Private Equity in India

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Private Equity Scenario in India :

Private Equity Scenario in India Vaibhav Gupta

Project Flow:

Project Flow Identified PE funds in the range of 0-200 USD Mn Made a portfolio of all the investee companies of each fund for the past 5 years Classified the investments, industry and sector-wise Studied the investment trends Studied and analyzed the education industry in detail

Agenda:

Agenda

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Trends in Indian PE industry “Stupendous growth from $20 Mn in 1996 to more than $5 Bn in 2010”

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Trend of PE backed IPO’s Trend in PE investments Trend of average PE deal size of announced PE deals (US $m ) Composition of total PE deal volume by PE deal size

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Composition of aggregate PE deal value by sector Composition of total PE deal volume by sector

Industry-wise Classification (Based on the study of mid-size funds in the range of 0-200 Mn USD) :

Industry-wise Classification (Based on the study of mid-size funds in the range of 0-200 Mn USD)

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*All amounts in USD Mn IT & ITES

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*All amounts in USD Mn

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*All amounts in USD Mn BFSI

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*All amounts in USD Mn Retail

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*All amounts in USD Mn Engineering & Construction

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Shipping & Logistics *All amounts in USD Mn

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*All amounts in USD Mn Energy

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Healthcare & Life Sciences *All amounts in USD Mn

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Education *All amounts in USD Mn

Industry & Sector Analysis:

Industry & Sector Analysis Education “Education is the second-largest spend for an Indian family after food and grocery compared to the seventh-largest in the US, below DVDs and music. The potential is large.”

There is demand…:

There is demand… DEMAND is definitely there… 572m population falls in age group 0-24 years – it’s double the US population 230m students enrolled every year – 219m for KG-12, 11m for higher education Allocation on education in XIth 5-year plan = 6x the Xth plan 246,000 candidates applied for CAT in 2009 = 3x that a decade ago

…and there is value:

…and there is value Price of education has increased by 3-6x over the last decade

Are we ready to explore it!:

Perpetual Demand Inelastic Pricing Perceived Value Inefficient Supply IES – a US$ 80bn Space Are we ready to explore it!

Private IES alone a $85bn opportunity by 2012E:

Private IES alone a $85bn opportunity by 2012E ( $ m ) Revenues (2009) Revenues (2012E) CAGR (%) Formal IES 45,200 65,250 13 K12 22,800 33,779 14 Higher Education* 22,400 31,470 12 Non-formal IES 11,930 19,608 18 Preschool 408 1,026 36 Multimedia -private sch. 112 459 60 ICT in govt. schools 153 752 70 Coaching classes 7,360 11,194 15 Vocational training 1,875 3,662 25 Books 1,925 2,516 10 Total IES 57,125 84,858 14

Why education sector? :

Why education sector? Demand-supply mismatch for the quality education Government proposing PPP to close a Rs 220,000 crore resource gap in the education sector Lack of quality primary and secondary school education in India Urbanization of the Indian population For schools, no need for financing their working capital Not heavily effected in times of crisis Cash flows are relatively assured Majority young population in India Foreign universities coming in and setting up campuses, provided the ‘Foreign Educational Institutions Bill’ is passed in the parliament Growth in double income nuclear families Greater teacher-pupil ratio Increased competition at graduate and post-graduate level

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Indian education industry overview Demographics Data Demand Supply scenario Demand side Supply side Source: Industry Reports Currently, India has the largest population globally in the K-12 age group of ~ 361 million students Public expenditure on Education (% of GDP) Age (years) Population (million) Pre-School: 2-4 Yrs K12: 5-19 Yrs Higher Education: >19 Yrs Drop out Rates Grade 1-5: 29% Grade 6-8: 50% Grade 9-12: 62% 219 mn children actually go to school 361 mn children should be in school

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With 572mn within the 0-24 years age group, India has potentially the largest market for education in the world Indians spend in excess of USD 40 billion per year on education of which 26% or USD 11.5 billion is private and offers investment opportunity 18,000 HEIs (largest globally) with total number of students enrolled ~11mn Education sector will see a 14 percent CAGR in private spending taking the education pie to around $85billion by 2012

Major Players :

Major Players

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Formal Education Kindergarten to 12 (K-12) Segment Formal Education Kindergarten to 12 (K-12) Segment

