Shikha 1

India Venture Capital and
Private Equity Report

2009
On top of the World;

Still miles to soar
An analysis of Venture Capital and Private Equity
investments and exits during 2004 – 08
Thillai Rajan A.
Ashish Deshmukh
India Venture Capital and
Private Equity Report
2009
On top of the World; Still miles to soar
An analysis of Venture Capital and

Private Equity investments and exits during 2004 – 08
Thillai Rajan A.
Ashish Deshmukh
Department of Management Studies

Indian Institute of Technology Madras
Chennai 600 036. India.
Foreword
It has always been our endeavour at IVCA to provide timely insight for the Indian Private Equity and
Venture Capital industry. Thus, it is with great pleasure, we collaborated with IIT Madras, and present
the IVCA - IIT Madras Indian Venture Capital an Private Equity Report 2009 – ‘On top of the World; Still
miles to soar’.
We believe the report is a must-have for all those prospecting in India, putting the current challenges
and opportunities presented to the industry in perspective, along with a detailed analysis of investment
trends according to stage, sector and players.
This is just one of the many measures IVCA is taking to promote the industry within India and
throughout the world and encourage investment.
We trust that you find this report useful.
Mahendra Swarup
President – IVCA
India Venture Capital and Private Equity Report 2009
Preface
We, along with the Indian Private Equity and Venture Capital Association (IVCA), are happy to present the maiden
annual report on the Indian Venture Capital and Private Equity Industry.
Private Equity (PE) and Venture Capital (VC) funding have played a pivotal role in technology-driven innovation
worldwide. They also play a vital role in the growth of start-ups as well as small and medium enterprises (SMEs).
The inherent risks that exist in start-ups and SMEs make it difficult for the entrepreneurs to raise the necessary
capital from conventional sources like banks and primary capital markets. PE and VC funds typically fill this void left
by traditional financial institutions in financing these high risks, high potential ventures. In recent years, PE funds
have also emerged as an essential source of funding for financing expansion of well-established firms.
With Indian economy growing at an average annual rate of more than 8 percent over the last five years and other
macroeconomic factors and policies favorably complementing the growth, India has emerged as an attractive
investment destination. Global investors looking for investment opportunities in emerging markets in order to tap
the growth potential as well as to diversify and mitigate their risk are getting increasingly attracted to Indian
markets. Consequently India’s share in global pool of private equity investments is steadily rising.
According to PriceWaterhouse Coopers (PWC) Global Private Equity Report 2008, India has taken a few giant
strides to move from 14th rank with a share of only 1.5% in 2004 to 3rd rank with a share of 7% in total PE-VC
investments worldwide in 2007. Thus India was the recipient of highest PE-VC investments in Asia-Pacific region
and only behind US and UK worldwide in 2007. In spite of such frenzied action in PE-VC investment arena in India,
there are very few rigorous longitudinal studies on the characteristics of PE-VC investments in India.
This study is an attempt to explore the trends and developments in PE-VC financing in India through an in-depth
analysis of these investments over the last 5 years (2004-2008). This report provides an exhaustive account of PE-
VC investments, the lifecycle of the investments and subsequent exits from different perspectives. We feel that the
contents of this report will be informative and resourceful for various stakeholders in the PE-VC industry. The
report has several interesting insights which will help the readers in enriching their understanding of PE-VC
financing in India.
We gratefully acknowledge the support received from IIT Madras, Indian Private Equity and Venture Capital
Association (IVCA) and the Indian Council for Social Sciences Research (ICSSR) for this study and the preparation of
this report.
Thillai Rajan A.
Ashish Deshmukh
© Indian Institute of Technology Madras (i)

Table of Contents
Preface (i)
Table o f Contents (ii)
List of Table s (iv)
List of Exhib its (v)
1.0 Execu tive Summary 1

1.1 Private Equity and Vent ure Capital F ina ncing in India 1
1.2 Private Equity F ina ncing: Investments 1
1.3 Private Equity F ina ncing: Lifecycle and Ex its 3
1.4 Private Equity F ina ncing: A Stat istical Ana lysis 3
1.5 Summary 4
2.0 Private Equity Financ ing in India: Introdu ction 5

2.1 Brief Hist ory and Evolution 5
2.2 Policy Out look a nd Regulatory F ramework 5
2.3 Recent Developments 6
2.4 Struct ure of t he Re port 7
3.0 Objective and Analysis Methodology 8

3.1 Object ive 8
3.2 Sources of Data 8
3.3 Analysis of P E-VC Investments 8
3.4 Analysis of P E-VC Investment in F irm Life cycle a nd Ex its 9
4.0 Private Equity Inv estmen ts 11

4.1 Overview of Private Equity Investments 11
4.2 Compa rison w ith Leading Private Equity Markets 21
4.3 Investment Trends: P rivate Equity vs. Capital Markets 25
5.0 Private Equity Financ ing: A Complete Lif ecycle 27

5.1 Round Wise Investments of PE-VC Firms 27
5.2 Numbe r of Rounds of PE Funding 27
5.3 Time Inte rval between Successive Rounds of PE Funding 28
5.4 No. of Deals at D iffe re nt Time Interva ls since Incorporation 28
© Indian Institute of Technology Madras (ii)

6.0 Exits in PE-VC Financ ing 30

6.1 Classificat ion of PE-VC Exits 30
6.2 Compa rison of Ex it Met hods 30
6.3 No. of dea ls for D iffere nt Durat ion of I nvestments 33
6.4 Performa nce of Companies Rece iving PE-VC Funding 34
7.0 Private Equity Financ ing: A Sta tis tica l An alysis 36

7.1 Mult iple Reg ression 36
7.2 Discrim ina nt Analysis 38
8.0 Conclus ion 40

8.1 Brief Summa ry of Out comes 40
8.2 Policy Im plicat ions 40
Important Ref erences 42
© Indian Institute of Technology Madras (iii)

