SIR M.
VISVESVARAYA INSTITUTE OF
MANAGEMENT STUDIES & RESEARCH`
CORE Project
On
“A STUDY ON VARIOUS COMPONENTS OF PRIVATE
EQUITY”
Under
University of Mumbai
By
Mr. Raj Jayesh Surti
( 13056 )
Specialization: Finance
Under the Guidance of
Prof. Ayan Thakur
SIR M. VISVESVARAYA INSTITUTE OF MANAGEMENT
STUDIES & RESEARCH
SEWREE – WADALA ESTATE, WADALA, MUMBAI – 400031
ACADEMIC YEAR 2022 – 2024
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DECLARATION
This is to declare that I RAJ JAYESH SURTI, student of SVIMS , MMS
batch (2022-2024), has given original data and information to the best of my
knowledge in the project report titled “A STUDY ON CSR ACTIVITES OF
NOMURA INDIA” is a record of independent work carried out by me under
the guidance and supervision of the Prof. AYAN THAKUR towards the partial
fulfilment of requirement for the MMS course.
I also agree in principle not to share the vital information with any other
person outside the organization and that I have not submitted it for any award
or any other title, degree or diploma.
NAME: Raj Jayesh Surti ( )
ROLL NO. 13056 SIGNATURE OF STUDENT
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CERTIFICATE
This is to certify that the project entitled “A STUDY ON CSR ACTIVITES
OF NOMURA INDIA”, submitted to SVIMS, Mumbai in the partial fulfilment of
the requirements for the award of MMS, embodies the results of confide
project work carried out by Raj Jayesh Surti under my guidance and
supervision.
To the best of my knowledge the results embodied in this project have
not been submitted to any other university or institute for the award of Degree
or Diploma. The assistance and help received during the course of this
investigation has been duly acknowledged.
NAME: Raj Jayesh Surti ( )
DATE: SIGNATURE OF GUIDE
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ACKNOWLEDGEMENT
It has always been my sincere desire as a management student to get an
opportunity to express my views, skills, attitude and talent in which I am
proficient. A project is one such avenue through which a student who aspires to
be a future manager does something creative. This project has given me the
chance to get in touch with the practical aspects of management.
I am extremely grateful to the University of Mumbai for having prescribed this
project work as part of the academic requirement in the Masters Of
Management Course (MMS).
I wish to appreciate SVIMS College for providing all the required facilities. I
would like to thank the Principal and Dean, for their dynamic leadership. I
would also like to thank all the faculties for their help and support.
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EXECUTIVE SUMMARY
The study on various components included in private equity provides a
comprehensive examination of the intricate elements comprising this dynamic
investment landscape. Private equity encompasses a range of strategies and
instruments utilized by investors to acquire, manage, and ultimately divest
ownership stakes in privately held companies. This study delves into the core
components that shape the private equity ecosystem, shedding light on their
roles, interconnections, and impact on investment outcomes.
At the heart of private equity lie distinct investment strategies, each tailored to
different stages of a company's lifecycle. These strategies encompass venture
capital, which targets early-stage startups with high growth potential, and
buyouts, which involve acquiring mature companies to drive operational
improvements and value creation. Additionally, the study explores other
strategies such as growth equity, distressed debt investing, and mezzanine
financing, highlighting their unique characteristics and investment objectives.
In addition to investment strategies, the study delves into the key players that
animate the private equity landscape. From institutional investors like pension
funds and endowments to specialized private equity firms and their portfolio
companies, each participant plays a crucial role in shaping investment decisions
and outcomes. Moreover, the study examines the role of intermediaries such as
investment banks, legal advisors, and consultants in facilitating private equity
transactions and enhancing value creation.
Furthermore, the study scrutinizes the intricate mechanisms of value creation
employed within private equity investments. From operational enhancements
and strategic repositioning to financial engineering and leverage optimization,
private equity practitioners deploy a diverse array of value creation levers to
enhance the performance and profitability of their portfolio companies. By
dissecting these value creation strategies, the study offers valuable insights into
the drivers of private equity returns and the factors underpinning investment
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success. In conclusion, the study provides a holistic understanding of the
multifaceted components that comprise private equity, offering stakeholders a
roadmap for navigating this dynamic and evolving investment landscape.
