Contents

Executive Summary 1 Sales Impact 3 Profitability Impact 4 Wages Impact 5

Export Impact

R&D Impact

Methodology

Case Study: Genpact

10

Case Study: Shriram Transport

12

Case Study: Excelsoft

14

Case Study: Subhiksha

16

About Prof Amit Bubna: Advisor to the Study

18

Sponsor Profiles

19

About Venture Intelligence Supported by:

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Executive Summary

n recent years, the swelling waves of Private Equity (PE) and Venture Capital (VC) funds that lashed the shores of India have significantly changed the countrys corporate landscape. In the three year period ended December 2008, PE and VC firms invested almost $32 billion (i.e., a staggering Rs. 1,30,000 crores) into Indian companies.

Private Equity Investments in India

16 14 12 10 8 6 4 2 0 2004 2005 2006 2007 No. of Deals 2008 82 1.7 2.1 158 7.2 326 10.8 13.9 399 439 500 450 400 350 300 250 200 150 100 50 0

Value US $ Billion

How exactly have Indian companies benefited from this barrage of PE and VC financing? What value did PE and VC investors offer to Indian entrepreneurs, besides the capital? The Venture Intelligence Private Equity Impact study, first conducted in 2007, measured the impact of PE and VC funds on the Indian economy using quantitative methods the first such initiative in India. This year, again with advice and guidance from Prof. Amit Bubna of the Indian School of Business-Hyderabad, we have revisited the theme of comparing PE- and VC-backed companies vis--vis non PE- or VC-backed peers in terms of key economic parameters such as Sales, Profitability, Exports, Wages and Research & Development.

Since our first PE Impact study in 2007, the sample size of publicly listed PE-backed companies has increased significantly. The list has also become more diversified in terms of sector. In addition, there has been a substantial rise in domestic-market focused companies. Apart from the quantitative study, we interacted with entrepreneurs and top executives at four companies from different sectors Business Process Outsourcing, E-learning, Financial Services and Retail to understand how their organizations benefited from PE/VC investments. The following are some of the key inferences that emerge from the quantitative study and interactions with entrepreneurs: PE and VC investment, when chosen and leveraged well, helps companies create innovative business models, scale up rapidly and accelerate growth in several ways that add significant value to the Indian Economy. PE and VC firms are forging active partnerships with their investee companies to improve capital efficiency, business strategy and corporate governance, besides opening up new markets internationally. !

Private Equity boosts Indian economy

Comparative 30% 25% Annual Sales Growth (2000 2008)

24.9% 20.0% 20.6%

20%
CAGR

19.0% 15.5%

15% 10% 5% 0% PE - backed companies

Non PE backed companies

Nifty

Sensex

CNX Midcap

Over the eight year period considered, on an average, PE-backed companies grew at 24.9%, a significantly higher rate than non PE-backed companies (15.5%), Nifty (19%) and CNX Midcap (20.6%).

Private Equity-backed companies are more profitable

Comparative Comparativ e Annual PA P AT Gro Gr o wth (2000 2008)

35% 30 % 25 %
CAGR

34.6%

25.3%

26.4%

25.6%

25.4%

20 % 15 % 10 % 5% PE - backed Non PE backed Nifty Sensex CNX Midcap

On an average, PE-backed companies showed 34.6% growth in Profit-After-Tax, significantly higher than non-PE backed companies (25.3%), Nifty (26.4%) and CNX Midcap (25.4%).

Private Equity-backed companies create well-paying jobs

Comparative Annual Wages 35 % 30 % 25 %
CAGR

Growth (2000 - 2008)

32.0%

20 % 15 % 10 % 5% 0% PE - backed Non PE backed

22.5% 20.3%

14.9% 11.1%

Nifty

Sensex

CNX Midcap

Wages at PE-backed companies grew at a significantly higher rate than at their non PE-backed peers. The growth rate of wages at PE-backed companies was almost thrice that of Midcap index companies and substantially more than that of non PE-backed companies.

Private Equity-backed companies generate foreign exchange earnings

Comparative Annual Exports Growth (2000 2008)

45 % 40 % 35 % 30 %
CAGR

42.2% 34.1% 31.0% 26.3% 27.8%

25 % 20 % 15 % 10 % 5% 0% PE - backed companies

Non PE backed

Nifty

Sensex

CNX Midcap

A few years ago, Private Equity firms were primarily focused on export-oriented sectors, especially IT Services, BPO and Pharmaceuticals. In recent years, they have shifted focus to sectors targeting the domestic economy. About 59% of the PEbacked companies are focused on the domestic market. (See page 9 for split-up of PE-backed companies by industry.) While the growth rate of exports at PE-backed companies (at 31%) lags that of large cap companies, it is still higher than at non PEbacked companies (26.3%) and midcap companies (27.8%).

