Cited political uncertainty greatest near-term risk to the growth of the business 50% 48% India Global M&A activity is expected to stay positive in the coming quarters, on the back of continued interest of financial and strategic investors in the Indian market. Domestic activity should strengthen further as players across sectors look to expand scale, de-leverage balance sheets and innovate their offerings through increased usage of new technologies. The restructuring deals will remain active in the coming months as the NPAs cleaning is a high priority for banks. Furthermore, the successful resolution of certain cases recently, with healthy recovery rates under the IBC, along with the implementation of project ‘Sashakt’, will further add to the pipeline. Amit Khandelwal Managing Partner - Transaction Advisory Services, EY Capital Matters 17

18. September 2018 September 2018 Setting Riding on the back of a buoyant IPO market, PE investors have also seen some highly profitable exits in the last few months, further increasing the level of confidence in the auto sector the wheels in motion Randhir Kochhar Partner, Transaction Advisory Services, EY 18 18 Capital Matters Capital Matters

19. Issue 1 Issue 1 T he automotive industry is presently in the midst of a high growth phase with nearly all segments witnessing record volumes. The government has placed the automotive sector as a top priority under its ambitious “Make in India” campaign. Their ongoing thrust on improving the investment climate within the country will drive inbound investments in this sector, especially given India’s strong position as a global automotive manufacturing hub. During the first half of 2018, domestic passenger vehicle and commercial vehicle sales grew by 13% and 39% respectively, over the same period last year. The overall automobile exports also increased by 26% over the same period last year indicating the rising confidence of global OEMs on the competitiveness of the Indian automotive industry. Automotive sales volumes have ramped up considerably in 2018 on the back of pick-up in economic activity and an accommodative monetary policy after being impacted over the last 12-18 months by the impact of demonetization and the implementation of GST. On the flip side, factors such as stringent emission and safety norms, increasing technological complexities and reduced product life cycles continue to be the challenges faced by this high-growth sector. Deal activity in the automotive sector has picked up significantly over the last couple of years, spurred on by renewed interest from global players as well as private equity investors, who have recognized long-term potential of the industry. On the inbound front, global players are showing more confidence in the country and are attempting to set their foot in the low-cost Indian market to cater to the demands from their overseas markets as well as with an aim to consolidate their existing presence in the sector domestically. Hence, we may see more deal announcements involving global MNCs buying out additional stakes in their Indian JVs. Looking at the outbound deals, a host of overseas acquisitions being inked by domestic players to gain access to a new or wider customer base and to augment their technological capabilities is expected to be seen. Capital Matters 19

20. September 2018 September 2018 Activity remains stable The M&A activity in the Indian auto industry has already shown signs of a strong trend in the initial months of 2018, building on the track record of the last few years. There have already been 23 deal announcements in H12018 vis-à-vis 27 in the year 2017. The disclosed deal value during the period was US$494 million with Minda Industries and the Motherson Group being the most active acquirers. While the disclosed deal value for the year 2017 was US$852 million, the same is expected to be much higher this year Emerging trends in the electric vehicle (EV) market One of the key developments that is being witnessed in the Indian automobile industry is the increased focus on electric mobility. Over the last few months, there has been a considerable amount of news regarding the adoption of electric vehicles with the Government of India announcing that it is in the process of setting up a new electric mobility mission that shall target significant EV adoption by 2030. The central theme of the Auto Expo that took place in February of 2018 was electric mobility wherein all major OEMs across the two wheeler, passenger car and commercial vehicle industry. Within the cross-border space, there was a healthy mix of inbound and outbound deals with five deal closures in each category. Indian companies’ quest to go global has continued in 2018. Several of these outbound acquisitions are OEM directed and assisted, ensuring favorable deal terms for the acquirer. A notable outbound deal is the acquisition of Reydel Automotive, a European manufacturer of automotive interiors by Motherson Sumi Systems Ltd (MSSL) for US$201 million. Reydel Automotive is a leading player in this segment and operates engineering sites in France, Germany, South Korea and Japan, and industrial sites in Spain, Brazil, India and Thailand. The proposed acquisition would help both companies in expanding their presence in the respective geographies in addition to provide an access to the customer portfolios. Much of the M&A activity in 2018 has been driven by domestic deals which contributed about 13 to the total deal volume for the industry, pointing towards the increasing consolidation in the Indian automotive 20 Capital Matters

