are you ready for growth capital? startup summit fro …
TRANSCRIPT
ARE YOU READY FOR GROWTH CAPITAL?
Startup Summit FRO Pune, 2013 By Girish Narasimhan, CFA – India July 2013
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Contents
Introduction to CFA India 2
PE / VC Overview 3
PE / VC as a source of Finance 5
What PE / VC firms look for in Prospects 6
Valuation 7
Deal Making & Transaction Process 10
PE / VC Pros & Cons 11
Contact 12
MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
Introduction to CFA India
16 Global shareholders /
Partners
Ranked top 10 for transaction values
upto $ 50 Mn in U.S
WHAT WE DO
WHO WE ARE
Serving Middle Market Companies
since 1956
Over 5,000 transactions since
1956
Global reach , Local support
Over 40 offices across North
America, Canada, Europe & India.
WHY WE SUCCEED
Leverage the experience and professional collaborationof our many offices.
Extensive network, research and industry affiliations.
Commitment to the highest standards in the M&A industry.
Seller Representation
Buyer Representation
Financing
Valuations
Strategic Consulting
A professional approach tomaximizing shareholder value
Building & growing your Companythrough intelligent acquisitions
Structuring a financing arrangement– Private Equity & Structured debttailored to your needs
Valuing closely held companiesaccurately, honestly, & clearlyexplained
Planning for your growth orPlanning your exit strategy
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
PE / VC Overview
SeedGrowth Stage
Series AGrowth stage
Series B
Priv
ate
Equi
ty
Upto USD 1 Mn
USD 5-20 Mn USD 20+ MnUSD 100+
MnInvestment
size
Potential sources of
funds
Pre IPO/Buyout
Ang
el
Inve
stor
&
VC
Priv
ate
Equi
ty
Priv
ate
Equi
ty
Private Equity (PE) or Venture Capital (VC) is medium to long-term finance provided in return for an equitystake in potentially high growth companies. These investments are generally characterized as high-risk/high-return opportunities.
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
Overview (cont…) In 2012, aggregate PE investments in India declined 15%, at USD 8.9 Bn across 406 deals as compared to USD 10.4 Bn from 481 deals in
2011.
Sector-wise, IT and healthcare contributed the most to PE deal activity in 2012. IT and ITeS accounted for over one third of the total dealvalue and volume in 2012.
Despite a slump in the overall deal value, banking and financial services maintained their relative attraction to PE funds. However, energy,engineering and construction (E&C) and manufacturing witnessed the largest declines. The infrastructure sector also suffered in terms offresh investments, due to lack of a clear policy regime, further accentuated by policy inertia.
2012 saw 55 funds with a mandate to invest in India, but the total fund value allocated to India was only USD 3.5 Bn, down from USD 6.8Bn in 2011. All this has been driven by the fact that 2012 was an uncertain year in India both politically and economically.
2.5 7.1 14.0 10.4 4.0 8.3 10.4 8.9
186
358
489465
268
359
481
406
0
100
200
300
400
500
600
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2005 2006 2007 2008 2009 2010 2011 2012
PE / VC Investment in India
Deal Value (USD Bn) Deal Volume
Secondary Sale, 12%
Open Market, 38%
Buyback, 10%
IPO, 8%
Strategic Sale, 32%
Exit Volume by Type
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
PE / VC as a source of Finance
Unique product or concept
Large potential market
opportunity
Excellent development
capability
Need to move rapidly
Intensecompetition
likely
HiringRapid productdevelopment
Alliances
CommercialisationInternationalisationInfrastructure
Pre-requisites
Implications
PE funding supports
Forward looking management
Are you prepared to give up a part of your company’scapital to a private investor?
Are you prepared to take on the accountability of anentrepreneur?
Does your company have high growth prospects and areyou and your team ambitious to grow your companyrapidly?
Does your company have a product or service with acompetitive edge or USP?
Do you and/or your management team have relevantindustry sector experience? Do you have a clear teamleader and a team with complementary areas ofexpertise, such as management, marketing and finance?
Are you prepared to share certain strategic decisionswith shareholders outside your “inner circle” ?
Is there a realistic exit strategy for all shareholders?
If your answers are “yes”, PE / VC is worth considering
Questions to ask yourself
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
What PE / VC firm looks for in Prospects
Business Opportunity &
Growing Market Segment
Tam (Total Available Market), Sam (Served / Servicable Availabile Market), Som(Servicable Obtainable Market).
