Private Equity Market-An Overview

Table of content

1. Introduction
2. History
3. Funds of funds
4. An overview
 Indian Market
 Global Market
5. Private Equity Issues and Opportunities
6. Advantages and disadvantages
7. Types of deals

https://business.tutsplus.com/tutorials/the-pros-and-cons-of-having-private-equity-firms-invest-in-
your-business--cms-19887

https://www.sciencedirect.com/topics/economics-econometrics-and-finance/private-equity

https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-0416.00012

https://insights.diligent.com/business-structures/private-equity-faces-structural-challenges/
1 Introduction

6 Challenges of Private Equity

Private equity firms, portfolio companies and investment funds face complex challenges. They are
under pressure to deploy capital amid geopolitical uncertainty, increased competition, higher
valuations and rising stakeholder expectations. Successful deals depend on the ability to move
faster, drive rapid and strategic growth, and create greater value throughout the transaction
lifecycle.

Our global network helps source deal opportunities and combines sector insights with proven,
innovative strategies that have guided the world’s fastest-growing companies. Our clients discover
powerful new ways to create unexpected paths to value, generating economic benefits for both
investors and society. That’s the power of positive equity.

https://www.ey.com/en_in/private-equity

The value of a private equity firm and/or its portfolio companies can plunge before there is even a
chance to react. Risk is inherent with investing, but – for private equity – the challenges now go well
beyond unpredictable business cycles and volatile markets. Strategic, operational and external risks
represent potentially disruptive forces that can wash away everything you built in the blink of an
eye.

Private equity firms are encountering risk everywhere, from disruptive technology and cybercrime to
fraud and regulatory compliance. And these threats are emerging at ever-increasing speeds. News—
especially bad news—travels around the globe almost instantaneously, giving PE firms and their
portfolio companies little time to react before the effects are felt.

It’s essential that these firms monitor and manage the growing threats, but this has proven
challenging. In many private equity firms, the focus and budgets are not aligned to managing the
escalating risks in the industry.

After listening to industry experts, we’ve come up with a list of top risk management issues facing
private equity firms. Read our full report to find practical actions to mitigate these risks.

Technology Risk

Managing technology risk is more than just information security. For PE firms, changing technologies
offer an opportunity to provide business value, anticipate problems and support the firm’s growth.
To be effective, technology risk management must not only measure the PE firm’s risk exposure but
that of the firm’s portfolio of companies as well. Risk at a portfolio company poses risk to the PE firm
as well. As quickly as technology grows and evolves, technology risk management practices need to
change with it.

Third Party Risk

As their investments expand, private equity firms routinely engage third parties to perform services.
Doing so increasingly exposes PE firms to outside contractors, who can easily damage the PE firm’s
reputation and investments. Third parties are critical to support operations, but financial services
regulators are clear that outsourcing work to third parties does not shift the responsibility from the
PE firm.

Fraud and Misconduct Risk

Firms that are highly motivated to sell a portfolio company can become victims of fraud caused by
outside actors. This risk can be multiplied for firms with holdings in foreign markets where fraud,
bribery and corruption are part of the culture. Private equity firms and funds have a long history of
transparency with their limited partners and with regulators. This transparency is key when potential
fraud or misconduct issues arise.

Cyber Risk

PE firms face a number of cyber threats, whether it’s from employees, third parties or other
outsiders. Attacks have become so common that some PE firms feel increased spending on better
security won’t deter attacks. Yet, in our opinion, this short-sighted approach just makes these firms
easier victims of cyber-breach and exposes them to penalties for regulatory failures.

Compliance Risk

PE firms are subject to more regulation and oversight than ever before. The laws, rules and
regulations impacting the private equity sector have grown exponentially over the past several
years. The private equity business model is no longer driven by performance alone – it now must
balance costs with a duty to ensure a robust compliance infrastructure.

