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MOd 3
Cycle of Private Equity Fund

Fundraising
The first task of a Private Equity Fund is fundraising. Broadly there are
three types of investors:
● High Net-worth Individuals: They broadly invest their personal
wealth into companies and are mostly active in the venture
capital stages of private equity investing.
● Family Offices: These are families, who invest their personal
wealth into companies. Their ticket size of investmentsis often
greater than that of high net-worth individuals. Depending on
the ticket size of investment, their participation is not limited
only to the venture capital stage. Famous family offices in
India include that of the Dabur family, among others. It is
important to note that family offices are often professionally
run with qualified fund managers managing investments
● Private Equity Funds: They are basically organizations that are
engaged in the practice of private equity investing and fund
management. The biggest difference between HNIs, Family
Offices & PE Funds are that PE Funds have multiple investors,
as opposed to HNIs and Family Offices, who’re either backed
by an individual or a particular family.
The three types of investors are also interconnected as the investors
in Private Equity Funds are often High Networth Individuals or Family
Offices.
As Family Offices are also professionally run, they have now
progressed towards launching funds in which they’re the lead
investors.
From a participation standpoint, let us classNameify this:
HNIs participate in PE investments either by directly investing in the
target company or by investing in a fund that goes on to invest in
companies.

Family Offices participate in PE investments either by directly

investing in the target company, or by investing in funds that invest in
target companies or by launching private equity funds, in which they
are the lead investors and managers; who go on to raise more money
from other investors – and then invest in target companies.

Private Equity Funds participate in PE investments by raising money

from multiple investors and investing in target companies. All
participants have the same objective – to increase the value of
companies that they’re investing in by helping them perform well.
When we speak about fundraising, we are now talking about it from a
Private Equity Fund’s perspective and not from a company’s
perspective.
Here, the Private Equity Fund may be launched by a group of fund
managers with a proven track record or may also be launched by a
family office and in that case, the family is the lead investor into the
fund.
In this stage, the promoters of the PE fund have to pitch the idea of
the fund to prospective investors in order to get their participation for
it.

Investment Pitch
There are four primary aspects in a PE fund’s investment pitch:
. Fund Structure and Targets: The fund structure will be
based on how many investors is the fund aiming to
onboard to raise a particular amount that it is targeting.
As a very simple and basic example, a fund can target a
size of Rs. 200 cr. and it can aim a group of 20 investors;
with each investor on an average contributing Rs. 10 cr.
This is only an average and does not necessarily be the
case. If say a Rs. 200 cr. fund is being promoted by a
family office, there can be a case of the family
contributing Rs. 50 cr. in it. Managing investors is a big
task and it often depends on the relation between the
fund managers and the investors and therefore fund
managers mostly prefer a small number of investors in a
fund.
Another fund target, is the targeted return. It is up to the
fund manager’s discretion to propose this and the risk
profile of the investors is often based on the targeted
return that the fund manager is proposing. The greater
the proposed return, the higher the risk and investors
with a greater risk appetite would be required. Continuing
the previous example, a fund manager can propose a
return of say 15% and a now very basic fund structure
would now be a corpus of Rs. 200 cr., with a target of 20
investors, contributing on an average Rs. 10 cr. for a
proposed return of 15%.
. Holding Period: The fund manager also has to give a
proposed holding period to prospective investors. As we
can now sense, private equity has a long term gestation
.