Private Equity catalyzes innovation in the economy

Comparative

Annual

R&D

Growth

(2000

2008)

50 % 45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5% 0% PE - backed companies Non PE backed Nifty Sensex CNX Midcap 21.3% 30.3% 32.4% 28.7% 45.2%

Research and Development (R&D) activity that helps launch innovative products and services is key to spurring economic demand. Lack of capital to invest in R&D has long been a factor that held back corporate India. Private Equity capital is helping address this issue. Growth in R&D investments at PE-backed companies is over twice that at their non PE-backed counterparts.

Methodology
venture capital (VC) and seed capital. In some cases, Private Equity firms also invest in listed companies through PIPE (Private Investment in Public Enterprises) transactions. Quantitative Study " The time period used for the quantitative comparison was 2000-2008. This period includes an upward and downward cycle in the economy and maximizes the number of companies taken for comparison. Private Equity investments in the economy declined in the period 2000-2002 before picking up again in 2003. " The companies analyzed in the quantitative study are publicly listed firms to ensure authenticity and accessibility of data. " The list of all publicly listed companies as on December 31, 2008 was compared to Venture Intelligences database of Private Equity-backed companies to generate a list of publicly listed Private Equity-backed companies. " The Private Equity-backed companies considered were those that received such an investment at any point in their lifecycles. The investor(s) might/might not hold a stake in the company currently. " From the above, companies for which sales data for either 2008 or 2000 wasnt available were eliminated from both PE-backed and Non-PE-backed sets. " Post the above filtration, there were 182 such publicly listed Private Equity-backed companies (which constitute the PE-backed Cos. list in the report). These companies were eliminated from the master list to generate the list of 1,988 non Private Equity-backed companies. " On the basis of the sector-wise and size-wise distribution of Private Equity-backed companies, Nifty, Sensex and CNX Midcap were chosen as the relevant indices for comparison. The constituents of the indices used for comparison were the ones as on January 1, 2009. Movement of particular stocks from and into the index was not considered. " In case a company in the PE-backed companies list was involved in a merger or acquisition, the merged entity was considered as Private Equity-backed based on the following: i) ii) iii) Whether the Private Equity firm retained a stake in the merged entity, or Whether the company that constituted 75% or more of the merged entitys revenues was Private Equity-backed, or Whether Private Equity funding played a role in the transaction. For example, it is common for companies to use Private Equity funding for inorganic growth. In such cases, the merged entity was considered Private Equity-backed. " Adjustments were made for changes in annual reporting cycles. " The sample might suffer from survivorship bias, as it represents a sample of Private Equitybacked companies that were able to go public. The performance of these companies has been compared to non PE-backed companies that are also listed, mitigating this bias.

rivate Equity firms invest in the equity of companies that are, typically, not traded on a public stock exchange. Categories of Private Equity investments include buyouts, mezzanine capital,

Industrywise distribution of PE-backed companies

Sizewise distribution of PE-backed companies

Case Study
Industry BPO Company Genpact

Profile: Genpact started out as GECIS, GEs captive outsourcing unit, in Gurgaon in 1998. In 2004, by which time the unit had grown into a sizable entity with 17,000 employees, GE and the GECIS top management saw the potential to extend the latters services to other large multinationals. While several strategic buyers were also interested in GECIS, the management chose to go with Private Equity firms General Atlantic and Oak Hill. The decision was driven by several factors, explains Pramod Bhasin, President & CEO of Genpact. Going with PE firms would help preserve the DNA and culture of the company, ensure continuity of services to GE and incentivize the existing management team to grow the firm. The PE firms would also be able to help commercialize the capabilities and value proposition of GECIS. Today, Genpact employs over 34,000 people across 31 Delivery Centers in 10 countries. Genpact went public on the NYSE in 2007. Investors: General Atlantic Partners, Oak Hill Capital Investment Summary: General Atlantic and Oak Hill acquired a 30% stake each from GE in November 2004 for a total investment of US$ 500 million. 10

Private Equity and Genpact: The investors have helped Genpact tap customer contacts, formulate company strategy and go-to-market strategy. At the time of Genpacts IPO, the company was able to leverage the investors knowledge of capital markets and experience of taking companies public. We were also able to benefit significantly from their global network, understanding of key markets as well as experience in new verticals and practices to formulate our expansion and diversification strategies, Bhasin adds. How has life changed for the management team post the entry of PE investors? Under GE, we built our culture, DNA and acquired significant capabilities. Under PE firms, we learned how to commercialize, market ourselves better and strategically think through where we want to be in the medium to long term, says Bhasin. Earlier, there was dependence on GE in terms of strategy and directions. Now, it is the management team that drives the strategic agenda and runs it like its own business. There is a sense of ownership, purpose and pride in building something unique. There is freedom with accountability and responsibility.