Crisis Management Risk

When corporate crisis hits, the ability to respond quickly is paramount for preserving reputation and
ensuring continued success. Allegations of fraud, misconduct, or bribery can quickly devalue a
private equity firm. Reputations fall faster than they are built. Social media and the speed of news
now gives firms only a few hours to come up with an effective reaction. It’s essential to have a crisis
management team ready to respond at any moment.

Managing risk is essential for PE firms. While it can be costly and time consuming, it will save the
organization much more in the long run.

7 Risk management in Private Equity

Private equity continues to grow in importance as an asset class, as investors seek

diversification benefits relative to traditional stock and bond holdings. In particular, large
institutional investors, such as insurance companies, endowment and pension funds, are
allocating increasing portions of their overall investment portfolios to private equity. Most of
these investments are intermediated through funds, because entering, managing and exiting
direct private equity investments requires high levels of expertise and experience. Despite
the increasing importance of private equity as an asset class, our understanding of how
investors can adequately measure and manage the risks of these investments remains
limited and continues to lag considerably behind that of other traditional asset classes. The
aim of this paper is to develop what is, to the best of our knowledge, the first comprehensive
risk management framework for private equity fund investments. Private equity funds have at
least two key institutional features that differentiate them from traditional investments in
traded stocks or bonds and make risk management a challenging task. First, private equity
fund investments are illiquid and long term. Private equity funds typically have maturities of
ten to fourteen years, and secondary markets for private equity fund positions are still highly
inefficient, making it costly for investors to sell their positions. Second, private equity fund
investments involve specific dynamics of capital drawdowns and distributions. The private
equity fund investor first makes an initial capital commitment and later transmits specific
amounts of capital to the general partner in response to capital calls (or capital drawdowns).
The timing and size of the capital calls are not known until they are announced, and usually
there is a substantial lag between the time at which capital is committed to a fund and the
time at which that capital is actually drawn for investment. In addition, cash payouts by
private equity funds are also uncertain, although they are significant, because of the
bounded life cycle of the funds. Thus, the invested capital changes dynamically over the
lifetime of a fund, and private equity fund investments require active cashflow management
of capital calls and distributions. Taking into account these special features, a risk
management framework for private equity fund investments has to capture three main
sources of risk. (i) Market risk: the risk of losses in the market prices of the portfolio
companies held by a fund exposes investors to market risk. (ii) Liquidity risk: the illiquidity of
private equity partnership interests exposes investors to asset liquidity risk associated with
selling positions in the secondary markets at potentially large and ex ante uncertain
discounts on a fund’s net asset value. (iii) Funding (or cashflow) risk: the unpredictable
timing and magnitude of fund cashflows pose funding and cashflow risks to investors. In
particular, capital commitments are contractually binding, and defaulting on these payments
can result in the loss of the entire private equity partnership interest.
https://www.risk.net/journal-of-risk/5311701/risk-management-for-private-equity-funds

Private Equity's Impact On The Global Economy

Guernsey's stability and depth of expertise continues to see the Island placed at the forefront of the
private equity funds industry. There are however few industries that evoke the sort of strong
feelings that characterise perceptions about private equity.

Fortunately, there exists a significant body of academic research that can help unwrap the mystery
and provide an objective voice in the debate.

As with anything, there exist both pros and cons, but it is clear that there are net economic gains
that are associated with PE's model of corporate ownership. Indeed, taken in aggregate, the
evidence is compelling that:

PE has measurable benefits on the productivity of the companies in which it invests

PE is not the job destroyer it's often portrayed to be

PE does not pose a systemic risk — on the contrary, PE's access to capital during tough times is a
stabilizing factor
PE-owned companies raise competitive standards in their industries, causing entire industries to
become more productive

The growing importance of PE in the global economy

Currently, there are at least 15,000 companies owned by institutional-quality PE funds, spanning all
industries and stages of development. The industry is continuing to grow, driven by a number of
important dynamics. New companies are staying private longer, enabled by a wide variety of
investors willing to provide capital at attractive terms.