INDEX
SR. NO. TITLE PG. NO
1 INTRODUCTION 7
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INTRODUCTION
Private equity is a dynamic and influential sector within the broader financial
industry. At its core, private equity involves investing in privately-held
companies with the goal of generating significant returns over a period of time,
typically ranging from three to seven years. These investments are often
characterized by active ownership, where private equity firms not only provide
capital but also play an active role in the management and strategic direction of
the companies in which they invest.
Private equity firms raise capital from institutional investors, such as pension
funds, endowments, and high-net-worth individuals, to form investment funds.
These funds are then used to acquire ownership stakes in companies through
various strategies, including leveraged buyouts (LBOs), growth capital
investments, and venture capital investments.
Leveraged buyouts are a common strategy in private equity, where a firm
acquires a company using a significant amount of debt, which is often repaid
using the cash flows and assets of the acquired company. This allows private
equity investors to amplify their returns, albeit with higher risk.
Private equity investments are typically made with the aim of improving the
performance and profitability of the acquired companies. This may involve
implementing operational improvements, strategic restructuring, or facilitating
mergers and acquisitions to enhance value.
One of the defining characteristics of private equity is its long-term investment
horizon. Unlike public equity markets, where investors can buy and sell shares
freely, private equity investments are illiquid and require patience as value
creation often takes several years.
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Overall, private equity plays a crucial role in driving economic growth,
fostering innovation, and providing capital to companies at various stages of
their lifecycle. However, it's also a complex and highly competitive industry,
subject to regulatory scrutiny and market volatility.
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TYPES OF PRIVATE EQUITY
Private equity encompasses a variety of investment strategies tailored to
different stages of a company's lifecycle and levels of risk tolerance. Here are
some common types of private equity:
1) Venture Capital (VC):
Venture capital focuses on investing in early-stage and growth-stage companies
with high growth potential. VC firms provide capital to startups in exchange for
equity, aiming to support their development, innovation, and expansion. These
investments often involve significant risk but offer the potential for substantial
returns if the company succeeds.
2) Leveraged Buyouts (LBOs):
Leveraged buyouts involve acquiring a controlling stake in a mature company,
often using a significant amount of debt financing. Private equity firms typically
seek to improve the performance and value of the acquired company through
operational enhancements, strategic restructuring, and cost efficiencies. LBOs
can range from small and mid-sized acquisitions to large-scale corporate
takeovers.
3) Mezzanine Capital:
Mezzanine capital sits between equity and debt financing on the capital
structure. Mezzanine investors provide subordinated debt with equity features,
such as warrants or conversion rights. This type of financing is commonly used
to support acquisitions, growth initiatives, or recapitalizations, offering higher
potential returns than traditional debt instruments
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4) Distressed/Private Debt:
Distressed/private debt strategies involve investing in the debt securities of
financially troubled companies or distressed assets. Private equity firms may
acquire distressed debt at a discount and then work to restructure the company's
operations or finances to improve its prospects for recovery. These investments
carry higher risk but can offer attractive returns if successful.
5) Growth Equity:
Growth equity investments target established companies with proven business
models and the potential for rapid growth. Unlike venture capital, growth equity
firms focus on later-stage companies that require capital to scale their
operations, expand into new markets, or finance acquisitions. Growth equity
investors typically take minority stakes in companies and provide both capital
and strategic support to fuel their growth.
6) Special Situations:
Special situations investing involves capitalizing on unique investment
opportunities that may arise from corporate events, regulatory changes, or
market dislocations. This can include investments in distressed assets,
turnaround situations, spin-offs, or special purpose acquisitions. Special
situations investing requires a flexible and opportunistic approach to identify
and capitalize on value-enhancing opportunities.
Each strategy has its own risk-return profile, investment horizon, and
specialization, catering to different investor preferences and objectives.
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FUND STRUCTURE
In private equity, the fund structure refers to organization and setup of the
investment vehicle through which investors pool their capital to invest in private
companies. The structure typically involves several key components.
1) General Partners (GPs) and Limited Partners (LPs)
General Partners (GPs):
GPs are the managing partners of the private equity fund. They are typically the
founders or senior executives of the private equity firm responsible for sourcing,
executing, and managing investments on behalf of the fund. GPs make
investment decisions, manage portfolio companies, and aim to generate returns
for the fund's investors.