The value added by PE / VC in many cases is their ability to grozw the “pie” and inthat context the growth potential in the target market segment is a very critical factor.
Strong Management team
Quality (Commitment, Integrity, Passion & Drive) of the management team is by far themost important criterion for many investors.
Strong Corporate Governance & Contingency
Planning
Investors seek firms that have good decision structures, reporting systems, and strongdocumentation.
Understanding what could go wrong and putting contingency plans in place to dealwith specific situations.
Reputation Investors check the business credit rating, the management team’s reputation, and
enthusiasm and determination of the team before they invest.
Rate of Return Investors look for 3x to 7x return for the capital they are investing based on the nature
of funding i.e. VC / PE . Reduced uncertainties to the business execution plan couldprovide better visibiity to possible returns.
Exit Route Investors need to have the confidence that there is a clear, planned path to their exit.
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
Valuation
Value of the Company
No pure quantitative method
Based on hypothesis
Always slightly subjective
Subject of long negotiations
Valuation is not just a science, but an art
Recognized methods
Discounted Cash Flow (DCF)
Comparative Method
Opportunity Cost
Which to use when – Depends on
Type of business
Stage of business
Industry it operates in
Market it caters to
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
Valuation – DCF (cont...)
LIMITATIONS
•Conceptually sound and widely used method
•Values the cash generated and not just the earnings
•Not dependent on accounting policies
•Captures Capital Expenditure needs and Working Capital requirements
•Projections are highly subjective hence could be inaccurate
•Inapplicable where projections cannot be made for the horizon period
•Difficulties in measuring risks (calculation of β)
•Market premium is highly subjective
STRENGTHS
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
Valuation – Comparative Method
When used
Unlisted companies
Listed comparable are available
Generally used multiples
Industry
CementPharmaIT/SoftwareEngineeringFI’s
MultiplePrice per MT
P/SP/S or P/E
P/EPrice to BV
‘Relative Valuation’ of entity vis-à-vis ‘Fair Value’
Premiums and Discounts
Percentage stake – control, minority
Lack of marketability
Small size
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
Deal Making & Transaction Process
Business / Financial Model
Preliminary selection of VC’s/ PE’s
Finalization of VCs/ PE’s
Floatation of TeaserExecution of Agreements
Share Holders Agreement
Share Subscription Agreement
Preparation Approach Negotiation Agreements
Due Diligence
Final Negotiations
Providing Additional Data required
Clarification on the Business Model
Company Valuation
Non-binding Term Sheet
Key Employee Agreements
Other Agreements
Information Memorandum (IM)
Teaser
Execution
Execution of Confidentiality
Agreement
Sharing Business / Financial
Model and IM
Wire Transfer of Money
Monitoring
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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
PE / VC Pros & Cons
Pros Cons (Based on how you look at them?)
• Long term committed capital, solidly underpinning your company’s growth.
• Investors do not get involved in the day-to-day running of your business.
• No need for collateral, i.e. personal assets and no need for periodic repayments and interests.
• Increased visibility with bankers, suppliers and clients.
• A partnership of sharing the risk and rewards.
• Adoption of high-performance management standards.
• Strategic advisory support along with financial guidance based on global market experiences.
• Assistance in hiring the right talent at mid, senior and advisory levels.
• Alliances due to the Investor’s network of relationships and portfolio investments
• Contractual commitments to share holder value creation, operations best practices & growth.
• Adhereance to Investor Rights (Liquidation Preference, Senior Rights, Anti-Dilution Protection, Investor Directors, Voting Rights, Information & Insception, Pre-Emption etc.)
• Most important of all Investor Rights, remains Exit Rights at end of term investment / period being 3rd / 5th / 7th year at negtiated IRR (Internal Rate of Return) being set as the base with no cap. (IPO / Strategic Sale, Promoter / Company buy back / Drag & Tag along.)
Pros
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CONTACT
MERGERS, ACQUISITIONS AND CAPITAL RESOURCES
Girish NarasimhanManaging Director & [email protected]+91.98230.14126
Corporate HQ:
24461 Ridge Route Drive, Suite A200Laguna Hills, CA 92653www.cfaw.com+1.949.305.6710
Mumbai:
Suite 2, E - 29, DhanrajMahal, ChatrapatiShivaji Marg, AppolloBunder, ColabaMumbai 400001www.cfaw.in+91.22.6650.1011
Pune:
Suite 5, Atharva, J.P. Nayak Marg, Kothrud, Pune 411038www.cfaw.in+91.20.2545.1811