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1. September 201 3 I N D I A N P R I V A T E E Q U I T Y L A N D S C A P E I N D I A P R I V A T E E Q U I T Y R E P O R T This document is made from India Private Equity Report 2013 by Bain & Company and it is only used for classroom demonstration purpose by Prof Bhat

2. Overview of current conditions in Private Equity arena • No significant increase in Private Equity investments from 2011 to 2012 • North America performed the best whereas activities in Asia fell around 20% over 2011 • India saw deal activities fall from $14.8bn in 2011 to $10.2bn in 2012 • Number of deals in India increased from 531 to 551, highlighting a fall in average size of the deal. • In Asia-Pacific, addressed value declined by 21% to $48bn; values in all geographies were down except South Korea

3. Indian PE Landscape 5 major issues which staunched Deal Flow • Private Equity funds and Venture Capitals being more cautious in selection of their investments in India in 2012 • Throughout 2012, the slowdown in Indian economy caused increasing concern for the General Partners. • Logjam at political landscape with minimal attempt at reforms • High inflation in 2011-12 • Low index of industrial production • Weakness if Indian Rupee • Regulatory uncertainty was an issue throughout the year • VC and PE deal value declined by 30% from 2011, to $10.2bn, although deal volumes remained robust

4. Key Trends for PE Issues to watch in 2013 • Slowdown of Fund-raising activities and careful due diligence by LPs before committing funds to India • Deals for Early stage growth and by VCs, which are valued less than $10mn have nearly doubled in 2012 • Investments in consumer sectors have increased. Particularly in Healthcare, it has tripled • The pressure to exit continues to build, with the increasing backlog • Concern about returns • Expectations mismatch over asset valuation • Sustained pressure on Exits • Value Creation • Macroeconomic Environment • Rating of challenges and barriers to VC/PE industry in India • On a scale of 1 to 5, where 5=very important; 1= least important

5. In-depth perspective on Indian PE Fund Raising Exits • India received only $3.5bn of the $320bn funded globally in 2012 • 80% of the funding came from overseas investors, with no indicators that this trends is going to be changed any soon • GPs need to differentiate themselves to attract investors, which can be done by demonstrating a quality track record in investing and exiting • Increased exits in 2012 from 88 to 115, which accounted for $6.8mn from $4.1mn in 2011 • Most popular exit route is through public market sales, including IPOs • Financial Services sector accounted for 35% of all exits In Focus: The Healthcare Opportunity Deal Making • Tripled investments in the sector from $0.46bn in 2011 to $1.3bn in 2012 • Deal volume rose by 50%, with 44 deals done in 2012 • Healthcare sector has grown 11% in last five years to $65bn, but still highly underpenetrated and huge potential for growth • The volume of deals grew slightly from 531 to 551, but 4% increase in volume signifies caution in market • Average deal size has fallen from $28mn in 2011 to $18.4mn in 2012 • Sectors that attracted the investments were healthcare and IT/ITES Portfolio Management • PE investors believe that they add value in the form of vision and strategy of the portfolio companies • They improve corporate governance and financial decision making • PE investors have recognized the value of operating teams along with customer access activities for expansion plans

6. Fund Raising – Current scenario and important variables Today’s baseline: Stable but slowing • Funds allocated to India have declined from $7bn in 2011 to $3bn in 2012 • Track and exit records of GPs are the most important factors for fund-raising • Domestic funding comes only through HNIs or institutions, since Pension funds and Insurance companies are not allowed to provide capital to PE,VC or alternative asset classes • In the survey conducted by Bain, LPs ranked the factors that influence their decision making when committing funds to a GP are track records and exit records, followed by quality of investments and GP team • Funds allocated to India decline • LPs continue to value Track and Exit records of GPs