Pramod Bhasin, President & CEO, Genpact

PE Impact: ! ! ! ! Developing customer contacts Active participation in the acquisitions process Corporate governance structuring the Board and its committees Devising employee compensation plans 11

Case Study
Industry Truck Finance Company Shriram Transport Finance

Profile: Innovation has repeatedly earned the Shriram Group rich dividends. In 1979, it spotted a market in offering vehicle financing to small truck owners. Its offer of loans to buy used trucks was a big success and today, with a 25% share of the largely unorganized market, Shriram Transport Finance Corporation (STFC) is the leader in truck finance. In the late 1990s, when NBFCs struggled to cope with stricter regulatory norms at one end and poor consumer confidence at the other, the Shriram Group trained its focus on managing its reputation and won the battle. In the early part of this decade, the group once again hit a new route it became one of the few big corporate houses in India to go for PE funding in a big way. Investors: ChrysCapital, TPG Newbridge Investment Summary: STFC raised about Rs. 100 crore from ChrysCapital in February 2005, followed by a $100 million round from TPG Newbridge in September 2005. 12

Private Equity and Shriram Transport: In recent years, PE funds have made 25 different equity investments totaling about Rs. 1,936 crore across nine companies of the Shriram Group. Of this, STFC has raised Rs. 439 crore. We raised Rs. 100 crore from ChrysCapital in 2005 to fund our capital needs, recalls R. Sridhar, MD of STFC. The growth that followed was rapid and we needed funds again in 12 months. In came TPG with a $100 million investment. We were looking to raise funds via various options including a public offering, says Sridhar. But the PE investors were very willing to invest during 2005-2008, when the countrys economic growth was booming. We opted for it because we found the PE route to be quicker and the process was easy. The investors interact with STFC at different levels. While ChrysCap operates mostly at the board level, TPG is more involved at an operational level. The PE investors also enable STFC to develop a global outlook. Its never easy working with multiple investors, admits Sridhar. I credit my management with handling them perfectly, he adds. We have a good relationship with them. We make them feel comfortable.

R. Sridhar, MD, STFC

PE Impact: ! ! ! Quicker access to funds to fuel rapid expansion Helped develop a global outlook Inputs for decision making at both board and operational levels 13

Case Study
Industry Company

Excelsoft Technologies

E-learning Tools

Profile: Mysore-headquartered software services provider Excelsoft decided to focus on e-learning when it was not fashionable to do so. We were encouraged by some of the successful large-scale online education implementations abroad and saw a huge opportunity there, recalls D.Sudhanva, CEO. Nine years down, his decision appears vindicated. The company is into a range of businesses in the e-learning space including consulting, product design & engineering, custom software development and content development. In 2001, for funding as well as for tapping business expertise, Sudhanva turned to UTI Ventures. UTI Ventures helped us in two ways, he observes. They offered a sounding board for our product ideas; and they lent us the business exposure we lacked. Result: Excelsoft now caters to corporations, universities, schools, publishers, e-learning portals and governments across the world, developing platforms under the brand Saras. Investors: UTI Ventures, DE Shaw, Arohi Asset Management

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Private Equity and Excelsoft: Excelsoft raised its first round of funding - of Rs. 2.5 crore - from UTI Ventures in 2001. Sudhanva says the role of UTI Ventures was particularly helpful because Excelsoft had a strong niche product focus that the investors understood. Also, they were willing to wait for the venture to shape up. The company has recently seen a change of investors. In April 2008, UTI Ventures sold its stake in the company to DE Shaw. In September 2008, another overseas investor, Arohi Asset Management, also chose to invest in the firm. UTI Ventures was associated with Excelsoft for over seven years. Initially, we helped the company in finetuning its business model and target-market focus. Though the company presented exit possibilities earlier, sensing the true potential of the company, we waited patiently. Our patience has paid off. We are very pleased to note that this is one of the best exit multiples realized by any VC/PE Investor in India, says Raja Kumar, MD & CEO, UTI Ventures. Sudhanva says the presence of financial investors provided a pressure point that made us stronger. To other entrepreneurs, his advice would be: Opt for an investor who knows the business, and is product- and IP-oriented. The investor should appreciate your model, and understand your market.