List of Tables
Table Page
Description
No. No.
1 Industry Classification Details 9
2 Financing Stage Classification Details 9
3 Industry wise Split up for Investment activities for each year (2004-2008) 13
4 Financing Stage wise Split up for Investment activities for each year (2004-2008) 13
Industry wise split up of amount invested at different financing stages for the entire
5-A 18
period (2004-2008)
Industry wise split up of number of deals at different financing stages for the entire
5-B 19
period (2004-2008)
6 Region wise Distribution of PE investments in India 20
7 Industry wise % Investment across leading PE markets 21
8 Financing Stage wise % investment in 2007 across different markets 21
9 Industry wise Y-o-Y Growth in PE investments 22
10 Private Equity vs. Capital Market Investments 24
11 Industry wise Private Equity vs. Capital Market Investments in India 25
12 Industry wise number of firms receiving specific number of rounds of PE funding 28
13 Industry wise Average Time Interval between successive rounds of PE funding 29

Number of deals at various financing stages in different time intervals since
14 29
incorporation
15 Classification of companies with PE funding on Investment and exit basis for 2004-08 30
16 Average number of rounds before exit across the industries 31
17 Average number of rounds before exit across the years 33
18 Number of deals at various financing stages for different duration of investments 34
19 Industry wise number of companies with no exits 34
20 Multiple Regression using dummy variables 37
21 Summary of results of Bivariate and Multiple Regression 38
22 Discriminant Analysis - Exit Method Classification Results 39
© Indian Institute of Technology Madras (iv)

List of Exhibits
Exhibit
Description Page No.
No.
1 Industry wise total PE Investment for 2004-2008 11
2 Comparison of Investment Pie in 2004 and 2008 12
3 Industry wise total number of deals for 2004-2008 12
4 Year wise amount Invested vs. No of deals 14
5 Industry wise average amount per deal for 2004-2008 14
6 Trends in Early and Late Stage investments over the years 15
7 Financing stage wise total PE Investment for 2004-2008 16
8 Financing stage wise total number of deals for 2004-2008 16
9 Comparison of CAGR (over 2004-2008) for Industry wise PE Investments 23
10 Size of Investment vs. Number of Deals 23
11 Round wise PE-VC Investments over 2004-2008 27
12 Ratio of IPO Exits to M&A Exits across the industries 31
13 Average Number of Rounds before Exit across the industries 32
14 Ratio of IPO Exits to M&A Exits over the years 32
15 Average number of rounds before Exit over the years 33
© Indian Institute of Technology Madras (v)

1.0 Executive Summary

The significance of Private Equity (PE) – Venture Capital (VC) investments in supporting business creation,
innovation and growth cannot be overemphasized. PE has already established itself as a separate asset class
not only in developed economies but also in emerging economies as highlighted in some of the recent texts
*
and publications . There are three principle components of the PE-VC industry as illustrated in schematic
diagram below -
Thus there are two key relationships – first, between the investors and the AMC (PE-VC Investment Company)
and second, between the AMC and the entrepreneurs. The major focus in this report is on the second
relationship, i.e., analyzing the investments and exits of PE-VC funds.
1.1 P rivate Equ ity and Ven ture C apital Financing in Ind ia
Though introduced way back in 1960s, the concept of PE financing really took off in Indian markets only after
economic reforms in 1991. Prior to that, most of the initiatives in PE-VC funding were from public sector
financial institutions. But such initiatives were few and far between and overall the period was characterized
by very low levels of PE-VC investment activity. Contrary to that, post 1991 Indian PE-VC industry has
witnessed a strong growth in terms of various growth measures and is poised to become one of the leading PE
investment destinations worldwide for years to come.
Moving to recent times, PE-VC investments in India has grown at a breathtaking speed in last five years (2004-
2008). This can be attributed to the gradual easing of regulatory barriers post economic reforms which is
supported by consistently impressive GDP growth, relative political stability, and favorable macroeconomic
indicators over the last five years. Another factor which played a major role in the surge of PE-VC investments
is the availability of excess liquidity in global markets during the economic boom and low-cost attractiveness of
emerging markets like India.
1.2 P rivate Equ ity Financin g: Investment s

PE-VC investments in India has witnessed a phenomenal growth both in terms of amount invested (from US$
1.8 billion in 2004 to US$ 22 billion in 2007 before tapering off to US$ 8.1 billion in 2008) as well as the number
of deals (from 80 in 2004 to 481 in 2007 and then slowing down to 297 in 2008). Some of the key findings from
our analysis of PE-VC investments are –
• The PE-VC investment activity in India is becoming more matured and broad based. It has undergone
a complete overhaul during the 5 year period ending 2008. While 4 out of 10 industry classes
accounted for more than 80% PE investments in 2004; investments are much more evenly distributed
across the 10 industry classes in 2008.
*
Exposed to the J-Curve: Understanding and Managing Private Equity Fund Investments, by Dr Tom Weidig,
and Ulrich Grabenwarter, Euromoney Books.
Inside Private Equity: The Professional Investor's Handbook (Wiley Finance) by James M. Kocis, James C.
Bachman, IV, Austin M. Long, III, Craig J. Nickels.
© Indian Institute of Technology Madras

• There are huge PE investments in technology-led, capital intensive sectors like Telecom, Power and
Infrastructure in addition to those sectors that were traditionally preferred by PE-VC investors like IT
& ITES, Healthcare, etc.
• The rate of growth in number of deals is consistently lower than the growth rate of amount invested.
• The overall inclination in PE-VC investment is towards having lesser number of high quality deals of
larger size and hence average amount per deal is rising steadily. Quite a few investments, mostly at
late stage in industries like Telecom and Financial services have recently witnessed deal sizes
unprecedented in Indian PE arena.
• Late stage and PIPE (Private Investment in Public Equity) deals are consistently bagging major share of
PE-VC investments over the five year period with late stage deals being the least affected even in the
period of economic downturn while early stage deals have suffered the most.
• Huge proportions of investments in late and PIPE stages coupled with very low share of early stage
investments highlights increasingly risk-averse nature of PE-VC investors as well as the pressure on
the fund managers to quickly exit from their investments.
• Buyout investments are comparatively very few in India and constitute only 3% of total number of PE
investment deals. The trend is also consistent across the industry classes except for IT & ITES.
• Majority of early stage investments are contributed by domestic investors while a large share of PIPE
and buyout investments is funded by foreign investors probably suggesting the tendency by foreign
investors to invest in established businesses.
The salient findings from comparison of the trends in Indian markets vis-à-vis leading PE markets like US and
UK are as follows -
• PE-VC investments in India are much more uniformly distributed across different industries as
compared to developed markets like US and UK where only three out of ten industry classes account
for more than 70% investments.
• As far as Y-o-Y growth in PE investments is concerned, India has experienced extremely high growth
rates of 379% and 118% in 2006 & 2007 respectively followed by steep decline of 63% in 2008. The
corresponding rise and fall in investments is relatively moderate for US.
• Indian PE-VC investments with a CAGR of 47% over 2004-2008 (i.e. even after considering the severe
negative growth in 2008) is one of the highest in world as against a CAGR of 6% for US over the same
period.
• Nearly 70% of the PE-VC investment deals in India are valued below US$ 20 Million which is quite
similar to PE investments in UK where 77% of deals are below £10 Million. Also only 5% deals in India
are above US$ 100 Million in size.
• While PE investments in India as a percentage of GDP has grown from a mere 0.4% of GDP in 2004 to
more than 1.5% of GDP in 2008, PE investments in US as a percentage of GDP is relatively constant
and hovers around 0.7-0.8 % of GDP.
Our study indicates that there is a strong correlation between investments in PE-VC markets and Capital
markets. This trend is observed not only in developed markets like the US and UK but also in emerging markets
like India and Brazil. It was also observed that even the sector wise trends PE investments in India are
positively correlated with the movements of respective sectoral indices for most of the sectors.