Closed Ended schemes are a popular option in Guernsey and the current Net Asset Value is over
£105 billion, which makes up 59% of all Closed Ended schemes registered on the Island 7.

An essential role in investors' portfolios

PE is playing an increasingly important role in portfolios. Preqin recently reported that there are now
more than 6,800 institutional investors in PE, up 8% in just the last year.

Numerous academic studies have documented the outperformance of private equity relative to
public equity benchmarks, estimates are consistently positive at around 3% per year on a net basis,
after fees and expenses are factored in 1.

However, from a broader economic perspective, the gains for investors do not necessarily mean
gains for the broader economy.

Understanding the economic impacts of PE - what does the research tell us?

PE leads to measurable gains in productivity

Several research studies have examined the ways in which PE investment changes operations and
identified positive impacts on operational efficiency.

A 2017 study, "Private Equity and Industry Performance" 2 examined 20 industries across 26
different countries with known PE investments between 1991 and 2009. The results showed that in
industries with greater PE investment, future growth in production, value added and employment is
faster. Importantly, the improved performance does not appear to be associated with greater
cyclical risk (such as from higher leverage); in fact, industries with increased PE activity are even
more resilient to industry-level shocks.

What about financial risk?

Academic researchers have examined what happened to PE-backed companies during the financial
crisis. A recent 2017 paper, "Private Equity and Financial Fragility During the Crisis" 3 examined 434
PE-owned companies from the UK. The authors found that PE-backed companies increased
investment relative to their peers, a result tied to fewer financial constraints and better access to
new capital. Combined with a lower overall cost of capital compared to public markets, the PE model
appears to provide additional flexibility and access to capital even during times of broad economic
and financial market distress.

Effects on employment

One of the most controversial aspects of PE arises from perceptions around the effect it has on the
employment levels at the companies firms acquire.

The 2014 study, "Private Equity, Jobs, and Productivity" 4 found job losses at existing establishments
of about 3% over the two years following a PE acquisition. Perhaps the most important finding in this
large study of employment patterns is that both job losses and job gains at PE-backed firms occur at
a much greater rate than at other similar firms.

The study also examines what happened to earnings at these companies, and found an
approximately 2.4% decline in earnings per worker relative to similar businesses. However, earnings
at newly created units were higher than wages at units in the control sample.

While evidence suggests some modest downward pressure on earnings, it also showed growth in
higher earning positions at new facilities established under PE ownership.

Other studies have examined whether the quality of employment changes. A 2016 study, "Private
Equity and Workers' Career Paths: The Role of Technological Change" 5 found that at PE-owned
firms, large IT investments are positively associated with the long-run employability of workers,
shorter unemployment spells and a tendency to transition to companies that have demand for lT-
complementary human capital. Together, these results suggest that (at least some) employees at PE-
backed companies get differentially more valuable skills versus their counterparts at non-PE-backed
companies.

Overall, the evidence suggests that PE isn't the job-eating machine that many critics assert. While
there are small, but measurable, net declines in employment at PE-backed companies, there are also
potential gains from higher quality new employment.

PE-owned companies raise competitive standards

Research detailed in "Private Equity in the Global Economy: Evidence on Industry Spillovers" 6
suggests that positive spillovers are created by companies responding to competitive pressure from
PE-backed companies. Essentially, PE-owned companies raise competitive standards and cause the
entire industry to become more productive. On average, a one standard deviation increase in the
amount of PE investment in an industry leads to a 0.9% increase in employment growth, a 1.2%
increase in labour productivity growth and a 2.6% increase in profit growth.

Executive summary

Macroeconomic overview

The global upswing in economic activity continued in 2017, with global GDP growth rising
to 3.2%, led by the US and the EU. Broad-based upward revisions of economic growth
parameters in Western Europe, Japan, emerging Asia and Russia more than offset downward
revisions for the US and the UK. Growth in Western Europe and EU bounced back, but the
recovery is not complete: While the outlook is strengthening, growth remains weak in many
countries, and inflation is below target in most of the advanced economies.