period. Proposed holding periods can be 3 years, 5 years

or even more.
. Sector Specific/Sector Agnostic: The third aspect of the
fund is whether it wants to be sector specific or sector
agnostic. Sector specific funds can choose to invest in
only a specific sector. For example, there are health-tech
specific funds, consumer tech specific funds among
others. Sector agnostic funds are those that can invest
across sectors. This aspect of the PE fund also
determines the investors that it attracts. For example, a
consumer tech specific fund can be attractive for an HNI,
who has spent majority of her career in the consumer tech
space.
. Investment Approach: This can be further divided into
two parts: The type of Investment and whether it is an
active or a passive approach.
In the first part, the PE fund has to make it clear as to
what type of investments is it going to make. There are
various types of PE investments and the type of PE
investments are dependent on the stage at which the
company is. Therefore, when a PE fund is pitching for
fundraising, it has to make it clear as to which stage of the
company life cycle, would it be participating.
In the second part, it has to specify whether it would be
following an active or a passive approach. An active
approach is when the fund management team will take
active involvement in the workings of their portfolio
companies. In an active approach, it is increasingly
important for the PE fund to have the correct set of
experts, who can possibly add value to its prospective
portfolio companies. A passive approach is when the fund
management team takes limited involvement in the
workings of their prospective portfolio companies. In this
approach, involvement is limited to scheduled quarterly
board meetings that help them monitor the company’s
progress.
The criteria for a PE fund to be called successful, include:
○ The first criteria is that a PE fund receives a letter of
commitment from its investors, which includes the
amount of their commitment.
 ○ The second criteria is an objective benchmark on
whether the fund was able to meet its targeted raise.
For example, if a fund targeted a raise of Rs. 200 cr.
and was able to reach that, it met its targeted raise.
Investing
Identification of Target Companies
This is a critical aspect in the lifecycle of a Private Equity fund as
much of its success is dependent on this. The first step in identifying
target companies is to scout the market.
1. Scouting
Fund managers use many techniques to do this, four such techniques
are:
● The first technique isnetwork driven scouting
.Most companies appoint investment bankers to aid their
fundraising process. Fund managers and investment
bankers are often in a closely knit network, which helps
fund managers in their scouting process as investment
bankers often introduce fund managers to a plethora of
companies looking to raise money.

● The second technique isinstitution driven

. Many fund managers directly interact with incubators
and accelerators in the start-up ecosystem that helps
them get introduced to companies with high potential.
Incubators and accelerators are generally setups that
identify ideas and companies of high potential and run
programs that help them scale up. These programs
culminate in a demo day, where the companies in that
incubator or accelerator display their work in front of fund
managers, with the aim of raising funds.
 ● The third technique isevent driven
. Many PE funds participate in events, where companies
display their work with the aim of raising funds.

● The fourth technique iscompetition driven

. Many PE funds host competitions, where companies can
share and show their work to them. The technique used to
scout the market, is often dependent on the type of
private equity investment, which is in turn dependent on
the stage of the company.
2. Screening Process
Some of the parameters used in the screening process include:
● Nature of problem addressed by the company & idea
● Size of the market
● Potential of the company to reach that market
● Background & qualification of the management team
● Growth & Performance of the company
● Amount of money that the company is looking to raise &
whether synergetic with the PE fund’s broad strategy.
Fund managers are not restricted by these methods and can include
other parameters as well.
3. Due Diligence
Due diligence is an audit on the facts that are represented by a given
company, with the aim of confirming those facts. The due diligence
process is often done by specialised professionals, either in the
company or externally appointed. As the process takes time, effort
and in many cases – money as well; fund managers conduct this
process on selected companies only.
For example, a fund manager may receive a review proposals of 100
companies, out of which 10 would make through the screening stage
and to the due diligence stage.

4. Valuation
This is one of the most critical stages as it would be determining the
nature of the relationship that a PE fund would be proposing to a
target companies. The fund would broadly be valuing the target
companies and be look at the amount that they are looking to raise.
This would in turn determine the PE fund’s offer to target companies
as a relationship between the amount that the target companies are
looking to raise and the PE fund’s valuation of target companies
would lead to the amount of shares that a PE fund would be looking to
purchase in that company.
Often, the valuation of a company done by a PE fund is lesser than
the proposed valuation of the company. This leads to a negotiation
between the target companies and the PE fund.
Negotiation
This stage comes after the PE fund has identified target companies
and is now close to entering into a deal with them. Apart from
negotiating on the valuation of the company, the negotiation also
includes other parts like the type of shares issued by the company to
the fund, the members appointed by the PE fund on the company’s
board and whether the PE fund will be giving the company’s
management, a part exit on their existing shareholding.
1. Difference in Valuation
When a company goes on to raise funds, it has a certain target in
mind. The target has been set in accordance with the amount it is
looking to raise and the percentage of shares that it is looking to
dilute in the process.
For example, a company XYZ Ltd. is looking to raise Rs. 10 cr. and is
willing to dilute 40% of its shares in the process. In this example, we
can see that the company has given itself a post-capital infusion
valuation of Rs. 25 cr. Similarly, a PE fund has valued the company at
Rs. 16 cr., and is willing to match the company’s ask of Rs. 10 cr. at
this valuation. The difference is that the PE fund is looking for a
62.5% stake in the company; while the company is looking to dilute
40%.