21. Issue 1 Issue 1 With all segments of the auto industry firing on all cylinders, investor confidence is at an all-time high. We are seeing unprecedented levels of interest in this sector from global as well as domestic strategic investors, apart from a renewed level of interest from financial sponsors. PE activity Financial investors are showing immense interest in the automotive sector of late. The sector has witnessed nine private equity investments with a disclosed deal value of US$260 million in the first half of 2018. The most notable among these are Blackstone’s buyout of Comstar Automotive for US$125 million and Kedaara Capital’s buyout of Sunbeam Auto. The next 12-18 months are expected to be a very strong period in terms of PE activity in the automotive sector in India with large private equity funds contemplating sizeable investments in the sector. Riding on the back of a buoyant IPO market, PE investors have also seen some highly profitable exits in the last few months, further increasing the level of confidence in the sector. industries displayed their electric vehicle offerings. While most market participants believe that electric vehicles will become a reality in the long term, infrastructural constraints in India suggest that the shift is unlikely to take place in the short to medium term. It is anticipated that two/three wheelers and intra-city buses will drive the first phase of growth for electric vehicles. Most OEMs and suppliers face a dilemma these days. While short to medium term demand is driving the need for investment behind conventional vehicle platforms, the expectation that electric mobility will eventually become a reality in India leading them to question the long-term viability of these investments. With all key stakeholders exhibiting a positive sentiment, the market is ripe for investments by both strategic and financial investors and the industry expects the remaining half of 2018 and 2019 to continue being a watershed period for M&A activity in the automotive industry in India. Capital Matters 21

22. September 2018 Maximizing value from carve-outs Corporates are increasingly considering divestment or carve-out of their non-core assets. This is largely being driven by macro-economic uncertainties, technological changes, shareholder pressures and geopolitical instability. According to the EY Global Divestment Study 2017, 43% of companies were planning to divest in the upcoming two years. Keeping pace with the global trend, Indian corporates have undertaken significant divestments over the past three years. More than 350 divestments (100% stake sale) have been concluded in India over the last three years (2015-2017) with a large number of deals having valuations over US$100m. Whilst these carve-outs help unlock value for corporate shareholders, they offer an even better opportunity for private equity (PE) on the buy-side for extracting maximum value from these assets post acquisition. Non-core assets by definition are despised and underinvested by corporates, thus these assets fail to achieve their full potential. Being under PE ownership can give these assets a new breath of life. In addition to bringing fresh capital and renewed enthusiasm, PEs invariably bring operational, strategic, transformational expertise or their industry network to help their portfolio achieve full potential. Naveen Tiwari Partner, Operational Transaction Services, EY 22 Capital Matters

23. Issue 1 More than 350 divestments in India over thelast three years For PEs, the key to success or failure of acquiring a carved-out entity is dependent on the level of preparation and readiness on both sides during the deal. Primary considerations in a carve-out should include the following: Transaction perimeter Clearly defining which of the people, assets, systems, contracts, etc. are part of the deal Carve-out governance Interdependencies A robust structure that can be implemented to provide an oversight to the carve-out process, thus, preventing value leakage Identifying interdependencies which are needed to be addressed between the carved- out entity and the parent such as shared employees, IT systems, facilities, etc. Primary considerations Target operating model Planning and timeline Articulating the post close operating model across functions independent of the target’s current parent Defining the overall project plan and timeline to achieve separation including consideration of any regulatory or compliance activities Transition services Financial impact Having an adequate interim arrangement whereby the target entity relies on its current parent for critical business support for a short duration post deal close Estimating incremental operating cost for the standalone business and identifying exceptional costs to achieve the separation timeframe. All of which, ensure value preservation while allowing the business and its PE owner to start focusing on value creation post close. A well-executed carve-out has several benefits. It allows a PE buyer to ensure adequate focus is given to ensuring business continuity on Day1. Further, it minimizes separation and transition costs, and most importantly supports achieving standalone capability in the carved out organization within a minimum Capital Matters 23

24. September 2018 Stressed assets market set to expand Dinkar Venkatasubramanian Partner, Restructuring and Turnaround Services, EY with inputs from Pulkit Gupta Director, Restructuring and Turnaround Services, EY J ust over a year ago, there was limited clarity about the bad loans which exceeded US$175 billion. However, since the Insolvency and Bankruptcy Code (IBC) has been introduced, over US$50 billion of bad loans have already been put through the insolvency process and are either getting resolved or going into liquidation in a time-bound manner. Led by all-time high NPAs and driven with determination by the government and the regulators, IBC has seen an unprecedented implementation journey in the last 18 months. Over 800 corporate debtors, have been admitted into the resolution process. There are about 1,800 insolvency professionals (IPs), 80 insolvency professional entities (IPEs), six registered valuer organizations, three insolvency practitioner associations (IPAs) and one information utility (IU) functioning as part of the ecosystem. An enforcement and adjudication framework in respect of service providers is also in place. While IBC has made a strong start, but as expected with any legislation of this magnitude, there are many challenges which would need ironing out as the process and stakeholders mature. Consistency of the interpretation of law and establishment of jurisprudence would instil a lot of confidence amongst all the stakeholders. This would, in particular, enable potential investors to plunge into these processes with more confidence and conviction. Based on the learnings of the first 12-18 months, significant steps have been taken to harmonize the process. 24 Capital Matters