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Segment Views Healthy EBITDA margins, an annuity business Negative working capital cycle makes the K-12 segment a value creating proposition Potentially an investment for Private Equity players with a large ticket size Huge potential for M&A activity to buy-out trusts with one or two schools Key Concerns Regulatory overhang - only a non-profit Trust/ Society can run a school Highly capital intensive Rising land prices can further increase capital investment and lower RoCE Long gestation period A snapshot

Key Players:

Key Players

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Higher Education Institutes (HEI) Segment

A snapshot:

A snapshot

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Segment Views Investments largely into Private and Deemed universities High growth segment Healthy EBITDA margins, an annuity business Potentially an investment for Private Equity players with large ticket size Scalability and Value Creation can be created by those players that manage to establish creativity, capital, content and credibility Key Concerns Regulatory overhang - UGC (University Grants Commission) mandates all HEIs to run in the form of a non-profit trust An overregulated space Large political involvement Very capital intensive Time to build brand equity

Key Players:

Key Players

Formal IES – pain points of investing:

Formal IES – pain points of investing Overregulated & under-governed Trust Issues Political quagmire Land Blues FDI clarity Multiple level structures (no central body); PPPs do not offer returns or autonomy! Not-for-profit structure; all surpluses to be ploughed back High political lineage (75% of HEIs owned by politicians); little ‘ will’ to change the existing structure Hoarding of land reserved for educational institutes for resale; high land prices make economics unviable 100% FDI allowed; but no incentives or regulations in place

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Non-formal Education

Key Highlights:

Key Highlights Non-formal IES: The non-formal education segments flanking the formal ones include preschools (1.5-3 years), coaching classes, multimedia/ IT to schools and colleges (catering to both private and public institutions), vocational training and the books market. The segments are free of any regulations (i.e. no governing/ regulatory bodies for this segment). While the non-regulated $10bn non-formal market is expected to witness 18% CAGR till 2012, the market broadly consists of segments that are inherently difficult to scale. In fact, scalability can be achieved only in less than 5% of the market while three of the largest segments (95% of the opportunity – coaching class; ~64%, vocational training; 15% and books; 17%) offer limited value creation potential. India’s non-formal education market is currently dominated by coaching class business (accounting for 64% of the total). However, the business ($6.4bn; 15% CAGR till 2012E) is inherently regional in nature and person-centric (a people driven model), which implies high dependence on a ‘brand-teacher’, or a low degree of stability and scalability. It is believed ~80% of the coaching class market arises from subject/ concept-based school and tertiary level coaching, which has to be localized to suit the dynamic needs of various institutions and has high dependence on ‘brand teachers’.

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Pre-School Segment

A Snapshot:

A Snapshot Segment Views Unregulated and Underpenetrated market Franchise model seen as the preferred method to scalability – leading to low upfront investment requirement during scale-up Key Concerns Limited catchment area (2 Km radius) for a preschool leads to limited scalability per branch Break even can be achieved only at 70% occupancy Under high rents the model becomes economically unviable India’s pre-school market penetration is just 1.1% while France & Scotland has 100% and U.S has 14.3%

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Vocational Training (VT) Segment

A Snapshot:

A Snapshot Segment Views Non-regulated space Players offering skills that have flexibility are equipped to handle changing trends/ preferences Supplements the inefficiency of the public education system Key Concerns Slowdown in services industry directly impacts vocational training institutes Corporate training revenues have low margins and are lumpy in nature Lack of financial institution support for vocational training Corporate spends on training are discretionary and based on competitive pricing

Key Players:

Key Players

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Coaching Classes (CC) Segment

A Snapshot:

A Snapshot Segment Views Non-regulated space Supplements the inefficiency of the public education system Large scope for M&A to enter new geographical markets High scalability in the test prep segment Key Concerns Geographical scalability a issue for coaching classes Capital intensive

Key Players:

Key Players

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E-Learning Segment

A Snapshot:

A Snapshot Segment Views Not capital intensive Huge growth prospects Highly scalable due to standardized content Higher margins and ROCEs Unregulated market Key Concerns Online universities face recognition issues Dependent on the broadband penetration in India Segment Views Unregulated space High value creation proposition as a technology-based product and an underpenetrated market ensure scalability High return on capital employed and an annuity revenue stream Key Concerns Large upfront investment Low margins owing to L1 bidding process Long receivables cycle Duplication of content Excessive competition

Key Players:

Key Players

Distance learning:

Distance learning Positives It can fill the gap that arise because of low GER It doesn’t impose a limit on the number of students to be admitted Large untapped potential as out of the ~10% population registered in HEI’s in India, a miniscule ~7% go in for distance education Low entry barriers for the suppliers in this segment Deterrents Low brand perception mars the potential to scale Lack of quality and concentration Way forward Quality to be controlled by improving the input and hence the output Adopting superior pedagogic measures Innovation Target the BPO, KPO sector where great opportunity is seen Opportunity

Key Drivers for IPO in education sector:

Key Drivers for IPO in education sector Revenues: Revenues of INR 50+ crores considered large in the education space compared to INR 400+ crores for midcap companies in other sectors. Margins: Education companies that have hit the IPO market have EBITDA margins in excess of 20% and double digit PAT margins Valuations are typically based on P/E multiples. Appetite from Investors: There is a pent up demand from Institutional Investors across all classes in an IPO in the education industry. The attractiveness of this sector is attributed to the fact that education in India is a sunrise industry that is capable of showing rapid scale up due to the huge domestic demand. Follow-up Issues: Historically public educational companies have raised capital through QIP, FCCBs, etc. Immediately post going public. Listing opens up various avenues for a company to raise further capital . But.... Listing of companies that run educational institutions, on the stock exchange is absolutely undesirable as education shouldn’t really be subject to risk factors. ( Kapil Sibal )

Listings in the education sector:

Listings in the education sector

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Market Cap has increased by 2,603% Post Listing

Challenges for PE in education sector in India:

Challenges for PE in education sector in India Regulation Corruption Valuations Scalability of non-formal segment (Less than 5% of $10 bn non-formal IES offers scalability)

Opportunities:

Opportunities Innovative structures approach Ways for a PE firm to invest outside the scope of the regulation?? The ISB approach – using the strength of brand and quality Tying up with a foreign institute Going the non-formal way Rolling it up

PPP – can education be the next ‘power’ play?:

PPP – can education be the next ‘power’ play? ICT and labs in schools Model Schools Vocational Training Allocated Rs130bn under SSA. Plans to implement ICT in 90,000 schools in the current 5-year plan Allocated Rs11.43bn under RMSA to create science and math labs in government schools Government-PPP initiatives – extending the spectrum from $100m to $1bn… 2500 schools out of the 6,000 model schools are declared under PPP (a Rs36bn opportunity; private investment of ~Rs100bn is expected to flow in) National Skill Development Corporation allocated Rs10bn in 2009-10 interim budget; plans to raise Rs150bn going forward

Key Notes:

Key Notes The government is planning to allocate $100 bn for the education sector in the 12 th year plan (2012-2017) This sector holds a potential to attract a whopping $100 billion investment over the next five years driven by demand for skilled professionals and need for infrastructure development (Economic Times) $13bn spent annually by Indians on higher education in the overseas markets asserts the pay power of the education-hungry Indians. Indians spend in excess of USD 40 billion per year on education of which 26% or USD 11.5 billion is private and offers investment opportunity (educomp.com) With an inefficient public education system, a growing young population, a bourgeoning middle class (with the intent and ability to spend) and price discovery, it is expected: 14% CAGR in private spends on education ($80bn by 2012) Non-formal segments are fast-growing areas of the education landscape hence it is expected: 18% CAGR for them over the next few years against 13% CAGR for the formal education space The IT training market is  one  of  the  biggest  sections  in  the  vocational  course segment and is estimated by industry participants and experts to be about US$500 million . This market, being outside  the purview of Government regulation, is  attractive for entrepreneurial participation

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The sector still lacks good-quality infrastructure in the country and investors have the opportunity to build it .Hence the sector offers opportunities to increase capital - ( Economic Times) The government of India announced a plan to establish 14 innovation universities in collaboration with leading universities of the world to draw on their talent and expertise There is a high ROCE and EBITDA margins of up to 50%. The client is locked in for a long period, attrition levels are low, and pricing is largely in the management’s control - (Financial Express) India’s education and training sector provides private institutions with a potential CAGR of  16%  over  a  five  year  period. The government currently spends 3.7% of the GDP which amounts to around $30 billion . This allocation is up 6X in the 11thplan period (2007-2012). This is subsisted by around $50 billion of private spend which is expected to increase to $80 billion by 2012 growing at a CAGR of 14%. In spite of the higher budget allocation the 11 th planning commission has identified a resource gap of Rs.2.2 Trillion (~ $25 billion) which needs to be filled by private funding Mobilization of funds for higher education is a challenge for the government, the gap could possibly be met by tailor-made public-private partnership mode. (Financial Express)

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Thanks & Over to you…

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