From this example, one can understand why the company would be
apprehensive to take this deal and negotiate on it. The PE fund’s offer
essentially places a majority stake with the PE fund, while the
company’s proposal keeps a majority stake with the company. This is
the basis of the negotiation process between the fund and the
company, where they may or may not be able to arrive at a mutually
agreeable deal. It’s important to note that we’ve taken an extreme
case here as the difference in valuation to an extent, where the point
of majority and minority ownership is coming into play.
2. Type of Share Issued to the PE Fund
The second aspect that gets determined in the negotiation stage is
the type of shares that the company will issue to the PE fund.
● Common stock: Each share has proportionate amount of
voting rights.
● Shares with an increased voting right: It is where the PE fund
gets greater voting right as compared to its shareholding. In
this case, the PE fund can exercise greater control over the
affairs of the company that it is investing in. For example, the
company may issue 2 votes for a share to a PE fund, where it
gets 2 votes for each share held by it.
● Put Option: This allows the PE fund to sell those shares under
 ●
specific circumstances.
3. Members Appointed by the PE Fund
The third aspect of the negotiation can be the members appointed by
the PE fund on the board of the company. The company’s board
monitors its progress on a regular basis and the senior management
of the company is often answerable to other members of its board.
Therefore, having members on the board of the company is helpful
for PE funds as they look to monitor the progress of the company,
after investing. In many cases, decisions are taken by a vote of the
board members and hence, the number of seats allotted to the PE
fund on the board of the company can be essential in the control it
has in the company.
4. Giving an Exit to the Company’s Founders
A fund raising can constitute two aspects:
● The first aspect of fund raising is of capital infusion, which is
the money that is invested in the company, for growth.
● The second aspect is of fund raising, can be giving an exit to
the company’s founders. This can be a part exit and is
possible only in mature stages of the company’s life cycle. In
this case, a part of the fund goes to the company’s founders
as they dilute their stake in the company. For example, if a
company is raising Rs. 25 cr. from a PE fund, the founders can
keep a clause of a 10% exit. This means that the company’s
founders will get Rs. 2.5 cr. as part of the deal and the rest of
the amount, which is Rs. 22.5 cr. will go in as capital into the
company.
Monitoring
After a PE fund invests in a company, it has to actively monitor the
progress of the company. These tools include voting rights on shares
and seats on the board of the company.
From a PE fund’s perspective, the core idea behind monitoring is to
help the company grow, while protecting its interest at the same time.
As the PE fund has undergone a similar journey with many companies
before, its involvement can help be tremendously value additive.

Exiting
In this stage, the PE fund exits the venture by selling its shares and
hopes for capital appreciation in the process. Capital appreciation
occurs when the company has grown and the value of its shares have
increased.
There are many ways in which the PE fund can look to exit a company.
. Selling its shares to another company: For example, take
the case of XYZ Ltd., a regional language OTT platform
which primarily curates and streams content in Marathi.
In this case, if the company and the PE fund that has
invested in it exits to bigger platforms in the same domain
like Amazon Prime Video, Netflix, Hotstar among others,
who are looking to increase their presence in the Marathi
language market, we can term this as a case of exiting to
another company. Generally, larger companies go on to
acquire smaller ones in the same market and give an exit
 to the PE fund that has invested in them. For the acquirer,
the core idea behind such acquisitions is to strengthen its
presence in sub-markets, where the acquiree has a
strong presence.