7. Fund Raising – Future of funding 2013 and Beyond • Prospects for fund raising looks positive. PE funds have overhanging funds of $11bn in 2013 start as compared to $18bn in 2012, reason may not only be increased investments but also reduction in incoming funds • Majority of GPs consider raising funds as a challenge much after challenges like ‘difficulty in exiting‘ and ‘mismatch in valuations’ • LPs are becoming more selective and competition is growing more intense, due to which GPs will have to differentiate themselves by demonstrating a quality track record in investing and exiting • Expectations of balancing between domestic and foreign investments is minimal and majority of investments are expected through FDI and FVCI only • GPs and institutional investors to increase share in domestic funding • >80% of funds continue to come from foreign sources

8. Deal Making – Deal size analysis Today’s baseline: Conservative and uneven signs of growth • Investment memorandums have increased from 100 to 180 in 2012 • Volume of deals increased by 4% but value of invested funds decreased by 30% in 2012 as compared to 2011 • Promoters were unwilling to divest at low valuations and struggled to find common grounds with the funds • Average deal size decreased from $28mn to $18mn due to rise of early-stage deals that were less than $10mn • Once these early stage deals valued at less than $10mn are taken out of the picture, average deal size remains remarkably consistent from 2011 onwards • Average deal size dropped sharply in 2012 due to increased volume of sales • GPs predict that deal size will stay the same or increase over the next two years

9. Deal Making – Larger deal size analysis Today’s baseline: Conservative and uneven signs of growth • PE deal size is likely to increase due to multiple reasons, such as economic growth at a significant rate, follow on investments in the future on maturing of PE scene • Decline by $10mn in 2012 was accompanied by drop in Mega deals. Top 25 deals made up only $4.3bn as opposed to $5.9bn in 2011 • Average deal size of these top deals dropped by nearly a quarter , to $175mn • In parallel, number of smaller deals rose by 40% in 2012, from 260 deals to 357 deals • Average deal size for larger deals in 2012 dropped to 2010 levels

10. Deal Making –Sector wise analysis of deals Today’s baseline: Conservative and uneven signs of growth • Analysis of investments less than $10mn shows significant growth in the healthcare, IT and IT-enabled services (ITES) sectors. Of the 360 deals valued at less than $10mn, over half were in IT and ITES • 40% of healthcare deals (20 out of 44) were valued less than $10mn. Investment is education is also growing • Majority of small deals were in e-commerce space and investment is also done in mobile value-added services • Financial service have seen a little change but manufacturing and infrastructure have all significantly declined • Deal making increases across healthcare, IT, and media and entertainment • Volumes surpass 2011 peak

11. Deal Making – Existing v/s new funds Today’s baseline: Conservative and uneven signs of growth • Increasingly, India is seeing new investors. • Number of active finds increased for a second year in a row rising from 202 funds in 2010 to 285 in 2012 • Increasing overlap between VCs and PE investors continue to grow as in 2011 • Small deals used to be with VCs but established PE players like Accel India have invested about $20mn each in Bookmyshow and Myntra, whereas VC firm Sequoia capital have participated in multiple consortium, investing more than $10mn • Number of active funds increased in 2012

12. Deal Making – Investment horizon and lock-in period Today’s baseline: Conservative and uneven signs of growth • Regarding Valuation, funds have become more conservative about the entry multiples of their investments • Average EBIDTA multiple has been dropping in the past from 20 times EBIDTA in 2006-2008 to 15 times EBIDTA in years 2010-11 • EBIDTA multiple fro 2012 was even lower at 8 times EBIDTA, driven by decline in multiples for consumer staples and the financial services sector • As capital markets show sign of improvement, promoters are likely to expect higher multiples in the future • Investments horizons are unlikely to change much

13. Deal Making – Valuations of targets Today’s baseline: Conservative and uneven signs of growth • Survey conducted by Bain shows that about 50% of GPs expect valuations to stay steady, although 75% feel that the current valuations are inflated • Lack of quality assets shows no signs of changing and will continue to keep valuations at their current levels • Consequently, paucity of deals involving quality assets has continued to make those assets pricey • About half of the surveyed GPs expect the current holding time of 3-5 years to continue while around a third expect holding periods to rise slightly • Current valuations are rated by most as high • However a decline in valuations is not expected by many