D. Sudhanva, CEO, Excelsoft Technologies

PE IMPACT ! ! ! HR systems, legal framework, overseas market knowledge Sounding board for product ideas and to validate assumptions Funding for niche product development

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Case Study
Industry Company

Subhiksha

Retail

Profile: In the 12 years since its inception in 1997, Subhiksha has grown from a single store in Chennai to one of Indias largest supermarket chains with over 1,000 outlets across 90 cities. Subhikshas founder, Ramaswamy Subramanian, an IITMadras & IIM-A alumnus, started the company with the aim of delivering savings to consumers on products they need in their daily lives. Subhiksha follows an Indianised format of supermarket catering to even the bottom of the pyramid customer, with goods typically sold at a discounted price. Besides grocery, childcare, food, pharmaceuticals and household products at its regular stores, the company is setting up exclusive retail outlets to sell mobile phones under the brand Subhiksha Mobile. The firm adopts a cluster strategy for growth by opening a large number of stores at a location that has a high density of potential customers. This ensures that cannibalization of sales would be within the network of stores, rather than to other chains or independent outlets.

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Investors: ICICI Venture, Premji Invest Venture Capital and Subhiksha: ICICI Venture first invested in Subhiksha in 2000. Subramaniam points to three distinct benefits that the venture capital infusion brought in: The first value-add was credibility with bankers, employees and with the rest of the market. Secondly, given that we were then a small company trying to expand, venture financing gave us quick access to capital. The third element was that the investors brought in an outsider perspective. It was valuable since they were familiar with different businesses across segments. ICICI Venture followed up their initial investment with another infusion in December 2004. Subramaniam says the second round was an endorsement to the way Subhiksha was doing. In September 2008, Wipro chairman Azim Premji acquired a 10% stake in the company via his Private Equity investment vehicle. Talking about Premjis decision to invest in his company, Subramaniam says: Premjis credibility rubs off on us. The company would surely benefit from being associated with someone who is known for probity and for setting high benchmarks in corporate governance.

Ramaswamy Subramanian, Founder, Subhiksha

PE Impact: ! ! ! Credibility with bankers, employees and the market Perspective on business from the investors experience of having dealt with several businesses across segments Quick access to capital for expansion 17

About Prof. Amit Bubna

Prof. Bubna holds a Ph.D in Economics from Stanford University (USA), an M.Phil and BA in Economics from Cambridge University (UK) and a B.Sc. in Economics from Presidency College, Kolkata. He joined the faculty at Indian School of Business, Hyderabad (ISB) as Assistant Professor in 2004. Prior to this, he was a Managing Economist at the California office of LECG, LLC, a leading economic consulting services firm that provides complex economic and financial analysis for a wide range of customers, including Fortune 100 companies, regulatory bodies, and international financial institutions. Prof. Bubna has taught economics to undergraduates at the University of California at Berkeley. He has also been a guest lecturer at the Haas School of Business, University of California where he spoke on the role of venture capital in funding new ventures. Prof. Bubnas research interests include microeconomic theory, with applications in areas such as informal finance, venture capital, bankruptcy and auctions; comparative institutional analysis; corporate finance; and law and economics. His article on venture capital syndication was published in Research in Finance.

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Sponsor Profiles

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alcyon is an Actively Involved Investing group, founded by Narayan Seshadri, Chairman and CEO and Abhay Soi, Managing Director.

Halcyon was established in 2004 as a work-out group helping underperforming and stressed companies survive, revive and grow. In 2007, Halcyon entered into an advisory arrangement with an overseas fund for investing in special situations businesses in India. This fund has as its investors, one of the most successful value investing fund houses in the world. In the course of their work-out and investing history and their prior careers, Halcyon and its sponsors have helped turn-around several stressed and underperforming companies. Halcyons model of innovative transaction structuring for downside protection in stress situation and active involvement for unlocking and creating value, have ensured most of their investments are still valuable despite the prevailing market and economic conditions. To enhance its impact of intervention, Halcyon has established an ecosystem of partners who provide specialized services ranging from Legal, Accounting, Tax, Audit and Recruitment services to Technical and IT support. Halcyon has now entered into an arrangement to advise a new fund being set up to address distress and restructuring opportunities in India.