. Selling its shares to the company’s founders: This is

essentially similar to a buyback that is exercised in public
markets. If the company’s founders have the resources
and are tremendously confident about the company’s
future, they can purchase the shares of the PE fund in the
company. This gives more operational autonomy to the
founders and they will also be gaining more, if the
company goes on the grow further. There is also a grim
case scenario that is forms a part of exits that are done in
this manner. Recollect from the previous modules that a
PE fund or an investor can have a put option on his
investment in order to safeguard it. In this case, if the
company does not do well, this option gets triggered and
the founders have to give an exit to the PE fund by
purchasing its shares.
. Selling its shares to another PE fund: This is one of the
most common ways of exiting a company that is
exercised. By now, we know that PE funds follow a
strategy in which they participate at certain stages of the
company’s life cycle. Generally, while setting up a PE
fund, the management team decides the broad stages in
which the PE fund will be investing. Once a company has
passed that stage, the PE fund may exit by selling its
shares to another fund, who participates in the next stage
of the company lifecycle.
For example, a PE fund could be following a strategy of
 investing in growth and once a company has passed that
stage, it could exit by selling its shares to another PE
fund, who follows the strategy of investing in stability.
. IPO: An IPO is a process in which a company lists its
shares on the stock exchange for the first time. Very few
PE funds have exited companies using this method. An
IPO process includes issuing of securities to the public
that are tradeable over the stock exchange. For an IPO
listing, a price band is shared by the company for the
initial purchase of its shares by the public. Post this, the
price of the shares is determined by demand and supply
forces of the market – which in turn look at the company’s
performance as a benchmark for price determination. If
the company and the PE fund believes that its
performance has reached a stage, where holding its
shares will be tremendously attractive to public; an IPO
may be launched – where they can invite public to
purchase their shares. For a PE fund, exiting through an
IPO can be one of the toughest ways of exiting a company
as the potential for capital appreciation is often
determined by public perception.

. Writing off investment: The last & most grim way of

exiting a company for a PE fund is by writing off its
investment. This is the last option for both the company
and the PE fund and happens when it is not able to find a
buyer for the company’s shares; even at a discounted
value to the fund’s original investment. This can happen
ifthe company has not performed according to the
estimate of the PE fund and hence interest in its shares
have dipped. This also incurs significant losses to the PE
fund.
MOd 4
Case Study: Exit Strategy
Case study of Byju’s acquisition of White Hat Jr. in India
Indian edtech powerhouse Byju’s purchased the coding-for-kids
edtech start-up White Hat Jr. for a mammoth 300 million dollars in
mid-2020. In this deal, existing White Hat Jr. investors like Omidyar
Networks, Owl Ventures & Nexus Ventures exited the company by
selling their shares to Byju’s.
Therefore, this can be classNameified as a case of PE funds exiting a
company by selling their shares to another company, in the same
domain.
Both Byju’s and White Hat Jr. operate in the education technology
space and broadly, both can be classNameified as school ed-tech
companies as their target audience falls are students, who are in
school. When a student is in school, often many of his or her
purchase decisions are made by parents. Therefore, both Byju’s and
White Hat Jr. were selling to parents of school going children. We can
say that their customers were parents, while their consumers were
students.
White Hat Jr. was present in the niche kids coding market. It is
interesting to note that Byju’s was trying to make an entry into this
market but had not been that successful. In the kids coding market in
India, White Hat Jr. is the market leader. While at the same time,
Byju’s has been the market leader in the broad school ed-tech space
in India.