Commodity exporters, especially of fuel, are hit particularly hard as they adjust to the
continuing stepdown in foreign earnings. And while short-term risks are broadly
balanced, medium-term risks are still tilted to the downside. For policymakers, the
welcome cyclical pickup in global activity provides an opportunity to tackle
challenges—namely, to boost potential output while ensuring its benefits are shared,
and to build resilience against downside risks.

As an IMF report, World Economic Outlook, October 2017, Seeking Sustainable

Growth: Short-Term Recovery, Long-Term Challenges, noted, "Notable pickups in
investment, trade and industrial production, coupled with strengthening business
and consumer confidence, are supporting the recovery … this welcome cyclical
upturn after disappointing growth over the past few years provides an ideal window
of opportunity to undertake critical reforms, thereby staving off downside risks and
raising potential output and standards of living more broadly."

India's GDP growth remained stable with a rate of 7.1%, due primarily to growth in
services and manufacturing. The "remonetisation" in 2017 restored consumption to
some extent, and infrastructure spending also increased. Agriculture contributed 15%
to India's GDP, while the contribution of services and industry to the country's GDP
was 54% and 31%, respectively. Manufacturing showed the highest growth of 11% in
2017 compared with the 7% growth achieved during the past five years (2012 to
2016). However, financial services, real estate and construction posted marginally
lower growth in 2017 compared with the previous five fiscal years.

Commodity price changes varied in India, but inflation remained in the 3% to 5%

range. Prices of oil, steel and rice increased in 2017 and declined for some
agricultural and metal commodities. Inflation dipped midyear, but recovered by
year-end. Inflation in crude oil led to an increase in the wholesale price index (WPI),
while the consumer price index (CPI) rose on the back of increasing food prices.

The annual rate of inflation, based on the monthly WPI, stood at 3.93% for the
month of November 2017 (over November 2016). The rupee appreciated in value vs.
the US dollar, whose strength declined due to delays in healthcare and tax reform in
the US and, in parallel, the growing strength of the euro.
India's central bank, the Reserve Bank of India (RBI), pared the rate at which it lends
overnight money to banks from 8% three years ago to 6% during 2017. Despite
consumer price inflation dipping below 4%, the RBI held off drastic rate cuts. India's
foreign exchange reserves were $404.92 billion in the week prior to December 22,
2017, which had steadily increased from $359.67 billion a year ago, according to data
from the RBI.

Several developments in India had positive effects on the economy in 2017. The
government's fiscal deficit, which was 4.5% of the gross domestic product (GDP) in
2013 to 2014, steadily declined to 3.5% in 2016 to 2017 and is expected to further
decrease to 3.2% of the GDP in 2017 to 2018, according to the RBI.

A broader tax base and improved spending efficiency helped narrow the budget
deficit. The Fiscal Responsibility and Budget Management (FRBM) review committee
proposed a new FRBM Act to improve fiscal accountability and transparency. The
report recommends lowering the fiscal deficit to 2.5% of GDP by 2023.

India's revenue receipts are estimated to reach INR 28–30 trillion ($436–$467
billion) by 2019, owing to the government of India's measures to strengthen
infrastructure and implement reforms, which include demonetisation and the Goods
and Services Tax (GST). The Indian government's Union Cabinet approved the
Central Goods and Services Tax (CGST) Bill, Integrated Goods and Services Tax
(IGST) Bill, Union Territory Goods and Services Tax (UTGST) Bill and Goods and
Services Tax (Compensation to the States) Bill 2017.

The unification of taxation under the new GST is supposed to be a uniform process
with centralised registration that will make starting and expanding businesses
simpler. Interstate movement of goods and services will become cheaper and less
time consuming. The government also provided tax breaks for small- and medium-
sized enterprises (SMEs) with revenues less than INR 50 crore.