25. Issue 1 On recognizing the progress in implementation of the reform, the World Bank improved India’s ranking from 136 to 103 on the parameter of resolving insolvency in its ‘Doing Business 2018’ report. NPA by sector (RBI) 60 Stressed advances ratio (%) 45 40 31 27 27 25 24 24 21 20 20 13 12 8 5 0 Basic metal Engineering Mining Food processing Construction Textiles Paper and paper products Vehicles Infrastructure Cement Chemicals Rubber Jems and jewellery Source: RBI Opportunities in stressed assets Distress investors now have a resolution process which has a structure, well-defined processes and timelines, responsibilities and protection from the past. To take benefit from the changing environment, a host of global investors have sprung up looking for investment opportunities. They are exploring different routes to participate in the distress asset sale in India, both under a formal insolvency process and before the start of bankruptcy proceedings. In the past, due to the absence of a strong legal and regulatory framework to protect creditor’s rights, investors had stayed away from India’s stressed assets. However, with the evolution of IBC and other government policies, the landscape has changed and a lot of interest has been seen in the last 18-24 months. Investors who have already started exploring India’s distress assets opportunity Liberty House Group Piramal Group and Bain Capital Kotak Mahindra IL&FS Deccan Value International SREI Alternative Investment CPPIB JM Financial Source: News reports Capital Matters 25

26. September 2018 The resolution process gives good outcomes when the process is initiated at the earliest and completed at the earliest. A few years down the line, we will see firms coming for resolution at the earliest instance of default, when in reasonably good health. The outcome, then, would be attractive. Dr. M.S. Sahoo Chairman of the Insolvency & Bankruptcy Board of India Many global private equity funds including KKR and Co., SSG Capital Management, and International Finance Corp. (IFC) have acquired stakes in existing ARCs, while Blackstone has acquired a stake in International Asset Reconstruction Pvt. Ltd. (IARC). Further, US-based JC Flowers and Indian investment banker, Ambit Holdings have formed a JV and launched an ARC. The way forward for investors The success of IBC hinges upon the successful resolution plans being finalized and their implementation such that it is a win-win for all stakeholders. The objective of the new framework, before a company is taken to IBC, is to salvage companies which are worthy of turnaround and thereby save institutional capital. In anticipation of the opportunity, fund houses have launched several stressed assets dedicated funds in the past 2-3 years. The government on its part is trying its best to create a cohesive ecosystem which is fair, transparent and business-friendly; the regulators are responsive to ironing out difficulties faced by stakeholders; newer economic policies are being implemented to boost growth across all stressed and non-stressed sectors. While this may take some time to achieve completely, the direction is right. IBC and other regulatory modifications are additionally an effort to enhance transparency and ensure that creditors’ invested money is safe. While the interest is very high, the execution has been hit by various factors. The law, is still in a nascent stage and as the interpretation and implementation of the law is evolving, several complexities are cropping up, including legal and operational challenges in resolving the stress. It therefore, remains a pertinent issue that the consummation of distressed debt transactions are easier said than done, whether in IBC or otherwise, owing to various bottlenecks including diligence delays, information availability, inter creditor issues, lack of clarity/protection against old liabilities and lack of precedents thereon thus far. The existing banking NPA’s stress on the economy is substantial, and so is the opportunity for investors. The debt market and stressed asset market is poised to expand and organize once the first phase of IBC completes and sets the ball rolling. The sheer size of assets on sale under IBC is substantial and warrants notice from global and domestic investors. There are abundant assets and more for both financial and strategic investors. With improved liquidity, legal transparency, ready market, and time-bound systems in place, the ball is in the court of bankers and investors to leverage the platform that IBC offers. Further, the time period to evaluate and execute a deal is fairly limited, anywhere between three to six months, from inception to closure. The shortened time period leads to a fair amount of risk, which will have to be carefully evaluated prior to closing such deals. 26 Capital Matters

27. Issue 1 Good buy or goodbye? One company’s non-core asset is another’s growth opportunity. ey.com/transactions #BetterQuestions © 2018 Ernst & Young LLP. All Rights Reserved. ED None. Capital Matters 27

28. Ernst & Young LLP EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit www.ey.com/in. Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata - 700016 © 2018 Ernst & Young LLP. Published in India. All Rights Reserved. EYIN1808-002 ED None This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. AGK ey.com/in EY|LinkedIn EY India @EY_India ey_indiacareers EY India careers