BYJU’S ECOSYSTEMAND REASONS FOR ACQUSITION:

1. Geographic perspective to the company
The first is that two-thirds of White Hat Jr.’s students came from Tier
2 and Tier 3 cities in India. Coding is seen as a route to upward
economic mobility in these areas and hence White Hat Jr.’s programs
were tremendously attractive to its audience. Byju’s, most of their
students and revenue come from urban centers. This acquisition
therefore, can help them make inroads into Indian hinterlands.
The second is that White Hat Jr. has been much more successful in
the US market, where Byju’s is trying to break in for quite some time.
This acquisition can therefore, help Byju’s gain inroads into that
market as well.

2. BYJU’S product channels

Byju’s follows a one-to many product channels and its content is
delivered in the form of recordings. This has helped the company
become competitive through pricing and has helped them gain a
strong foothold in the broad school ed-tech space.
White Hat Jr. on the other hand delivers content in the form of live
one to one className. This has been a primary reason for the
company’s growth in the US market, where one to one tutoring is
extremely expensive. In comparison, White Hat Jr. provides a cheap
alternative.
3. Scalability of the company
Due to the Covid –19 pandemic and subsequent lockdown, White Hat
Jr. has had a lot of growth in their sales and revenue. White Hat Jr.
delivers one to one className. Most of their teachers are
contractors, who are not employed by the company and are paid
around Rs. 275 per hour. The student, who enrolls for its programs is
paying around Rs. 600 per hour. Not only does this provide a
handsome margin to the company but due to the contracting model in
teaching, the company has the ability to scale up and scale down as
per demand.
Whenever there is a downturn in demand, the company’s payments to
teachers will proportionately reduce and hence the business model
has the potential to withstand changes in demand, without losing
money. This is one of the most attractive aspects of the company.

Private Equity investors took home $130 million, a little above Rs.
1000 cr. from this deal. This was a 10 –15 times multiple on their
investments in under 18 months.
This deal showcased how the identification of the correct company is
the key to unlocking the power of PE investing.
Case Study: Shares Sold to the Founder
In September 2019, the Competition Commission of India approved a
buyback worth $1.5bn dollars conducted by Ritesh Agarwal of Oyo
Rooms.
The contours of the deal wereThat $1.5 billion would be spent in
acquiring shares that were earlier held by Private Equity Investors
and$500 million would be additional capital that would be infused in
the company for expansion.

Ritesh Agarwal raised debt worth $2bn from Japanese banks Nomura
and Mizuho in order to finance the buyback and expansion.
Exits
Existing Private Equity Investor Lightspeed sold a part of its stake and
got a massive 50 times exit on its initial investment. It continues to
hold 6.5% stake in OYO Rooms.
Sequoia, another PE fund sold a part of its stake and got an exit worth
18 times its initial investment. It continues to hold 5.5% stake in OYO
Rooms.

The purpose of the buyback conducted by Ritesh Agarwal can be the

fact that OYO has IPO aspirations and this deal has tremendously
boosted its valuation, before it can go in for a public offering to list
itself on the stock exchange.
A company’s latest funding round is the benchmark for its valuation
and through this deal, Ritesh Agarwal drove up OYO’s valuation to $10
billion.
An increase in the company’s performance can drive this up this
figure further as the company looks to list itself. This can be
tremendously lucrative for Agarwal, who has increased his stake from
9.9% to 30% in the company.