14. Deal Making – Minority v/s Majority stakes Today’s baseline: Conservative and uneven signs of growth • Majority of PE deals continues to involve minority stakes, reflecting the nascent stage of India’s private equity market • The percentage of deals acquiring minority stakes dropped from 95% in 2011 to 86% in 2012 • PE practitioners are likely to increase the number of instances in which they acquire a controlling stake, indicating a change in a relationship between investors and entrepreneurs, as per the survey done by Bain • Proportion of late stage deals also continue to decline from around 30%in 2009 to 15% in 2012 • Choppiness of capital markets had a knock-on effect on private equity, causing a big drop in pre-IPO deals and making several entrepreneurs choose to defer their IPOs • Most deals continue to be for minority stakes • However, a majority stakes are predicted to become popular

15. Deal Making – Deal structures at time of exit Today’s baseline: Conservative and uneven signs of growth • Buyouts have decreased from 25 in 2011 to 15 transactions in 2012,however they are likely to increase in 2012 • Lately, Increasing trend is of relinquishing the control in the company after sale of controlling stake • Private equity players are taking initiatives for doing secondary buyouts, which was earlier done only when funds were unable to meet the relinquish deal size without buying out older fund’s stake • Number of deals channeling private investment in public equity (PIPE) fell, from 71 deals to 67 in 2012 • PIPEs in India will increase, as several attractive assets are unable to find the liquidity they need through public channels, according to the conversation Bain had with respondents • Early-stage deals have become more popular • Buyouts and secondaries will increase in the future

16. Deal Making – Growth prospects 2013 and Beyond • Expectations for deal activities in 2013 remains cautious but still positive • GPs believe more deals will close in 2013 as steps are taken towards improving India’s legislative framework • Nearly half of the surveyed respondents are looking to invest less than $50mn in 2013, only 51% had a plan to invest between $50mn to $200mn • Industry will witness average growth acc to 60% of the respondents, fewer(10-15%) expect high growth figures • Respondents estimate that venture capital and private equity will grow moderately in 2013, as funds plan to increase investments in India

17. Deal Making – High growth sectors 2013 and Beyond • Growth in healthcare will continue as it is a recession proof field, with growth predicted as more than 15% as infrastructure and insurance penetration rates improve • Consumer product have shown resilience in troubled times, there’s a distinct investments in food and beverages over last 2 to 4 years • Education can also continue its upwards trajectory and attract increasing level of investments • Telecom and real estate are likely to remain low on investors list of priority • Both consumer and retail and healthcare sectors are expected to draw the most interest

18. Deal Making – Funds network and intermediaries 2013 and Beyond • Indian markets will continue to be heavily intermediated, and fund networks and banks are likely to play a significant role in deal sourcing • Most PE practitioners ought to work harder to source deals, which entails establishing a close and cordial relationship with entrepreneurs and engaging with them as early as possible • This has to be done sometimes even before the promoter start thinking about VC or PE for capital • Due to focus on commercial diligence across multiple parameters, deal closure time can increase • Fund networks and banks continue to be the deal sources • Deal closing duration is set to increase

19. Deal Making – Criteria for selecting a GP by an entrepreneur 2013 and Beyond • Entrepreneurs are increasingly looking at valuation, followed by brand and sector experience, while choosing a partner for funding, which increases pressure on PE funds to develop sector expertise • About competition, there is a mixed feeling, with some suggesting the existing competition intensity continues due to current capital overhang and lack of compelling deals, whereas, others opine that several GPs have no longer capital to invest and are unlikely to raise more • Financing options used by funds are unlikely to change by much, a straight equity and convertible instruments continue to account for over 90% of the funding. Mezzanine loans can also appear as a financing option • GPs are divided on competitive intensity • Entrepreneurs continue to look for matching valuations and brand