1.3 P rivate Equ ity Financin g: Lifecycle and Exits

A complete lifecycle comprising all the investment rounds as well as exit was mapped for companies for which
both investment and exit details are available. This provided interesting insights on average number of rounds
of financing, average duration of investment, time period between successive rounds and share of new
investments vis-à-vis follow-up investments. The analysis also provided insights about the type of preferred
exit for different circumstances. Main findings from the analysis of investment lifecycle and exits (throughout
this report ‘exits’ are meant to denote the occurrence of an exit event such as public offering or a trade sale)
are:
• Though PE-VC investments are considered as medium to long term investments, the average duration
of PE-VC investments in India is remarkably low i.e. 17 months. Following this, average time interval
between successive rounds of PE-VC funding is also very low and typically varies between 10-15
months.
• 82% of total amount invested by PE-VC investors over the last five years in India are new or fresh
investments thereby signifying very low proportion of follow-up investments which indicates the
inclination of PE-VC investors to continually look for newer high growth avenues and modify the
investment choices accordingly. It may also suggest that many new ventures may not be running
operations viable enough to attract subsequent rounds of funding.
• 1226 out of 1503 (or 81%) companies which received PE-VC funding during the five year period have
received only one round of PE-VC investment and only 79 (5%) companies have received more than
two rounds of PE-VC funding.
• Our analysis reveals the propensity of PE-VC investors to invest in well-established firms as nearly 50%
of the investments are in companies which had incorporated at least for 8 years.
• The overall ratio of IPO to M&A exits over the five year period is 0.5 and the trend is similar across
industries with the exception of Engineering & Construction and Transportation & Logistics sectors.
Year wise analysis also shows that the ratio varies from 0.3 to 0.6 for most of the years except 2006,
probably owing to boom in Indian IPO markets in 2006-07.
• The number of rounds of PE-VC investment in a company before the exit indicates that the overall
average numbers of rounds are only marginally higher for IPO exits (2.35) as compared to that for
M&A exits (1.97).
• The average duration of investment in firms with IPO and M&A exits is found to be 12 and 23 months
respectively.
• It was also observed that as many as 75% of growth stage investments have exited in less than 2 years
which again underlines overall short duration of PE-VC investments in India. The proportion of exits
within 2 years from investments is 87% for late-stage funding.
• Analysis of firms with one or more rounds of PE-VC funding during the last five years but no exits
reveals that in case of only 108 (or less than 10%) out of 1276 such firms, the time elapsed since last
investment is more than 3 years. This may lead us to conclude that PE-VC financed firms are doing
reasonably well in India as the operations of two-third (866) of such firms were viable enough to
attract PE funding at least once in last 24 months.
1.4 P rivate Equ ity Financin g: A St atistical Analysis

A regression analysis of the investments indicate that the variations in duration of investment can be best
explained by financing stage of investment while variations in type of exit method are more closely associated

with industry class among all the independent variables. Multiple regressions for analyzing the combined
impact of all the independent variables points out that Exit mode shows higher association and predictability
as compared to Duration of investment. The results obtained from Discriminant Analysis performed to
determine the classification or choice of exit method for a given combination of independent variables also
strengthens this conclusion further with around 85% cases being correctly classified.
1.5 Summ ar y
To sum it up, though the PE-VC financing in India has grown at a tremendous rate in last five years, it is felt
that PE-VC investments in India need to be more supportive of financing entrepreneurs and corporations
during the early stages. The findings from our study are surprising, contrasting and at times contradicting
popularly held opinions and notions about PE-VC investments. These results also have some significant policy
implications which are discussed in the report. Thus even if the future outlook for PE-VC investments in India is
very promising and inflow of funds for investments in India is expected to be buoyant over medium to long
term, it is up to the government, regulatory agencies, and the industry itself to effectively channelize the funds
and to ensure its efficient utilization so as to meet the objectives of promotion and growth of
entrepreneurship and economy as a whole.

2.0 Private Equity Financing in India: Introduction

2.1 Brief History and E volution
The concept of PE-VC financing was introduced in India in 1964 even though it is formally recognized in
developed markets like the US since 1940s. The evolution of PE-VC industry in India can be broadly divided into
two time periods – 1) Pre 1991 i.e. the pre-economic reforms, pre-globalization era and 2) Post 1991.
Due to virtual monopoly of Public sector financial institutions in India in the pre-reforms period, the initiative
on PE-VC financing was also lead by public sector undertakings like IDBI (Industrial Development Bank of India)
and IFCI (Industrial Finance Corporation of India). In the initial years, PE-VC financing mostly took the form of
seed or start-up capital only. The first major initiative from Government of India came in 1985 when it
launched its own VC fund to finance pilot projects involving application of new technologies. This was
accompanied by launch of a VC scheme by ICICI. Thus for more than 25 years since its inception, PE-VC funding
in India witnessed extremely slow growth.
But post 1991, the activities on PE-VC investment front started picking pace, mostly owing to fundamental
change in policies regarding foreign investment and development financing. Thus in last eighteen years post
1991, India has experienced tremendous growth in the number of domestic PE-VC funds, amount invested,
number of deals, average amount invested per deal (deal size) and number of foreign PE-VC funds setting
offices in India. The setting up of Indian Venture Capital Association (IVCA) in 1990-91 to coordinate and look
after the developmental activities of VC financing also provided the necessary impetus to growth and
development of PE-VC funding in India.
2.2 P olicy Ou tloo k and Regulatory Frame work

