ARE YOU READY FOR GROWTH CAPITAL?

Startup Summit FRO Pune, 2013 By Girish Narasimhan, CFA – India July 2013

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Contents

Introduction to CFA India 2

PE / VC Overview 3

PE / VC as a source of Finance 5

What PE / VC firms look for in Prospects 6

Valuation 7

Deal Making & Transaction Process 10

PE / VC Pros & Cons 11

Contact 12

MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

Introduction to CFA India

16 Global shareholders /

Partners

Ranked top 10 for transaction values

upto $ 50 Mn in U.S

WHAT WE DO

WHO WE ARE

Serving Middle Market Companies

since 1956

Over 5,000 transactions since

1956

Global reach , Local support

Over 40 offices across North

America, Canada, Europe & India.

WHY WE SUCCEED

Leverage the experience and professional collaborationof our many offices.

Extensive network, research and industry affiliations.

Commitment to the highest standards in the M&A industry.

Seller Representation

Buyer Representation

Financing

Valuations

Strategic Consulting

A professional approach tomaximizing shareholder value

Building & growing your Companythrough intelligent acquisitions

Structuring a financing arrangement– Private Equity & Structured debttailored to your needs

Valuing closely held companiesaccurately, honestly, & clearlyexplained

Planning for your growth orPlanning your exit strategy

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

PE / VC Overview

SeedGrowth Stage

Series AGrowth stage

Series B

Priv

ate

Equi

ty

Upto USD 1 Mn

USD 5-20 Mn USD 20+ MnUSD 100+

MnInvestment

size

Potential sources of

funds

Pre IPO/Buyout

Ang

el

Inve

stor

&

VC

Priv

ate

Equi

ty

Priv

ate

Equi

ty

Private Equity (PE) or Venture Capital (VC) is medium to long-term finance provided in return for an equitystake in potentially high growth companies. These investments are generally characterized as high-risk/high-return opportunities.

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

Overview (cont…) In 2012, aggregate PE investments in India declined 15%, at USD 8.9 Bn across 406 deals as compared to USD 10.4 Bn from 481 deals in

2011.

Sector-wise, IT and healthcare contributed the most to PE deal activity in 2012. IT and ITeS accounted for over one third of the total dealvalue and volume in 2012.

Despite a slump in the overall deal value, banking and financial services maintained their relative attraction to PE funds. However, energy,engineering and construction (E&C) and manufacturing witnessed the largest declines. The infrastructure sector also suffered in terms offresh investments, due to lack of a clear policy regime, further accentuated by policy inertia.

2012 saw 55 funds with a mandate to invest in India, but the total fund value allocated to India was only USD 3.5 Bn, down from USD 6.8Bn in 2011. All this has been driven by the fact that 2012 was an uncertain year in India both politically and economically.

2.5 7.1 14.0 10.4 4.0 8.3 10.4 8.9

186

358

489465

268

359

481

406

0

100

200

300

400

500

600

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2005 2006 2007 2008 2009 2010 2011 2012

PE / VC Investment in India

Deal Value (USD Bn) Deal Volume

Secondary Sale, 12%

Open Market, 38%

Buyback, 10%

IPO, 8%

Strategic Sale, 32%

Exit Volume by Type

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

PE / VC as a source of Finance

Unique product or concept

Large potential market

opportunity

Excellent development

capability

Need to move rapidly

Intensecompetition

likely

HiringRapid productdevelopment

Alliances

CommercialisationInternationalisationInfrastructure

Pre-requisites

Implications

PE funding supports

Forward looking management

Are you prepared to give up a part of your company’scapital to a private investor?

Are you prepared to take on the accountability of anentrepreneur?

Does your company have high growth prospects and areyou and your team ambitious to grow your companyrapidly?

Does your company have a product or service with acompetitive edge or USP?

Do you and/or your management team have relevantindustry sector experience? Do you have a clear teamleader and a team with complementary areas ofexpertise, such as management, marketing and finance?

Are you prepared to share certain strategic decisionswith shareholders outside your “inner circle” ?

Is there a realistic exit strategy for all shareholders?

If your answers are “yes”, PE / VC is worth considering

Questions to ask yourself

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

What PE / VC firm looks for in Prospects

Business Opportunity &

Growing Market Segment

Tam (Total Available Market), Sam (Served / Servicable Availabile Market), Som(Servicable Obtainable Market).

The value added by PE / VC in many cases is their ability to grozw the “pie” and inthat context the growth potential in the target market segment is a very critical factor.