Demonetisation has led to more digital transactions. A unique identification scheme

(Aadhaar) is gradually allowing better fund tracking. A direct benefit transfer (DBT)
system will improve accountability and curb the black market for subsidised goods.
The government of India has saved $10 billion in subsidies through direct benefit
transfers with the use of technology, Aadhaar and bank accounts, according to a
statement given by Prime Minister Narendra Modi during his address at the Global
Conference on Cyber Space in November 2017.

Heightened financial sector risks related to the concentration of bad loans in public
sector banks was a big concern for India. According to RBI's latest Financial Stability
Report, the gross nonperforming advances (GNPA) ratio of banks increased from
9.6% to 10.2% between March and September 2017. The GNPA of banks in India may
increase to 10.8% by March 2018 and further to 11.1% by September 2018, per the
RBI report. China, Brazil and South Africa all have GNPA ratios below 4%, a number
considered a safe zone.

The government of India invested $32.4 billion to recapitalise public sector banks
over the next two years. The government's bank recapitalisation plan is expected not
only to uplift lending and investment in the country, but also to push credit growth in
the country to 15%.

In addition to the improvement of the economic scenario, there were several

investments in various sectors of the economy. The M&A activity in India increased
53.3% to $77.6 billion in 2017 while private equity (PE) deals reached $24.4 billion.
Indian companies raised INR 1.6 trillion ($24.96 billion) through the primary
market in 2017. India received net investments of $17.412 million from FIIs between
April and October 2017.

These moves have led to higher investor confidence, reflected by India's improved
rank in the World Bank's "ease of doing business" category. India moved up 30
places and is now among the top 100 countries. Moody's upgraded India's sovereign
rating for the first time in 14 years—to Baa2 with a stable economic outlook.

Including add-on transactions, global buyout value grew 19%, to $440 billion,
supported by a stream of large public-to-private deals. However, global deal count
was essentially flat, growing just 2%, to 3,077 deals. That's off 19% from 2014, the
high-water mark for deal activity in the current economic cycle.

Two record-setting deals in Asia marked a big year for private equity-backed deal
activity in 2017 in the region. Investors led a surge of megadeals ($1 billion or more)
including the region's largest deal ever—a $14.7 billion buyout of Toshiba Memory
Corp. by a group of investors led by Bain Capital and others.1 The third-largest deal
occurred in Singapore, where multiple investors acquired Global Logistic Properties
Limited for $12 billion. These two deals alone have produced the record-breaking
total, accounting for more than half of all Asian buyout deal value in 2017.

Asian private equity deals continue to offer strong growth, with favourable
demographics and a growing middle class that leads the demand across sectors. The
Asian market gives investors an opportunity to diversify portfolios away from
traditional US and European markets.

Fund-raising

The global private equity industry raised a record $452 billion from buyout funds
alone in 2017, giving it more than $1 trillion surplus to pour into companies and new
business ventures according to data from industry tracker Preqin, the leading source
of data and intelligence for the alternative assets industry.

In 2017, Asia-Pacific-focused fund-raising levels recovered to 2015 levels of

approximately $66 billion, growing by 6.3% from 2016. India was among the leaders
of that growth, with India-focused funds growing by 48% to an aggregate $5.7 billion
in funds raised. In terms of returns, LPs have been cash-positive since 2013, and the
Asia-Pacific private equity industry has been consistently outperforming public
markets.

Moreover, at approximately $9 billion, Indian dry powder remained at levels similar

to 2015 and 2016, indicating no dearth of capital for good-quality deals. Aided by
government regulations and tax breaks, new asset classes like alternative investment
funds (AIFs) and distressed asset management have further grown in the Indian
market.

Registered AIFs in India have more than doubled over the past couple of years and
number approximately 346 in 2017. AIFs have also been a significant contributor to
overall fund-raising in the Indian market and have helped raise $5.1 billion in 2017,
more than double their 2016 total.