In 1988, the Government of India took a policy initiative and issued guidelines for VC Funds in India for the first
time, though only restricted for domestic banks and financial institutions. Later in 1995, a new set of guidelines
were issued for overseas VC investment in India. Meanwhile, the power to regulate the PE-VC investments in
India was transferred to SEBI from CCI in 1992. SEBI framed and issued fresh guidelines in 1996 regulating the
PE-VC investments. Subsequently two more committees were set up, the KB Chandrashekhar committee in
2000 and the Dr. Ashok Lahiri Committee in 2003, to identify key areas critical for the development of VC
industry and to issue recommendations for promoting VC investments in India. The key recommendations of
both these committees are summarized below –
1. K.B. Chandrashekhar Committee (2000) –
• The multiplicity of regulations should be avoided and there is a need for single nodal regulator in the
form of SEBI for hassle-free clearance.
• Eligibility for registration as PE-VC funds should be neutral to firm structure and should be flexible to
allow different structures like LP, LLP and LLC.
• Being a dedicated pool of capital, PE-VC funds should operate in the environment of fiscal neutrality
and should be treated as tax pass-through vehicle.
• 70% of PE-VC fund’s investible funds must be invested in unlisted equity and not more than 25% of a
PE-VC fund’s corpus may be invested in single firm.

• The IPO norms of 3 years track record should be relaxed for firms / projects funded by registered PE-
VC funds. However shares acquired by PE-VC funds after allotment in an IPO should be subject to
lock-in period of one year.
2. Dr. Ashok Lahiri Committee (2003) -
• Requirement for investment in unlisted equity may be reduced to 66.67% and balance 33.33%
investment may be allowed in listed companies.
• Removal of maximum limit of 25% investment in a single firm
• Removal of lock-in period of one year for shares acquired after listing.
• All PE-VC funds formed as trust/company and duly registered with SEBI should be eligible to avail tax
exemptions.
• More flexibility should be there as far as matters regarding sectoral restrictions and PE-VC funds
should be allowed to invest in sectors restricted earlier like Real estate and Gold financing.
In summary, both these reports underlined the significance of VC financing in India for growth of
entrepreneurship and the need for government to play a role of facilitator by creating a policy environment
which will regulate and promote VC investments.
2.3 Recen t Developments

Ever since the famous Goldman Sachs paper on future outlook for BRIC economies was released in October
2003, India as the second fastest growing economy in the world has become even more attractive destination
for global investors. Though PE-VC investments in India started rising consistently at a faster clip since 1991, it
underwent a dramatic turnaround during the five year period 2004 to 2008.
Some of the key factors responsible for this turnaround can be –
1. Gradual easing of regulatory barriers for foreign investment in India post liberalization
2. Consistently impressive GDP growth in excess of 9% from FY 2006 to FY 2008 driven by –
• Huge foreign capital inflows.
• Spurt in demand generated by growing prosperity of Indian middle class with higher disposable
incomes resulting in higher purchasing power.
• Very high growth in few sectors like Telecom, ITES, Financial services, Real estate and Infrastructure.
3. Political stability and other favorable macroeconomic variables like –
• Sharp rise in foreign exchange reserves during 2004-2007 crossing US$300 billion mark in FY 2008.
• Fiscal consolidation with notable decrease in fiscal and revenue deficits during FY 2006 to FY 2008.
• Strong domestic savings and investment rates further enhanced India’s reputation as one of the most
favored investment destination.
The above factors coupled with excess liquidity during the economic boom world over from 2003 to 2007 and
pressure to diversify internationally in the globalization era has resulted in tremendous growth of PE
investments in India specifically from 2005 to 2007. The cost effectiveness of emerging markets like India vis-à-
vis matured markets, for building a new business has further boosted the inflows. According to the “Global

trends in venture capital 2006 survey” by Deloitte, China (30%) and India (25%) were voted as the most
favored investment destination for PE investment over the next five years by US Investors.
But there is another dimension to this PE-VC growth story as the period under discussion (2004-08) presents a
curious case with an unabated growth spree in first four years followed by a sudden economic downturn in
2008 triggered by an unprecedented financial crisis, resulting in sharp decline in investment activities all over
the world. This, in turn, has also severely affected PE investments in India which provides an opportunity to
explore the traits in PE-VC market in these tumultuous periods and how the PE markets are responding to the
challenges posed by this turbulence in global financial markets.
2.4 Structure of th e Report

The report discusses different quantitative as well as qualitative aspects of PE-VC investments in India over
next few chapters –
• Chapter 3 describes the objective and analysis methodology used including sources of data and
classification criteria.
• Chapter 4 presents overview of PE-VC investments from different perspectives and the comparison
with leading PE markets.
• Chapter 5 discusses the analysis of complete investment lifecycle of firms which received PE-VC
funding.
• Chapter 6 deals with the analysis and comparison of IPO and M&A exits.
• Chapter 7 deals with the results of statistical analysis done on the PE-VC investment data.
• Chapter 8 provides a brief summary of results and discusses a few policy implications.

3.0 Objective and Analysis Methodology

This section presents a brief overview about objectives as well as analysis methodology i.e. sources of the data
and the various techniques, classifications, criteria and tools used for analysis in the study.
3.1 Obje ctive

The primary objective of this study is to get a better understanding of Indian PE-VC market through an in-
depth analysis of PE-VC deals – both investments as well as exits - over a sufficiently long period of time. In
addition, this report also intends to track the transformation of the PE-VC industry in recent years, provide a
snap shot of the present status as well as the future prospects.
3.2 Source s of data