20. Portfolio Management – Role of PE investors in portfolio firm Today’s baseline: An increasing active role from investors • In India, PE investors play an advisory role, monitor their investments periodically through channels such as board participation, management information systems and regular updates from the senior management • PE investors add value to their portfolio companies by making improvements in company’s corporate governance, vision and strategy, and financial decision making • Attitude of entrepreneurs towards PE investors is also changing, but there is continued mismatch. This gap need to filled in areas such as executive coaching, operational improvements and 100 days blueprints • More and more funds are building operating teams as the realization hits that achieving growth and profit in their portfolio companies is not easy • Promoters need PE funds to help with corporate governance, strategic vision and financial decisions

21. Portfolio Management – Promoters and PE funds future relationships 2013 and beyond • Indian promoters and entrepreneurs will be more conversant with the PE’s advantages over the next two years • Many would like to see more clarity on how the funds engage with their investment companies • PE funds are using the diligence findings and reports to share their value-creation blueprint with management • Funds are taking increasing care to align their expectations for value addition with those of management • Funds are increasingly seeing the need to demonstrate immediate impact, by sharing customer contacts • GPs are hopeful that promoters will gain a better understanding of PE’s funding proposition

22. Exits – Current trends of exit opportunities Today’s baseline: An upward trend • A total of 115 exits in 2012, valued at $6.8bn as compared to $4.1bn in 2011, through the most popular exit route for both venture capital and private equity investments, which is public market sales including IPOs • Part of this increase may be attributed to the fact that many IPOs of PE-backed companies occurred in 2011 were deferred and showed up in 2012 • Promoter buybacks and secondary sales were other popular exit routes, accounting for 35% of 2012 volume • Together secondary and promoter buyback deals accounted for 35% of exit volumes • Exits increased by about 30% in 2012

23. Exits – Channels to exit Today’s baseline: An upward trend • Financial service investments reported a fivefold increase in exits, from $0.39bn in 2011 to $2.1bn in 2012 • Many high-profile exits took place including Carlyle’s $1.1bn exit from ICICI • Preference for secondary and strategic sales increased in 2012

24. Exits – Future prospects of Exits in India 2013 and beyond • India has only returned $30bn out of $85bn approximately since 2000, whereas China has returned $375bn of $561bn, a significantly higher proportion • Vast majority of firms believed, exits will increase in 2013, with a fifth expecting this increase to be over 25% • Next 3 years predictions for exit is pretty high, all this being based on expectations that capital markets will bounce back, which would increase investors appetite for PE-backed IPOs • In 2013, buyback and secondary sales will continue to be predominant modes of exit • India has returned $30bn of the $85bn total capital invested since 2000

25. Exits – Inability to Exit v/s IRR 2013 and beyond • The pressure on GPs will only grow in coming years, which is priority is to get out of the deal rather than to wait for the perfect valuation • On one hand, they have an increasing portfolio of investments that they are unable to exit will significantly weaken their position with LPs • On other hand, accepting IRRs below what might be considered as acceptable hurdle rate will make it very difficult to justify their investment philosophy for the next round of fund raising • Exits to increase significantly, with IPOs gaining as the favoured mode of exit

26. Investing in Healthcare – Healthcare opportunities • Private Equity investments in healthcare have shown an exceptional growth of around 200% from $0.46bn in 2011 to $1.3bn in 2012. Number of deals also rose by 50% to 44 deals in 2012 • Healthcare which includes delivery centres, providers, pharmaceuticals, diagnostics, medical devices, biotechnology firms was the third largest sector attracting PE firms last year accounting for 12% of the value • Closer analysis reveals that the delivery segment has driven the bulk of healthcare investments, accounting for 60% of the funds invested • Growth in India’s healthcare sector can be attributed to ever rising demand to governments support. • The healthcare industry is expected to grow 20% as India tries to catch up with developing nations Sources: India Brand Equity Foundation