This growth in AIF fund-raising grew from the strong performance of public markets
(the Bombay Stock Exchange Sensitive Index, SENSEX, rose 28% in 2017) and
regulation change in June 2017 that allowed Category III funds to participate in
commodity trading. Opening the market to foreign institutional investors and
exempting AIFs from a minimum lock-in period for pre-IPO investments for
Category II funds further boosted growth.

Distressed asset funds also gained momentum in 2017 following 2016's Insolvency
and Bankruptcy Code institutionalisation and relaxation by the Securities and
Exchange Board of India (SEBI). Institutionalisation of the Insolvency and
Bankruptcy Code has streamlined resolution of distressed assets. SEBI relaxed its
takeover code for stressed asset deals. Investors can now purchase equity from
distressed company's lenders without making an open offer in the market.

Several private equity players have set large targets to acquire distressed assets.
CDPQ (Caisse de dépôt et placement du Québec), Edelweiss Financial Service,
Blackstone, International Asset Reconstruction Company, Piramal Group, Bain
Capital Credit, ILFS and The Capital Group Companies, Inc. have together set aside a
fund target of more than $2.5 billion for distressed asset management.

Fund-raising is a higher priority for investors in 2018, with many expecting the
environment to remain stable.

Deal making

India remained a hotbed for deal making in 2017. The total deal value in India during
2017 was $26.4 billion, the highest in the last 10 years. While the number of deals fell
30% in 2017 to 682 from 976 in 2016, in terms of value, a few large deals in 2017
increased the deal value almost 60% over the previous year.

India's median deal multiples reached a record high value and was greater than
APAC's. The median EV/EBITDA multiple on Asia-Pacific M&A transactions in 2017
was 11.5 times in 2017 while the median EV/EBITDA multiple on India M&A
transactions was 12.8 times in 2017 (vs. 11.9 times in 2016), indicating a very healthy
pricing trend for India.

In fact, the top 15 deals in 2017 accounted for almost half of total PE deal value. In
2016, the top 15 deals were worth only 30% of the total deal value. Clearly, the PE
funds value quality over quantity and are not allowing dry powder to pile up.

Consumer tech and Banking, Financial Services and Insurance (BFSI) segments were
the largest sources of investment in India during 2017, aggregating to more than 50%
of the entire deal value for the year. Big-ticket consumer technology deals—Flipkart
($2.5 billion), Paytm ($1.4 billion) and Ola Cabs ($1.1 billion), to name a few—
reemerged in 2017, driving an average deal size of $47.1 million, compared with a
mere $17 million in 2016. Deals in the manufacturing sector witnessed a big decline
of 67% in volume, going from 54 deals in 2016 to 18 in 2017, while IT/ITeS also faced
a downswing of 29% in volume, from 130 deals in 2016 to 92 in 2017.

Indeed, the number of active players in PE increased—particularly institutional

investors. The number of active players in the Indian market increased from 474
between 2014 and 2016 to 491 during the 2015 to 2016 period, mainly due to the
increase in institutional investors.

Investments from sovereign wealth funds and pension funds constituted almost 20%
of deal value. Sovereign wealth funds and pension funds like Canada Pension Plan
Investment Board (CPPIB), Government of Singapore Investment Corporation
(GIC), CDPQ, Abu Dhabi Investment Authority (ADIA) and Ontario Teachers'
Pension Plan (OTPPB), among others, increased the activity in India in the last year.
CPPIB's president and CEO said in December 2017, "The good part about India is the
substantial long-term economic growth. There is so much upside, so many
opportunities. … We want to do more private equity, through working with our
partners here and through direct opportunities."

As in previous years, early- and growth-stage investments continue to be the most

dominant stages of investment, contributing to nearly 80% of the total number of
deals. Majority deals by value declined in 2017 to 2015 levels of less than 20%.
However, investors in minority deals still seem to be interested in getting a "path to
control" for key decisions.