Limited Partners (LPs):
LPs are the investors in the private equity fund. They can include institutional
investors such as pension funds, endowments, insurance companies, and high-
net-worth individuals. LPs provide the capital for the fund and have a passive
role in the fund's management. They entrust the GPs with making investment
decisions and rely on them to generate returns on their investments.
The relationship between GPs and LPs is governed by a partnership agreement
that outlines the rights, responsibilities, and obligations of each party. GPs
typically receive management fees and carried interest as compensation for their
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services, while LPs benefit from any profits generated by the fund's
investments.
2. Fundraising Process:
The fundraising process for a private equity fund involves several stages:
Preparation:
The private equity firm prepares a fund offering, including a detailed
investment strategy, track record, and target fundraising amount. They may also
engage placement agents to help raise capital from potential investors.
Marketing:
The private equity firm pitches the fund to potential investors, such as
institutional investors and high-net-worth individuals, through presentations,
meetings, and roadshows. They highlight the firm's investment track record,
expertise, and potential for generating attractive returns.
Due Diligence:
Prospective investors conduct due diligence on the private equity firm,
including its investment team, track record, investment strategy, and operational
capabilities. They assess the firm's ability to generate returns and manage risk
effectively.
Capital Commitment:
Investors who decide to invest in the fund commit capital to the fund by signing
a subscription agreement and transferring funds to an escrow account. The
private equity firm aggregates these commitments until the fundraising target is
met.
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Closing:
Once the fundraising target is met, the private equity fund holds a final closing,
and the fund's legal structure is established. The fund is then ready to start
making investments in accordance with its investment strategy.
3)Fund Terms and Agreements:
Management Fees:
GPs typically receive an annual management fee based on the committed capital
of the fund, typically ranging from 1% to 2% of assets under management. This
fee covers the operating expenses of the private equity firm, including salaries,
office rent, and due diligence costs.
Carried Interest:
Carried interest, also known as the "carry," is the share of profits that GPs
receive from the fund's successful investments. It is typically structured as a
percentage of the fund's profits above a certain threshold, known as the "hurdle
rate." The standard carry percentage is 20%, although it can vary depending on
the terms negotiated between GPs and LPs.
Hurdle Rate:
The hurdle rate is the minimum rate of return that the fund must achieve before
GPs are entitled to receive carried interest. It is usually set at a predetermined
level, such as 8% or 10% per annum, and ensures that GPs only receive carry
once investors have received a satisfactory return on their investment.
Other fund terms and agreements may include provisions related to governance,
reporting requirements, investment restrictions, and the distribution of profits.
These terms are negotiated between GPs and LPs and documented in the fund's
partnership agreement.
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INVESTMENT PROCESS
The investment process in private equity is a meticulous and strategic journey
that involves identifying, evaluating, and ultimately investing in companies with
the aim of generating attractive returns for investors. This process can be broken
down into several key stages
1) Deal Sourcing:
Private equity firms employ various methods to identify potential investment
opportunities:
Networks and Relationships:
Private equity professionals leverage their networks and relationships within the
business community to source investment opportunities. This may involve
maintaining contacts with industry executives, investment bankers, lawyers, and
other intermediaries who can provide referrals or introductions to potential
deals.
Proprietary Research:
Private equity firms conduct proprietary research to identify attractive
investment themes, industry trends, and target companies. This may involve
analyzing market data, industry reports, and financial metrics to uncover
opportunities that align with the firm's investment strategy.
Deal Screenings:
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Private equity firms actively screen and review a large number of potential
investment opportunities to identify those that meet their investment criteria.
This process may involve evaluating companies based on factors such as
industry dynamics, growth potential, competitive positioning, and financial
performance.
Partnerships and Collaborations:
Private equity firms may collaborate with other investors, strategic partners, or
co-investment platforms to source and evaluate investment opportunities jointly.
This allows them to leverage complementary expertise, resources, and networks
to identify and execute deals more effectively.
2) Due Diligence:
Due diligence is a comprehensive process of evaluating the potential risks and
opportunities associated with an investment opportunity:
Financial Due Diligence:
Private equity firms conduct detailed financial analysis to assess the target
company's historical performance, financial health, cash flow generation, and
growth prospects. This involves reviewing financial statements, conducting
ratio analysis, and assessing key financial metrics to identify any red flags or
areas of concern.