27. Investing in Healthcare – Factors for rapid expansion of the sector • Growth in Population : India’s population has increased by 1.5% per year over a decade now, this trend is expected to continue. The population over age of 15 is expected to grow even faster, at around 2% annually • Increasing incidences of diseases : lifestyle diseases, such as diabetes and heart disease, have grown approximately 3% and 9% respectively, in last three to five years • Increased affordability : India’s per capita disposable income is expected to increase by about 1.6 times by 2017 to around @2300 per person. Healthcare will inevitably see an increase in spending as families at the bottom of pyramid move above the poverty line • Rise in Insurance : Health insurance penetration is expected to increase to 20% by 2015, up from 15% in 2010. This is still low but will have a real impact on both attitudes and spending when it comes to healthcare • Government Schemes: Schemes backed by central and state governments make healthcare services affordable to a larger section of the Indian society below poverty line • Population growth is stable at around 1.5%; insurance penetration to increase to 20% with increase in per capita income

28. Investing in Healthcare – Deal sizes and reasons • Most of the deals in healthcare are currently minority stakes, and this is expected to continue in the year ahead • Around half of the deals fell under $10mn mark, both in 2012 and 2011, but in 2012 there were four deals valued at more $100mn or more, all in delivery subsector • The average deal size in the sector have increased from $16m to $28mn in 2012. In delivery, in particular, average deal size has more than doubled, from $17mn in 2011 to $40mn in 2012 due to increase in deals valued more than $50mn, which has tripled to six from two deals in 2011 • Healthcare continues to present a unique opportunity for PE and VC investors for the reasons as – Sound fundamentals for growth, established track record for value creation, recession proof nature, government support, new delivery models, value add for PE and VC investors, track record for Exits. • Deals valued more than $50mn have gained share in 2012 Source: Bain PE deal database

29. Investing in Healthcare – Trends and Future Outlook • Investments in healthcare have shown a steady growth, with a move away from pharma to delivery providers • About 140 companies have received investments in past 5 years, out of which 15% to 20% have raise more than round one of capital, pointing to increasing confidence in the value creation potential of the sector • Out of $5bn invested, $2.8bn have been returned with an average holding period of five years for the top 25 deals • Of the total 115 exits in 2012, seven were healthcare. A large proportion of these exits were in delivery • Public market sales, including IPOs, seems to be most popular exit routes, constituting 40% of healthcare exits in last three years • Healthcare is an industry on a growth trajectory, in which PE and VC can play an active role • Delivery and Pharmaceuticals accounts for more than 50% of the deals

30. Implications – Lessons for each of the key stakeholders General Partners Indian Entrepreneurs • GP should work on building strong relationships with entrepreneurs much earlier in the deal cycle • GP should explore opportunities to invest with existing promoters or to re-up existing investments to avoid competition • Place more emphasis on holistic diligence • GPs should take care to discuss their investment thesis and value creation blueprint with the entrepreneur throughout the deal-making process • Should be open and transparent from the start • PE should not be seen as a way to access cash but rather thought of as activist capital, which brings vast experience, network and fiscal discipline • Investor should also come with a set exit time frame in mind, and it is best to align on exit road map early Public Policymakers • There is much that can be done to stimulate private equity investments in India and promote economic growth • India currently required extensive capital across multiple sectors: infrastructure, telecom and education • Poilicymakers should realize the benefits of PE funding-involved and available capital with shared risk • They should also recognize the value that private equity can bring to Indian entrepreneurs in terms of expertise and guidance Limited Partners • Patience is the key issue with funds, when faced with a growing portfolio • Reevaluation of exit options and tough calls on IRRs may be required • Create a clear road map on all new investments, being done as an integral part of due diligence of GP

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