With the rise in the number of participating funds, the year also saw increasing
competition. More funds are participating in the India market, particularly LPs
investing directly. PE funds have developed pockets of strength across sectors and
regions, and the number of active players in the market has increased by 3% with an
increase in institutional investors. Most investors expect to offer more coinvestment
opportunities to LPs in 2018. This could potentially be one of the moves to ensure
that LPs continue to invest in the funds and decrease risk. India-focused funds
believe that competition from LPs investing directly with regional and local funds is a
key concern.

The top priority for funds in 2018 will be making new deals. Funds expect BFSI and
consumer products and retail to see maximum investment activity in 2018. Investors
feel that the current valuations are high, but they expect a slowdown in 2018.

Exits and portfolio management

Investments and exits in India had a strong 2017, surpassing their respective
previous highs. Exit momentum continued to be robust, indicating healthy and
strong public markets in India. Initial public offerings (IPOs) are the primary exit
mode in India. More than 200 exits took place in 2017. The exit values for 2017 grew
by approximately 60% over 2016 to almost $16 billion.
 The number of exits increased by only 7% to 211 compared with 197 in 2016, but big-
ticket deals like Bharti Airtel, Flipkart, GlobalLogic and ICICI Lombard powered that
increase. The top 10 exits alone in 2017 accounted for almost 40% of the total exit
value.

There was a marked increase in the number of public market sales, including IPOs,
which rose from 45% in 2016 to 50% in 2017, suggesting confidence in the Indian
market. Consumer tech and BFSI were key sectors for this activity, thanks to exits by
Tiger Global ($1.3 billion), SAIF Partners ($0.82 billion) and Fairfax (~$1 billion);
telecom saw one large exit (~$1.4 billion) by Qatar Foundation Endowment.

Qatar Foundation Endowment exited Bharti Airtel Ltd. in an open market

transaction for $1.486 billion. Tiger Global exited Flipkart for $800 million in a
secondary sale that also saw APAX Partners exiting GlobalLogic for $780 million.
Tiger Global also exited Ola in a secondary sale for $500 million. Among the big IPO
sales, Fairfax Financial Holdings Ltd. exited ICICI Lombard for $558 million. Fairfax
also sold its holding in ICICI Lombard in another secondary sale for $383 million,
making the total exit value close to a billion dollars.

Considering the way India's economy is poised for growth in the coming year, with
capital markets on an upswing, we expect many more exits in the next few months.
However, fund houses Bain spoke with believe that the number of secondary and
strategic sales will increase. But a mismatch in valuation expectations and
maintaining high-level returns could hinder exits, according to funds with whom we
spoke.

Implications

Overall, 2017 was a good year for private equity in India. The year saw $26 billion of
PE/VC investments in India—the highest ever and a 60% increase from 2016. Mega
deals were the bulk of the investments; the top 10 players were involved in almost
two-thirds of the deals by value this year. Consumer technology and BFSI sectors
were the primary interest for private equity and venture capital in 2017. Fund
sources continued to diversify: Sovereign wealth funds and pension funds
participated in about 20% of the total deal value. New asset classes, which include
alternative investment funds, continued to scale. Competitive intensity in the market
grows as the number of funds increases, including an increase in institutional
investors. Exits continued on an upward trajectory, driven by consumer tech and
telecom. Most funds expect a moderation in valuations and returns to decline by 2%
to 4% in the coming three to five years.