The requisite data about PE-VC deals over the five year period from 2004 to 2008 in India was obtained from
two databases – Venture Intelligence India and Asian Venture Capital Journal (AVCJ) database – which provide
data and information services for PE-VC investments as well as PE-backed IPO and M&A deals in India. The
databases provided various details of PE investments such as the company, industry/sector, financing stage,
type of investor, city/region, investment amount, month & year of investment, type of exit method if any.
Apart from the core data about investment and exit deals in India, the information about PE investments in
different foreign markets was obtained from the reports of respective venture capital associations like NVCA
(US), BVCA (UK), EVCA (Europe). Historical data of Indian capital market indices like BSE-Sensex, NSE-CNX Nifty
and BSE sectoral indices as well as that of other leading capital market indices like Dow Jones Industrial
Average (DJIA) and S&P 500 of US, FTSE-100 of UK, Nikkei 225 of Japan and Bovespa for Brazil was collected
from the websites of stock exchanges and other sources on Internet. Additional requisite information and data
wherever necessary was gathered from several sources such as newspaper and magazine articles, journal
papers and reports published worldwide on PE-VC investments.
3.3 An alysis o f PE-VC Investments

The discussion on PE-VC investment is based on the analysis of 1395 investment transactions for which all the
relevant data was available out of the total 1713 PE investment deals in India over the five year period. Four
important attributes of any firm receiving PE-VC funding as marked from the available data are Industry,
Financing Stage, Region, and Type of PE-VC fund. Different categories of each of these attributes were
identified for classifying the deals with respect to these attributes and the analysis was done from different
perspectives on the basis of these classifications. The criteria used for classifying deals on the basis of different
parameters are as follows –
1. Industry: After going through classifications used in different countries and markets, all the
investments were classified into ten different industry classes. The details of these ten categories and
the sectors included in each industry class are given in Table 1.
2. Financing Stage: The investments were classified into any of the following stages, based on the
lifecycle of the investee firm: Early, Growth, Late, Pre-IPO, and PIPE (Private Investment in Public
Equity). Obviously it is not necessary that each firm will receive PE-VC funding at each of these stages
of lifecycle. An additional classification that is frequently seen in PE-VC investment, but not analyzed
in detail in this report is the “Buyout” deals. The details of classification of financing stages are
presented in Table 2.

Table 1 - Industry Classification Details

Sl.
Industry class Sectors included
No.
1 IT & ITES IT & ITES / Software / Internet
2 Computers-Hardware Computer Hardware / Semiconductors / Electronics
Healthcare / Pharmaceuticals / Medical services / Life sciences /
3 Healthcare
Biotechnology
Light & Heavy manufacturing / FMCG / Foods & Beverages / Consumer
4 Manufacturing
& Business products
Engineering / Capital goods / Construction / Real estate / Energy / Oil &
5 Engineering & Construction
Gas / Infrastructure
6 Telecom & Media Telecommunications & ISPs / Print & Electronic Media / Entertainment
7 Transportation & Logistics Shipping & Logistics / Distribution / Transportation
8 Financial services Banking / Financial Services / Insurance
Advertising & Marketing / Education / Hotels & Resorts (Hospitality) /
9 Non-Financial Services
Travel & Tourism / Leisure / Sports & Fitness
Agriculture / Retail & Wholesale / Mining & Metals / Textiles &
10 Others
Garments / Chemicals
Table 2 - Financing Stage Classification Details

Sl.
Financing Stage class Type of funding
No.
1 Early Seed Capital / R&D / Start-up / Early Stage
2 Growth Expansion / Growth Capital (< 10 yrs old)
Expansion / Growth capital at later stages / Rapid growth towards liquidity /
3 Late
Special Purpose Vehicles (SPV)
4 Pre-IPO Mezzanine / Pre-IPO funding / Bridge Loan
5 PIPE Private investments in Public Equity / Private placements
6 Buyout Buy-outs (MBO / MBI / LBO) / Acquisition of controlling or significant stake
3. Type of PE-VC fund: The PE-VC funds are divided into two main categories – a) Domestic funds which
include Indian PE-VC funds as well as foreign funds having separate entities for India-dedicated
operations and b) Foreign funds which include all the overseas funds making PE-VC investments in
India through different routes.
4. Region: All the firms which received PE-VC investments are sorted into four regions – East, North,
South and West depending upon geographical location of their corporate headquarters.
3.4 An alysis o f PE-VC Investment in Firm Lifecycle an d Exits

The analysis of PE-VC investments based on the lifecycle of investee firm and exit deals is based upon the
review and compilation of total of 1912 PE-VC transactions (both investment and exit considered together)
involving 1503 firms. Out of these 1503 firms, 1276 firms have only PE-VC investment transactions while
another 129 firms have only exit transactions during the period under study. Remaining 98 firms are having
both PE-VC investment and exit transactions. These 98 firms were analyzed on the lifecycle of investment

along with reference to patterns in type of exit method preferred, investment duration, etc. Statistical
techniques for multivariate data analysis like Multiple Regression and Discriminant Analysis were used on the
data of these 98 firms to get more understanding on investment and exits.
Though the same classification criteria and classes for industry, financing stage, type of PE-VC fund and region
are used while analyzing the lifecycle and exits, the PIPE and Buyout stage investment deals are excluded. PIPE
deals are investments in firms which are already public whereas buyout deals are investments with an aim to
acquire a controlling stake in an existing firm and hence do not qualify as investments in new ventures, for
analysis from lifecycle point of view.
Exit methods are categorized into two types – Initial Public Offer (IPO) and Merger & Acquisition (M&A) or
Trade sale. For the purpose of this analysis, the different variations of M&A or Trade sale like strategic sale,
secondary sale or buyback by funded firms were grouped into a single category.
Microsoft Excel 2007 and SPSS 15.0 packages were mostly used for the data analysis.

4.0 Private Equity Investments

The analysis of PE investments is based on the data of 1395 PE-VC transactions over five years. The
transactions were analyzed with respect to the Industry and Financing stage of the investment across the
years.
4.1 Overview of Private Eq uity Inve st ments
4.1.1 Industry
The industry wise split-up of total investments for the ten industry classes over the five-year period are given
in Table 3. Figures in the brackets indicate the investments in a given industry as a percentage of total
investments in that particular year.
Prior to 2004, a majority of PE-VC investments were in the IT & ITES sector, with the manufacturing sector
accounting for the remaining. This trend is evident even in 2004 with IT & ITES industry bagging more than
42% of the total investments. However, this picture has dramatically changed now. During the years 2004 -
2007, there was robust growth in PE investments in technology-led, capital intensive sectors like Telecom,
Energy, Transportation and Infrastructure in addition to the initial drivers like IT & ITES, BPO, Healthcare and
Biotechnology. The industry-wise share of total PE investments in India over the five year period is given in
Exhibit 1.
This indicates that the PE-VC investment in India is maturing and hence becoming more inclusive and broad
based. This is best illustrated by the fact that while there is a steep decline in the share of IT & ITES and
Healthcare sectors as a percentage of total investments, the respective share of sectors like Engineering &
Construction, Telecom & media and Transportation & Logistics have considerably gone up over the same
period.
Another sector which has seen huge upswing in investments is Financial Services which has Y-o-Y growth in
excess of 300% for three consecutive years before a precipitous 88% fall in 2008 owing to the worldwide
slowdown in the sector. Overall the financial services sector has attracted highest amount of investments (US$
10.62 billion) in India over the five year period, accounting for a total of 24.1% of total PE-VC investments in
the country. On the other hand, the computer-hardware industry class which also includes computer