Operational Due Diligence:
Private equity firms evaluate the target company's operations, management
team, business model, and competitive positioning to understand its strengths,
weaknesses, and growth opportunities. This may involve site visits, interviews
with key personnel, and benchmarking against industry peers to assess
operational excellence and identify potential areas for improvement.
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Legal and Regulatory Due Diligence:
Private equity firms engage legal and regulatory experts to review the target
company's legal structure, contractual agreements, compliance obligations, and
litigation risks. This helps identify any legal or regulatory issues that may
impact the investment thesis or require mitigation measures.
Commercial Due Diligence:
Private equity firms conduct market research and industry analysis to assess the
target company's market positioning, customer base, competitive landscape, and
growth potential. This involves evaluating market trends, customer preferences,
and competitive dynamics to validate the investment thesis and identify
potential risks or opportunities.
3) Valuation Methods:
Private equity firms use various valuation methods to determine the value of
target companies:
Comparable Company Analysis (CCA):
CCA involves comparing the target company's financial metrics, such as
revenue, EBITDA, and multiples (e.g., price-to-earnings ratio), to those of
comparable publicly traded companies in the same industry. This helps establish
a valuation range based on market multiples and benchmarks.
Discounted Cash Flow (DCF) Analysis:
DCF analysis involves forecasting the target company's future cash flows and
discounting them back to their present value using a discount rate. This
approach considers the time value of money and the risk associated with future
cash flows to determine the intrinsic value of the company.
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Transaction Multiples:
Private equity firms may also consider recent transaction multiples from
comparable M&A transactions in the same industry as a benchmark for
valuation. This involves analyzing the purchase price multiples paid by
acquirers relative to the target company's financial performance.
Asset-Based Valuation:
Asset-based valuation involves assessing the value of the target company's
tangible and intangible assets, such as property, plant, equipment, intellectual
property, and brand value. This approach provides a floor value for the company
based on its underlying assets.
4) Negotiation and Deal Structuring:
Once the due diligence process is complete, private equity firms negotiate the
terms of the investment and structure the deal:
Deal Terms:
Private equity firms negotiate the key terms of the investment, including the
purchase price, equity ownership stake, governance rights, management
incentives, and exit strategies. This involves balancing the interests of the
investors, management team, and other stakeholders to achieve a mutually
beneficial outcome.
Legal Documentation:
Private equity firms work with legal advisors to draft and finalize the legal
documentation required for the investment, including the purchase agreement,
shareholder agreements, and other transaction documents. These documents
outline the rights, responsibilities, and obligations of the parties involved and
provide legal protections for the investment.
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Financing Arrangements:
Private equity firms arrange financing for the investment, which may involve
using a combination of equity, debt, and mezzanine financing to fund the
transaction. This requires coordinating with lenders, underwriters, and other
financial institutions to secure the necessary capital on favourable terms.
Structuring Incentives:
Private equity firms may structure incentive plans, such as management equity
participation, stock options, or performance-based bonuses, to align the interests
of the management team with those of the investors. This helps motivate and
retain key personnel and incentivize value creation.
Overall, the investment process in private equity involves a thorough and
disciplined approach to sourcing, evaluating, valuing, negotiating, and
structuring investment opportunities to maximize returns and mitigate risks for
the investors.
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EXIT STRATEGIES
Exit strategies are crucial considerations for private equity firms as they seek to
maximize returns on their investments and provide liquidity to their investors.
These strategies include Initial Public Offerings (IPOs), where portfolio
companies go public, offering shares to the public; Strategic Sales, involving the
sale of portfolio companies to other corporations seeking strategic advantages;
Secondary Buyouts, where in portfolio companies are sold to other private
equity firms; and Recapitalizations, which involve restructuring a company's
ownership or capital structure. Each strategy offers unique opportunities for
realizing value and balancing risk, enabling private equity firms to optimize
their investment portfolios and achieve successful exits.
1) Initial Public Offerings (IPOs):
An IPO is the process by which a privately held company offers shares of its
stock to the public for the first time. This allows the company to raise capital
from public investors and provides liquidity to its existing shareholders,
including the private equity firm. The process involves extensive regulatory
requirements and financial disclosures, often requiring significant preparation
and coordination with investment banks. IPOs can be attractive exit strategies
for private equity firms looking to realize significant returns on their
investments and provide liquidity to their investors.
