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The Fourth Wheel 2017 Private Equity in the Corporate Landscape 2 The Fourth Wheel 2017 Table of contents 1. Introduction a. Foreword by IVCA b. Foreword by Grant Thornton in India c. Editorial 2. Overview of PE environment and economic outlook a. PE contribution to the Indian economy b. Funds raised by PE c. Economic Outlook 3. PE deal scenario a. Deal formations b. Existing investment c. Future investments 4. Sector snapshot 5. Industry insights/investor speaks 6. Grant Thornton in India’s views a. Tax b. Start up c. Fraud environment Introduction 4 The Fourth Wheel 2017 Message from IVCA Gopal Srinivasan Chairman The Indian Private Equity and Venture Capital Association Private equity, venture capital and angel capital are playing a The recommendations hace been very well received by vital role in India’s economic development. Grant Thornton stakeholders namely the Government, fund managers and is taking the lead in this area by publishing this important portfolio companies. report. The data and insights contained in this report will It is a testament to these efforts that more new fund help spur the greater flow of private equity and venture managers are entering India given the wide range of capital in India. investment opportunities. Softbank and Lonestar are good IVCA would like to stress a few points. examples. New domestic funds are being formed such as the successful fund raising by first time manager, Stellaris Regulatory authorities like SEBI have helped lay the Capital. The Government’s Rs. 10,000 crore fund-of-funds foundations of “Alternative Investment Funds” in is a highly commendable initiative. India. SEBI’s leadership in appointing and convening the Alternative Investment Policy Advisory Committee Finally, I would like to thank everyone at Grant Thornton (AIPAC) is a major catalyst. and IVCA who worked tirelessly to produce and launch this invaluable report. AIPAC has been at the forefront of making sound policy recommendations for the development of AIFs. The Fourth Wheel 2017 5 Foreword by Grant Thornton Harish HV Partner Grant Thornton India LLP We are pleased to present the next edition of the Fourth in 2016 by raising nearly US$ 4 bn across 25 issues. The Wheel which we launched in 2011 that discusses the recent coming year is also expected to show robust growth in developments and trends in the private equity (PE) deal primary markets, with SEBI approving 13 more IPOs, landscape. Over the years, PE investors have nourished which are slated to hit the markets in 2017. the breed of entrepreneurs and helped businesses generate 2017 could be the year of reckoning for the country where significant value. As a result, the Fourth Wheel (Private implementation of structural policies and reforms such as Equity in the Indian corporate landscape) has aligned the GST and the recently announced measures in the Union with the three other Wheels (PSU, MNC and the Indian Budget 2017 by way of massive push to the infrastructure Private Sector) and has become an integral part of corporate sector, plans to integrate the transport architecture, renewed India and I would argue its biggest wealth creator and focus on affordable housing and a boost for ease of doing has provided the capital needed for India Inc.’s new business will drive growth. Also, expected improvements in entrepreneurs to grow and scale up. the banking sector, pick up in rural demand, post the effect According to the data available with Grant Thornton, of demonetisation, a robust primary market and improving Private Equity and Venture Capital investors invested US$ capacity utilisations across industries are likely to drive 14 bn in 971 deals in 2016. The sectors in focus were startup, domestic economic activity. Amidst global uncertainties telecom, banking and financial services, real estate, IT/ITeS arising due to Brexit, protectionist policies proposed by the and manufacturing. These sectors contributed around 78 US and a slowing Chinese economy, India continues to be percent of the overall deal value in 2016. The transaction the bright spot. India is likely to drive resilient growth in values and volume were lower than in 2015, wherein US$ deal activity in 2017. 16 bn was invested in 1045 deals. This was partly due to The Fourth Wheel 2017, now in its fifth edition is an effort the absence of some of the mega deals, particularly in by Grant Thornton in India in association with IVCA to e-commerce in 2015, which did not recur in 2016. highlight the PE activity in India. The study also provides PE investors continued to show faith in startups where an insight into the vibrant and dynamic entrepreneurship volumes remained more or less at par with the last year. ecosystem in India. The data presented in the study is based However, increasing caution among PE investors prevented on Grant Thornton’s Dealtracker Report and views from them from betting big this year. Unlike 2015 which across leading PE/VC fund houses. This makes the report