peripherals, electronic goods, networking devices & Semiconductors has consistently received lowest PE-VC
investment in India, accounting for only 1.22% of total investments.
While four out of the 10 industries accounted for more than 80% investment in 2004, the investment picture
appears relatively less skewed and much more uniformly distributed across the 10 sectors in 2008. Exhibit 2
illustrates this shift in the distribution of total investment pie among the 10 industries from 2004 to 2008.
Exhibit 2 – Comparison of Investment Pie in 2004 and 2008
Apart from amount invested, the number of deals and average amount per deal were also analyzed for each
industry class. The industry-wise share of total number of PE-VC deals in India over the five year period is given
in Exhibit 3.

Table 3 - Industry wise split-up of investment activities for each year (2004-2008)
Year wise investment in $mn (% of Total investment in the year) Year wise no. of deals (% of Total no. of deals in the year) Year wise Average amount per deal (in $mn)
INDUSTRY
2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008
IT & ITES 750.69 (42.66%) 259.77 (12.32%) 2408.47 (23.86%) 1430.62 (6.5%) 947.26 (11.67%) 25 (31.25%) 34 (22.22%) 71 (18.49%) 77 (16.01%) 68 (22.9%) 30.03 7.64 33.92 18.58 13.93
Computer-Hardware 48.4 (2.75%) 40 (1.9%) 67.6 (0.67%) 249.53 (1.13%) 132.1 (1.63%) 5 (6.25%) 7 (4.58%) 5 (1.3%) 13 (2.7%) 8 (2.69%) 9.68 5.71 13.52 19.19 16.51
Healthcare 195.4 (11.1%) 332.54 (15.77%) 588.93 (5.83%) 748.05 (3.4%) 488.47 (6.02%) 11 (13.75%) 20 (13.07%) 40 (10.42%) 36 (7.48%) 28 (9.43%) 17.76 16.63 14.72 20.78 17.45
Manufacturing 267.56 (15.2%) 390.13 (18.5%) 1182.37 (11.71%) 1663.26 (7.56%) 745.9 (9.19%) 9 (11.25%) 34 (22.22%) 80 (20.83%) 75 (15.59%) 35 (11.78%) 29.73 11.47 14.78 22.18 21.31
Engineering & Construction 214.8 (12.21%) 142.84 (6.77%) 1216.88 (12.05%) 2942.68 (13.37%) 2233.9 (27.52%) 10 (12.5%) 10 (6.54%) 48 (12.5%) 59 (12.27%) 49 (16.5%) 21.48 14.28 25.35 49.88 45.59
Telecom & Media 68.8 (3.91%) 94.6 (4.49%) 1498.17 (14.84%) 4698.49 (21.34%) 1214.8 (14.96%) 3 (3.75%) 6 (3.92%) 14 (3.65%) 37 (7.69%) 21 (7.07%) 22.93 15.77 107.01 126.99 57.85
Transportation & Logistics 4.6 (0.26%) 73.4 (3.48%) 518.31 (5.13%) 931.43 (4.23%) 399.1 (4.92%) 1 (1.25%) 3 (1.96%) 27 (7.03%) 29 (6.03%) 12 (4.04%) 4.60 24.47 19.20 32.12 33.26
Financial services 68.5 (3.89%) 285.3 (13.53%) 1660.85 (16.45%) 7721.24 (35.07%) 890.47 (10.97%) 7 (8.75%) 9 (5.88%) 44 (11.46%) 87 (18.09%) 31 (10.44%) 9.79 31.70 37.75 88.75 28.72
Non-Financial Services 56.9 (3.23%) 257.86 (12.23%) 609.45 (6.04%) 1191.83 (5.41%) 619.41 (7.63%) 4 (5%) 15 (9.8%) 30 (7.81%) 49 (10.19%) 32 (10.77%) 14.23 17.19 20.32 24.32 19.36
Others 84.2 (4.78%) 232.46 (11.02%) 344.17 (3.41%) 436.94 (1.98%) 446.5 (5.5%) 5 (6.25%) 15 (9.8%) 25 (6.51%) 19 (3.95%) 13 (4.38%) 16.84 15.50 13.77 23.00 34.35
Table 4 - Financing Stage wise split-up of investment activities for each year (2004-2008)
Year wise investment in $mn (% of Total investment in the year) Year wise no. of deals (% of Total no. of deals in the year) Year wise Average amount per deal (in $mn)
FINANCING STAGE
2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008
Early 80.1 (4.55%) 108.84 (5.16%) 766.61 (7.59%) 2745.41 (12.47%) 246.91 (3.04%) 15 (18.75%) 26 (16.99%) 70 (18.23%) 74 (15.38%) 47 (15.82%) 5.34 4.19 10.95 37.10 5.25
Growth 199 (11.31%) 177.63 (8.42%) 1697.98 (16.82%) 4492.38 (20.41%) 980.35 (12.08%) 13 (16.25%) 20 (13.07%) 96 (25%) 120 (24.95%) 55 (18.52%) 15.31 8.88 17.69 37.44 17.82
Late 351.95 (20%) 583.84 (27.68%) 3211.16 (31.81%) 5463.52 (24.82%) 5074.78 (62.51%) 20 (25%) 45 (29.41%) 98 (25.52%) 139 (28.9%) 133 (44.78%) 17.60 12.97 32.77 39.31 38.16
Pre-IPO - 100.4 (4.76%) 201.19 (1.99%) 798.57 (3.63%) 375.5 (4.63%) - 7 (4.58%) 14 (3.65%) 30 (6.24%) 8 (2.69%) - 14.34 14.37 26.62 46.94
PIPE 605 (34.38%) 885.09 (41.97%) 2131.35 (21.11%) 7397.86 (33.61%) 1307.87 (16.11%) 29 (36.25%) 51 (33.33%) 91 (23.7%) 104 (21.62%) 49 (16.5%) 20.86 17.35 23.42 71.13 26.69
Buyout 523.8 (29.76%) 253.1 (12%) 2086.9 (20.67%) 1116.32 (5.07%) 132.5 (1.63%) 3 (3.75%) 4 (2.61%) 15 (3.91%) 14 (2.91%) 5 (1.68%) 174.60 63.28 139.13 79.74 26.50
GRAND TOTAL 1759.85 2108.9 10095.19 22014.06 8117.91 80 153 384 481 297 22.00 13.78 26.29 45.77 27.33