Strong Management team

Quality (Commitment, Integrity, Passion & Drive) of the management team is by far themost important criterion for many investors.

Strong Corporate Governance & Contingency

Planning

Investors seek firms that have good decision structures, reporting systems, and strongdocumentation.

Understanding what could go wrong and putting contingency plans in place to dealwith specific situations.

Reputation Investors check the business credit rating, the management team’s reputation, and

enthusiasm and determination of the team before they invest.

Rate of Return Investors look for 3x to 7x return for the capital they are investing based on the nature

of funding i.e. VC / PE . Reduced uncertainties to the business execution plan couldprovide better visibiity to possible returns.

Exit Route Investors need to have the confidence that there is a clear, planned path to their exit.

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

Valuation

Value of the Company

No pure quantitative method

Based on hypothesis

Always slightly subjective

Subject of long negotiations

Valuation is not just a science, but an art

Recognized methods

Discounted Cash Flow (DCF)

Comparative Method

Opportunity Cost

Which to use when – Depends on

Type of business

Stage of business

Industry it operates in

Market it caters to

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

Valuation – DCF (cont...)

LIMITATIONS

•Conceptually sound and widely used method

•Values the cash generated and not just the earnings

•Not dependent on accounting policies

•Captures Capital Expenditure needs and Working Capital requirements

•Projections are highly subjective hence could be inaccurate

•Inapplicable where projections cannot be made for the horizon period

•Difficulties in measuring risks (calculation of β)

•Market premium is highly subjective

STRENGTHS

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

Valuation – Comparative Method

When used

Unlisted companies

Listed comparable are available

Generally used multiples

Industry

CementPharmaIT/SoftwareEngineeringFI’s

MultiplePrice per MT

P/SP/S or P/E

P/EPrice to BV

‘Relative Valuation’ of entity vis-à-vis ‘Fair Value’

Premiums and Discounts

Percentage stake – control, minority

Lack of marketability

Small size

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

Deal Making & Transaction Process

Business / Financial Model

Preliminary selection of VC’s/ PE’s

Finalization of VCs/ PE’s

Floatation of TeaserExecution of Agreements

Share Holders Agreement

Share Subscription Agreement

Preparation Approach Negotiation Agreements

Due Diligence

Final Negotiations

Providing Additional Data required

Clarification on the Business Model

Company Valuation

Non-binding Term Sheet

Key Employee Agreements

Other Agreements

Information Memorandum (IM)

Teaser

Execution

Execution of Confidentiality

Agreement

Sharing Business / Financial

Model and IM

Wire Transfer of Money

Monitoring

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MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

PE / VC Pros & Cons

Pros Cons (Based on how you look at them?)

• Long term committed capital, solidly underpinning your company’s growth.

• Investors do not get involved in the day-to-day running of your business.

• No need for collateral, i.e. personal assets and no need for periodic repayments and interests.

• Increased visibility with bankers, suppliers and clients.

• A partnership of sharing the risk and rewards.

• Adoption of high-performance management standards.

• Strategic advisory support along with financial guidance based on global market experiences.

• Assistance in hiring the right talent at mid, senior and advisory levels.

• Alliances due to the Investor’s network of relationships and portfolio investments

• Contractual commitments to share holder value creation, operations best practices & growth.

• Adhereance to Investor Rights (Liquidation Preference, Senior Rights, Anti-Dilution Protection, Investor Directors, Voting Rights, Information & Insception, Pre-Emption etc.)

• Most important of all Investor Rights, remains Exit Rights at end of term investment / period being 3rd / 5th / 7th year at negtiated IRR (Internal Rate of Return) being set as the base with no cap. (IPO / Strategic Sale, Promoter / Company buy back / Drag & Tag along.)

Pros

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CONTACT

MERGERS, ACQUISITIONS AND CAPITAL RESOURCES

Girish NarasimhanManaging Director & Principalgnarasimhan@cfaw.in+91.98230.14126

Corporate HQ:

24461 Ridge Route Drive, Suite A200Laguna Hills, CA 92653www.cfaw.com+1.949.305.6710

Mumbai:

Suite 2, E - 29, DhanrajMahal, ChatrapatiShivaji Marg, AppolloBunder, ColabaMumbai 400001www.cfaw.in+91.22.6650.1011

Pune:

Suite 5, Atharva, J.P. Nayak Marg, Kothrud, Pune 411038www.cfaw.in+91.20.2545.1811