Case Study 3
In this case, a PE fund will first exit a company by selling its shares to
another PE fund. Subsequently, the second PE fund will exit the
company through an IPO.
In 2011, Canaan Indian Partners led a fundraising round of Rs. 229
crores in Happiest Minds Technologies.
Canaan had invested this amount along with Intel Corporation and
Happiest Minds Technologies’ Founder Ashok Soota.
During the time of the deal, the exact amount invested by each of
these parties was not disclosed and therefore the analysis of this
case study would be relying on post-investment information
combined with certain assumptions for further analysis.In 2015,
Canaan India Partners exited its India fund to JP Morgan Asset
Management for around Rs. 1,260 crores.
Through this deal, its stake in all companies that it had invested in,
changed hands. In total, it had invested in 15 companies including
H a p p i e s t M i n d s Te c h n o l o g i e s , N a a p t o l , C a rTr a d e .c o m ,
Matrimony.com among others.
The valuation of Rs. 1,260 crores were the combined valuation of
Canaan India’s stake in all 15 companies and not just one. Therefore,
it is difficult to ascertain the valuation increase arising from Happiest
Minds Technologies, alone due to two reasons:
● Canaan India exited its complete portfolio to JP Morgan and
not just one company.
● We are yet to know the exact shareholding of Canaan India in
Happiest Minds Technologies, as the fund raising round
conducted in 2011 had three participants.
This deal can be categorized as a case of a PE fund, Canaan India
exiting a company or in this case companies, by selling its shares to
another PE fund, JP Morgan Asset Management.
In mid-2020, Happiest Minds Technologies filed for an Initial Public
Offering, as it looked to list its shares on the stock exchange.The
company stated that JP Morgan Asset Management will completely
exit the company by selling its 27 million shares (19.43% stake) to the
public, as a part of the IPO.
Through this information, one would be able to ascertain the amount
of money that JP Morgan would be making in this deal; by selling its
shares as part of the IPO.
However, one would yet not be able to find out the compounded
annual growth rate seen in this investment for the asset management
company because the exact contribution of Canaan Partners in the
fundraising of Rs 229 Cr in 2011 is still unknown.
Whenever a company goes for an IPO, it has to release a prospectus
– which has information on the company’s performance, plans and
shareholding. Through this prospectus, we could find out the
company’s shareholding history of the last two years and it was seen
that Intel Corporation had a shareholding of around 14.31% in 2018.
To find out a minimum compounded annual growth rate of JP
Morgan’s investment, assume that only Canaan India and Intel Capital
participated in the 2011 fund raising round of the company, where the
former picked up a 19.43% stake and the latter picked up a 14.31%
stake.

Based on this assumption, it can be said that out of Rs. 229 crores
invested in 2011, 57.58% was funded by Canaan India Partners and
the rest was funded by Intel Corporation. This translated to a funding
of Rs. 130 crores by Canaan India Partners.

The compounded annual growth rate of the 19.43% stakeheld by

Canaan Partners from 2011 to 2015 and then by JP Morgan from 2015
to 2020 would be calculated over an 8.5 year holding period from
2011 to 2020.
As Happiest Minds’ Technologies IPO opened at a premium, which
means it opened on a positive note, JP Morgan exited its stake in the
company at Rs. 450 crores.
From this, it can be interpreted – that a 19.43% stake has at the
minimum grown from Rs. 130 croresin 2011 to Rs. 450 crores in 2020.
This translates to a compounded annual growth rate of a minimum of
15.79%. However, we do feel that the rate could be much higher than
that as well as we have assumed only Canaan India Partners & Intel
Corporation as participants in the 2011 fund raising round, while
calculating this. The company’s founder, Ashok Soota had also
participated in the 2011 fundraising round but due to lack of disclosed
information, his contribution has been omitted, while calculating the
compounded annual growth rate of the investment.

Therefore, on current data, one can conclude that a minimum of

15.79% compounded annual growth can be seen in the company over
an 8.5 year period, with a note that it can be much greater than that
as well.
Conclusion
. We have calculated the compounded annual growth rate
over a 8.5 year period and therefore, Canaan India and JP
Morgan’s investment has been taken together as part of
the study. As JP Morgan had acquired 15 portfolio
companies of Canaan India in 2015 and Happiest Minds
was one of them, we could not split the compounded
annual growth rate calculation of the company in two,
2011 to 2015 & 2015 to 2020, which would enable us to
look at the deal between JP Morgan and Canaan India on a
standalone basis and JP Morgan’s IPO exit on a
standalone basis.
. Reiterating, that a minimum of 15.79% compounded
annual growth rate can be seen, with potential for more.
Through this case study, we have addressed two types of PE exits.
The first being when a PE fund exits a company by selling its shares
to another company. And second, is when a PE fund exits a company
by selling its shares as part of an IPO.