Though the number of deals per year broadly follows a similar trend as that of the amount invested over the
period (a consistent rise from 2004 to 2007 followed by a steep fall in 2008), there is a significant difference
between their Y-o-Y rates of growth. Thus the number of deals are not growing or declining proportionately
with amount invested but at a much slower pace. A discernible trend about these two parameters is depicted
in Exhibit 4 which highlights that while in good times, the growth in amount invested is much faster than the
growth in number of deals (as is the case between 2004 to 2007), the decline in the amount invested is also
much more sharper than the dip in number of deals during the periods of slowdown (as can be seen in 2008).
Having said this, the overall inclination is towards fewer deals resulting in higher average amount per deal. This
trait is most visible in 2007 where the number of deals increased only by 25% only even though the amount
invested more than doubled over the previous year. This can be mainly due to three reasons –
• The PE-VC funds looking for lesser number of high quality deals which are expected to provide higher
returns, while simultaneously keeping the investment portfolio more compact and manageable
• Constant pressure on PE-VC fund managers to generate higher returns from each and every investment so
as to attract and retain investors in the Fund in view of increasing competition

• Growing investments in sectors with huge capital demand like Telecom, Engineering & Construction, and
Financial Services which naturally pushes the average amount per deal over the five year period upward
(US$31.6Mn) as is evident from Exhibit 5.
A closer look at the graph in Exhibit 5 clearly emphasizes this point further as average amount per deal hovers
around US$20Mn for all the industries except those mentioned above.
4.1.2 Finan cing Stage

The financing stage wise split-up of total investments for six different stages over the five-year period are
tabulated in Table 4. Figures in the brackets indicate the investments at a given financing stage as a percentage
of total investments in that particular year. As can be seen from Table 4, late stage investments and Private
investments in Public Equity (PIPE) deals constitute a majority of the investments and consistently account for
more than 50 % of total amount invested in each of the five years.
Another distinguishing feature about late stage deals is that they are least affected in terms of both value and
volume during the slowdown – amount invested in late stage deals fell only by 7% as compared to dip of 63%
in total investments in 2008 over previous year. In fact it seems that late stage investments are most preferred
in the period of economic downturn with investors looking for more stable and established businesses to
invest as is evident from the fact that more than 62% investments in 2008 are late stage investments.
On the contrary, early stage investments suffered the most during the economic crisis with steep decline of
91% in the amount invested in 2008 over 2007 as can be seen from Exhibit 6.
Though it is quite obvious for investors to become risk-averse and hence skeptical about new ventures in
period of economic slowdown, the steep decline is definitely a cause of worry. Another critical factor
concerning early stage investments is that the Y-o-Y growth in number of deals is very slow as compared to Y-
o-Y growth in amount invested even during good times suggesting that very few new ventures are receiving
funding although average amount of funding received by a new venture has gone up.
As mentioned above, the category which is attracting substantial investment apart from late stage is PIPE. This
is one of the most favored routes by foreign investors for entering Indian PE market as it allows them to tap
the growth potential of already well-established public-listed enterprises with minimum risk. Though being
one of the crucial sources of financing for the expansion of publicly listed enterprises, PIPE investments are
obviously not serving the purpose of fulfilling the funding needs of promising but yet to be established SMEs
for growth.

The other two stages i.e. Pre-IPO and Buyout have attracted lowest investments in Indian markets so far. Pre-
IPO stage funding witnessed a spurt especially in 2006 and 2007 when Indian IPO market was at its peak
generating very attractive returns and there was considerable increase in PE-backed IPO exits. While Buyouts
are one of the most favored PE investments in developed markets, they are comparatively rare in India
(accounting for only 9% of total funds invested and 3% of total number of deals) and this trend has been
consistent over the five year period. This may be due to the fact that PE investors play an active role in the
market for corporate control in developed economies like the US, while such opportunities are rare in Indian
context given the regulatory and other constraints.
The financing stage-wise share of total PE-VC investments in India over the five year period is given in Exhibit
7. If total investments over the five-year period are considered, it was found that late stage investments
constitute one-third of the total investments closely followed by PIPE deals, which account for 28% investment
of the total investment.
The number of deals also follow similar pattern of proportion across the different stages except for early stage
investments where share by value (amount invested) is only 9% (US$ 3.94 billion) as against share by volume
(number of deals) of 17% (232 deals) as can be seen from Exhibit 8. This is more surprising given the fact that
number of early-stage deals was growing at very slow clip as pointed out earlier. As far as average amount per
deal is concerned, it is fairly constant across the stages (varying between US$ 20 million – 35 million) except
for buyout deals, where the average deal size is much higher in the range of US$ 100 million and above.