1. Macroeconomic overview

 2017 showed signs of recovery from 2016. The growth rate of US and Eurozone economies
increased due to notable pickups in investment, trade and industrial production, coupled
with stronger business and consumer confidence.
 India and China continued to maintain healthy growth rates of about 7%, similar to 2016.
 India's GDP growth remained stable at a rate of 7.1%, driven by services and continued
growth in manufacturing.
 Inflation remained in the 3% to 5% range. Indian currency appreciated vs. the US dollar, in
line with developing currencies, and treasury bill yields rose due to expectations of higher
fiscal deficits.
 Investor confidence in India grew as a result of regulatory action and government stimulus
to address nonperforming assets (NPAs) and a growing formal economy coupled with
unification of taxation under the new GST.
 2. Fund-raising

 After a decline in 2016, fund-raising in Asia-Pacific rose to match 2015 levels, growing 6%
from 2016 to 2017, with India among the leaders of that growth.
 India continued to be an attractive destination for investments, as India-focused funds
increased 48% in aggregate to $5.7 billion.
 India-focused funds are carrying approximately $9 billion in dry powder, similar to 2016
levels, reaffirming the potential for investments in the Indian market.
 New asset classes and fund types continue to emerge in India. AIFs showed robust growth in
2017 and have raised about $5.1 billion to date vs. $2.4 billion in 2016.
 While fund-raising is a 2018 priority for investors, they believe the fund-raising environment
will be more stable, similar to 2017.
 LPs will likely play a more active role in deals in 2018, and investors are likely to offer more
coinvestment opportunities to them in the coming year compared with 2017.
 3. Deal making

 Total PE deal value in 2017 was the highest ever in India: about $26.4 billion vs. $16.8
billion in 2016. The investment value increased 57%.
 India's median deal multiples value reached a record high—higher than Asia-Pacific's.
 Investment in consumer tech bounced back, and BFSI continued to grow.
 Consumer tech, BFSI and telecom accounted for a value increase of about 60% while
manufacturing and IT/ITeS activity slowed.
 The top 15 deals contributed 50% of the total investment value vs. 30% in 2016. Foreign
funds were largely the source of these investments.
 Since 2016, the average deal size increased 95% for deals greater than $10 million, driven by
big-ticket deals in consumer tech and BFSI.
 Early- and growth-stage deals continue to be the most dominant stages of investment.
Majority deals increased compared with 2016, indicating an inclination for more control by
investors.
 Competition for deals is increasing, with growth in the number of participating funds and PE
funds developing pockets of strength across sectors and regions. The number of active
players and institutional investors grew.
 The top 10 players were involved in almost two-thirds of the deals by value this year. India-
focused funds are concerned about LPs investing directly.
 Making new deals is the top priority for funds in 2018. Funds expect financial services,
consumer products and retail to see the most investment activity in 2018.
 Investors feel the current valuations are high, but they expect a slowdown in 2018.
 4. Exits and portfolio management

 2017 was the best year for exits, which should signal confidence for investors. The total exit
value grew by more than 60% to $15.7 billion, while the number of exits increased 7%.
 The top 10 exits together constituted 40% of total PE exit value in 2017, slightly less than
2016 (45%).
 Consumer technology, BFSI and telecom had the highest exit activity and accounted for 50%
of the total exit value. Exits were driven more by transaction value than an increase in deal
volume.
 Although public market sales continued to be prominent modes of exit, consumer tech and
media exit primarily via strategic sales.
 Most funds expect returns to decrease by 2% to 4%; top line and cost and capital efficiency
will create value in the future.
 According to India-focused fund managers, a mismatch in valuation expectations between
investors and firm owners hinders deal making, while a high level of returns could hinder
exits. They also believe that leadership issues at portfolio companies are common and have a
major effect on value creation.
Methodology

This work is based on secondary market research, analysis of financial information

available or provided to Bain & Company and a range of interviews with industry
participants. Bain & Company has not independently verified any such information
provided or available to Bain and makes no representation or warranty, express or
implied, that such information is accurate or complete. Projected market and
financial information, analyses and conclusions contained herein are based on the
information described above and on Bain & Company's judgment, and should not be
construed as definitive forecasts or guarantees of future performance or results. The
information and analysis herein does not constitute advice of any kind, is not
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agents accept any responsibility or liability with respect to the use of or reliance on
any information or analysis contained in this document. Bain & Company does not
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