Contact Details: Halcyon Resources & Management Limited Ground Floor, Hoechst House Nariman Point, Mumbai 400021 Tel: 91 22 2284 6000 Fax: 91 22 2284 6060 Email: [email protected]

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About UTI Ventures

UTI Ventures is a leading Indian Private Equity firm focused on growth capital. We are backed by marquee investors from India and overseas. The key attributes of our firm are: ! ! ! ! An outstanding track record built over the course of Fund I and Fund II, both of which are among top performers A local, cohesive and well-networked team with over 80 years of experience in Indian markets and nearly 40 years of experience in Indian PE An investment philosophy based on entrepreneur-centric opportunities, disciplined valuation and continuous value-add A vast network which gives us access to proprietary deal flow and enables us to drive our portfolio companies to a higher growth trajectory

Investment Approach
The focus of our investments is Indian mid-market growth capital private equity. We follow an entrepreneur centric investment approach and take significant minority stakes in the companies that we back. We actively seek out promising Indian companies driven by visionary leadership. Our constant endeavour is to complement the strengths of the teams we back. From raising additional capital, attracting senior management talent, maintaining high standards of corporate governance, preparing companies for successful IPOs to providing advice on inorganic growth plans, we leverage our experience and network to drive the success of every company we back.

Ascent India Fund III

The management team has currently launched Ascent India Fund III with a targeted corpus of US$ 400 million. Fund III will focus on mid market growth capital opportunities and make investments in the range of US$ 10 30 million in each portfolio company over one or multiple tranches.

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Focus Sectors
We prefer to invest in sectors in which we have proven expertise and are poised for significant growth due to Indias emergence as a fast growing economy. These sectors are underpinned by three key considerations. Domestic consumption driven demand Key Sectors: Retail, Entertainment & Media, Financial Services, Healthcare, Educational & Training Services

Infrastructure spend led demand Key Sectors: Engineering, Capital Goods & Construction, Logistics & Allied, Power & Renewable Energy

Global competitiveness of Indian industry Key Sectors: Pharmaceutical and Life Sciences, Information Technology, Business Process Outsourcing & Knowledge Process Outsourcing

Portfolio Companies
Our portfolio includes emerging leaders in sectors such as infrastructure services, retail, outdoor media and alternate energy: Laqshya Media, one of Indias largest outdoor media companies Koutons Retail, one of the largest integrated apparel retail chains in India Consolidated Construction Consortium, a leading urban infrastructure services company PESCO Beam, a fast growing environmental solutions company Shriram EPC, a leading EPC service provider Ind Barath Power, Indias largest group captive power producer

For further details contact: UTI Ventures Concorde Block, 16th Floor, UB City, #24 Vittal Mallya Road, Bangalore 560 001 Tel: + 91 80 3055 1200. Fax: + 91 80 3055 1234 email: [email protected]

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Capvent AG is an independent Private Equity investment group based in Switzerland, with offices in the UK and India. Our focus is on generating high returns for our LP investor partners by investing in exceptional Private Equity funds internationally. We manage or advise Private Equity programs of over $1.5 billion in size, invested in over 80 groups through fund-of-funds and co-investment programs. Capvent invests in the full range of Private Equity strategies, including leveraged buyout, growth and expansion capital, venture capital, distressed and mezzanine funds. The team includes five partners, two based in India (Varun Sood and Rohan Ajila), two in Zurich (Tom Clausen and Thomas Vock) and one in London (Joe Sovran) respectively, with a cumulative total of over 80 years of experience in Private Equity. They are supported by an investment team of 10 investment professionals in addition to analytical and back office resources, functioning out of three offices in India. With an office in India since 2003, Capvent was the first experienced institutional fund-offunds manager with an operational presence in India.

For further details contact: Varun Sood Capvent India Advisors Ltd., 7/2 Edward Road, Bangalore 560052, Tel: +91 98 504 61676. email: [email protected] Tom F. Clausen Capvent AG, Dufourstrasse 24, 8008 Zurich, Switzerland India, Tel: +41 43 500 50 71/2. email: [email protected]

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About Venture Intelligence

Venture Intelligence, a division of TSJ Media, is the leading provider of information and networking services to the Private Equity/Venture Capital Entrepreneur ecosystem in India. Our research and analysis is used extensively by PE / VC industry practitioners, entrepreneurs, CXOs of large corporations, the media as well as regulatory agencies. Our publication subscribers include leading PE / VC Firms, Limited Partners, Investment Banks, Law Firms, HR Services Firms and Consulting Firms. Venture Intelligence has an exclusive agreement with the Global-India Venture Capital Association (GIVCA) to bring out quarterly and annual reports on Venture Capital investments in India. Venture Intelligence products are a one point source for information and analysis on: Private Equity, Venture Capital and M&A deals Companies looking for investors and M&A deals New Funds being raised

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