witnessed more than 40 big-ticket investments (deals abundantly rich with datasets and analysis. valuing US$ 100 mn or more), 2016 saw only 28 such deals. I am hopeful that we see robust deal activity resulting in Investment values in startups declined by more than 50 a healthier investment climate in coming months. I am percent this year, signifying rationalisation of investments thankful to all the people involved in preparing the report and startup valuations. However, the Government’s push on and trust you will find the report insightful. We thank you digitisation and initiatives under the Startup India plan are all for your continued support and look forward to your likely to lead to a rebound in this segment. valuable inputs as we launch this year’s publication. 2016 also witnessed significant activity in exits especially through IPOs, which augurs well for the investor community. The IPO market showed phenomenal potential 6 The Fourth Wheel 2017 Editorial Prashant Mehra Partner Grant Thornton India LLP We welcome you to this year’s edition of The Fourth Wheel! key policy issues and reforms such as GST, insolvency and bankruptcy code, rationalisation of tax regime, unblocking 2016 reported a 43.5 percent y-o-y jump in transactions stalled projects, etc. should help improve the ‘ease of doing amounting to US$ 62.5 bn. The jump was primarily led by business’ that may further accelerate the transaction activity the resurgence of big-ticket M&A deals resulting in 2016 in India. With macro-economic scenario continuing to be clocking the highest M&A deal value in the last five years. positive, it is expected that PE investments will shift focus In contrast, PE activity declined this year and registered its to the consumer and industrial sector to fund both organic first decline in the last four years over increasing caution in growth and consolidation in the domestic industry. investor sentiments. PE transaction values reduced by 12 The year 2016 witnessed a number of key reforms such as percent primarily due to the absence of large ticket deals the roadmap to implementation of GST, demonetisation, resulting in a marginal decline in the average deal size. income hike due to the seventh pay commission and one Moreover, large part of the activity was concentrated on rank one pension (OROP). With more economic reforms on early stage companies where average deal sizes are relatively the anvil per the announcements in the Union Budget 2017, small. 2016 saw an uptick in follow-on funding rounds as we can expect 2017 to be an action-packed year. companies focused on expansion and increasing scalability while the year fell short of recording growth capital funding. Having said that, challenges facing the banking sector, subdued private investments, rising crude oil prices and In terms of sector spread, startups continued to dominate the uncertainty in the global markets are likely to be both in terms of deal values and deal volumes contributing key concerns facing India this year. However, growth around US$ 2.5 bn and 70 percent to transaction volumes. in domestic consumption (after the likely set-back post Other major deal value contributors were core sectors demonetisation), a strong IPO market (with nearly US$ such as telecom, BFSI and real estate capturing around 40 4 bn raised this year and over a dozen IPOs expected in percent of values. The startup ecosystem in India witnessed 2017), infrastructure spending, banking sector reforms rationalisation with funding getting tougher and investor’s and a supportive policy environment are expected to keep focus shifting to business fundamentals and scalability with India’s growth resilient in 2017. Moreover, the recent budget realistic and justified valuations. Investors’ ability to mentor announcements around conversion of preference shares and nurture startups will be the key to finding the right (compulsory or optionally) to equity shares, proposal to early-stage investment opportunities. abolish the FIPB, partial roll-back of long term capital gains, Indian assets are expected to remain in focus as inbound proposal to restrict the offset of foreign tax credits against and domestic M&A accelerate on the back of a pickup MAT and AMT and concessional withholding tax benefit in alternate buy out financing by PEs i.e. PE financed of 5 percent on ECB and Masala Bonds, should further acquisitions. This may also result in the long-awaited big encourage greater PE activity. ticket transactions in the PE space. Government’s actions on PE environment 8 The Fourth Wheel 2017 2(a) PE Contribution to the Indian economy Trend in PE Investments to Gross Domestic Product (GDP) and Foreign Direct Investments (FDI) 60% 2.0% 55% 1.5% 40% 1.5% 1.0% PE/GDP PE/FDI 20% 17% 0.3% 0.5% 0.6% 9% 0% 0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 PE/FDI PE/GDP Source: International Monetary Fund, Foreign Investment Promotion Board The Indian economy has been on an uptrend since the global lower.

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