2) Strategic Sales:
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Strategic sales involve selling a portfolio company to another corporation, often
a strategic buyer within the same industry. These buyers may be interested in
acquiring the portfolio company to expand their market reach, access new
technologies or products, or achieve other strategic objectives. Strategic sales
can offer attractive valuations and synergies for both parties involved. Private
equity firms may pursue strategic sales as an exit strategy when they believe
there is a strong market demand for the portfolio company or when they receive
an attractive acquisition offer.
3) Secondary Buyouts:
Secondary buyouts involve selling a portfolio company to another private equity
firm. In this scenario, the purchasing private equity firm acquires the majority or
all of the ownership stake in the portfolio company from the selling private
equity firm. Secondary buyouts can occur for various reasons, including
portfolio rebalancing, strategic realignment, or capital restructuring. Private
equity firms may choose secondary buyouts as an exit strategy when they
believe there is limited potential for further value creation through organic
growth or operational improvements and when they receive a favorable offer
from another private equity firm.
4) Recapitalizations:
Recapitalizations involve restructuring the ownership or capital structure of a
portfolio company. This may include issuing new debt or equity securities,
repurchasing existing securities, or adjusting the company's financial leverage.
Recapitalizations can be used to provide liquidity to existing shareholders,
including the private equity firm, while allowing them to retain partial
ownership in the company. This exit strategy is often pursued when the portfolio
company has strong cash flow generation and growth prospects but requires
additional capital to support its expansion plans or to facilitate shareholder exits.
Recapitalizations can also be used to optimize the company's capital structure
and enhance its financial flexibility.
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PERFORMANCE MEASUREMENT
Performance measurement is crucial in evaluating the success and effectiveness
of private equity investments. Here are the key aspects:
1) Key Performance Indicators (KPIs):
KPIs are essential metrics used by private equity firms to assess the
performance of their investments. These metrics vary depending on the nature
of the investment and the goals of the investors. Common KPIs include:
- Internal Rate of Return (IRR): This measures the profitability of an
investment over time, taking into account the time value of money.
- Return on Investment (ROI): It calculates the gain or loss generated on an
investment relative to the initial amount invested.
- Multiple of Invested Capital (MOIC): MOIC measures the ratio of the total
distributions to investors relative to the total amount of capital invested.
- Portfolio Company Performance Metrics: These include revenue growth,
EBITDA (earnings before interest, taxes, depreciation, and amortization) margin
expansion, and market share growth, among others.
2) Benchmarking:
Benchmarking involves comparing the performance of private equity funds
against industry benchmarks or peer groups. These benchmarks provide context
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for evaluating the success of investments and help investors gauge the
performance of their portfolio relative to others in the market. Common
benchmarks include:
- Public Market Equivalents (PME): PME compares the performance of
private equity investments with equivalent investments in the public markets.
- Vintage Year Analysis: This compares the performance of funds raised in the
same year to assess how well they have performed relative to each other.
- Industry-Specific Benchmarks: Some industries have specific benchmarks
that are relevant for comparing performance, such as median revenue growth or
EBITDA margins.
3) Reporting and Transparency:
Private equity firms communicate performance to investors through regular
reporting and transparency initiatives. This includes:
- Quarterly and Annual Reports: Private equity firms typically provide
investors with detailed reports on the performance of their investments,
including financial statements, KPIs, and updates on portfolio companies.
- Investor Meetings: Firms may also hold regular meetings with investors to
discuss performance, strategy, and any other relevant updates.
- Limited Partner Portal: Some private equity firms offer online portals where
investors can access real-time performance data, documents, and other
information related to their investments.
- Compliance and Regulatory Requirements: Private equity firms must adhere
to regulatory requirements regarding performance reporting and transparency,
ensuring that investors have access to accurate and timely information.
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OBJECTIVE OF STUDY
Understand the functioning and dynamics of private equity (PE) as an
asset class.
Analyze the key components that constitute private equity investments.
Evaluate the impact of private equity on financial markets, firms, and
economies.
Explore the strategies and tactics employed by private equity firms.
Investigate the performance and returns of private equity investments
compared to other asset classes.
Identify challenges and opportunities in the private equity landscape.
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REFERENCES
https://www.skynova.com/learn/business/the-9-types-of-private-equity-simply-
explained
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