4.1.3 Industry vs. Financing S ta ge

Table 5-A and 5-B presents the total PE-VC investments and number of deals over the five years for all the ten
industry classes across the different Financing Stages. Figures in brackets indicate the investments or number
of deals at a given financing stage as a percentage of total investments in that particular industry.
As pointed out earlier, Late and PIPE stages have biggest share in investment pie and this trend is clearly visible
across almost all the industry classes in terms of amount invested as well as number of deals except IT & ITES
and Computer-Hardware industries. Another interesting observation about IT & ITES industry is that while
Buyout stage deals forms a major chunk of investments by value (42.6%), Early stage deals grab the highest
share by volume (43.6%) of total investment in the industry over the period, thus defying the trends observed
across most of the other industries, both in terms of value and volume investments.
Talking about Early stage investments, Financial services has attracted considerably higher seed / early stage
funding as compared to other industries most probably owing to emergence and growth of numerous new
firms in BFSI sector during the strong economic growth period of 2005-2007.
Table 5-A and 5-B reveals that industries like Telecom and Manufacturing with huge capital requirements have
relatively much higher proportion of Late and PIPE stage investments (more than 80% of total investments) as
compared to the other industries which again highlights the risk-averse nature of PE-VC investors and the
pressures faced by PE-VC fund managers to achieve high returns in quick time. Huge Late and PIPE stage
financing coupled with a very small proportion of Early stage investments in these industries substantiates this
point further and is definitely a cause of concern especially for Manufacturing industry. Considering the
average amount per deal, Late and PIPE stage deals in Telecom and Financial services industry has recently
witnessed unusually high levels which were never seen before in Indian PE space.
4.1.4 Region Wise Distrib utio n of PE Investment

There appears a characteristic trend in PE-VC investments when the deals are classified by the region of
incorporation of investee firm. While the West has attracted the highest investment by value, the South has
the most number of deals (largest share by volume) during the five year period ending 2008. Table 6 presents
the region wise split-up for 1033 PE-VC investment deals for which region-specific data was available. Overall
distribution of investments across different regions is quite skewed with very low PE-VC Investments in East as
compared to other three regions. But this could be more to do with low levels of industrial activity in the
region as a whole vis-à-vis the rest of India. More importantly, PE-VC funding has shown almost constant
distribution pattern across the regions over the five years.
Another notable aspect of region wise distribution of PE investments in India is that there is considerably
higher preference for few industries over the other in a given region. For e.g., while Financial Services and
Telecom are prime drivers in West, Engineering & Construction and IT & ITES are most sought after industries
in North. Similarly, manufacturing and Non-Financial services have attracted relatively more investments in
East. The investments are more evenly distributed across the industries in South region where 4 to 5 industry
classes including Healthcare and IT & ITES account for a major share of the total investments in the region. As
far as stage wise investments across the regions are concerned, there was no discernible trend towards any
particular stage in any given region.

TABLE 5-A - Industry wise Split-up for Investment at different Financing Stages for the entire period (2004-08)
Financing stage wise investment in US$mn (% of Total investment in the industry )

INDUSTRY
Early Growth Late Pre-IPO PIPE Buyout
IT & ITES 610.33 (10.53%) 979.83 (16.9%) 1065.9 (18.39%) 72.75 (1.25%) 595.01 (10.26%) 2473 (42.66%)
Computer-Hardware 58.9 (10.96%) 239.6 (44.57%) 117.5 (21.86%) 33.23 (6.18%) 63.4 (11.79%) 25 (4.65%)
Healthcare 121.36 (5.16%) 423.21 (17.98%) 1106.52 (47.02%) 55.25 (2.35%) 614.05 (26.09%) 33 (1.4%)
Manufacturing 29.37 (0.69%) 370.47 (8.72%) 1677.77 (39.48%) 52.67 (1.24%) 1904.41 (44.82%) 214.53 (5.05%)
Engineering & Construction 706.12 (10.46%) 1600.9 (23.71%) 2706.16 (40.08%) 406.89 (6.03%) 1213.78 (17.98%) 117.26 (1.74%)
Telecom & Media 84.19 (1.11%) 628.32 (8.29%) 4404.55 (58.15%) 133.9 (1.77%) 2208.36 (29.15%) 115.54 (1.53%)
Transportation & Logistics 184.04 (9.55%) 152.04 (7.89%) 797.4 (41.38%) 149 (7.73%) 437.01 (22.68%) 207.35 (10.76%)
Financial services 1818.11 (17.11%) 2391.57 (22.51%) 1538 (14.47%) 179.48 (1.69%) 4349.45 (40.93%) 349.74 (3.29%)
Non-Financial Services 327.66 (11.98%) 651.58 (23.82%) 897.1 (32.8%) 115.05 (4.21%) 407.36 (14.89%) 336.7 (12.31%)
Others 7.8 (0.51%) 109.82 (7.11%) 374.35 (24.24%) 277.4(17.9%) 534.34 (34.6%) 240.5 (15.57%)
GRAND TOTAL 3947.88 7547.34 14685.25 1475.66 12327.17 4112.62

TABLE 5-B - INDUSTRY WISE SPLIT UP FOR NUMBER OF DEALS AT DIFFERENT FINANCING STAGES FOR THE ENTIRE PERIOD (2004-08)
Financing stage wise no. of deals (% of Total no. of deals in the industry) Financing stage wise average amount per deal (in US$mn)
INDUSTRY
Early Growth Late Pre-IPO PIPE Buyout Early Growth Late Pre-IPO PIPE Buyout
IT & ITES 120 (43.64%) 68 (24.73%) 40 (14.55%) 4 (1.45%) 36 (13.09%) 7 (2.55%) 5.09 14.41 26.65 18.19 16.53 353.29
Computer-
12 (31.58%) 15 (39.47%) 6 (15.79%) 2 (5.26%) 2 (5.26%) 1 (2.63%) 4.91 15.97 19.58 16.62 31.70 25.00
Hardware
Healthcare 21 (15.56%) 27 (20%) 51 (37.78%) 4 (2.96%) 31 (22.96%) 1 (0.74%) 5.78 15.67 21.70 13.81 19.81 33.00
Manufacturing 7 (3%) 31 (13.3%) 83 (35.62%) 6 (2.58%) 99 (42.49%) 7 (3%) 4.20 11.95 20.21 8.78 19.24 30.65
Engineering &
16 (9.09%) 31 (17.61%) 78 (44.32%) 14 (7.95%) 32 (18.18%) 5 (2.84%) 44.13 51.64 34.69 29.06 37.93 23.45
Construction
Telecom &
8 (9.88%) 21 (25.93%) 37 (45.68%) 3 (3.7%) 10 (12.35%) 2 (2.47%) 10.52 29.92 119.04 44.63 220.84 57.77
Media
Transportation
8 (11.11%) 12 (16.67%) 31 (43.06%) 3 (4.17%) 14 (19.44%) 4 (5.56%) 23.00 12.67 25.72 49.67 31.21 51.84
& Logistics
Financial
17 (9.55%) 51 (28.65%) 43 (24.16%) 8 (4.49%) 55 (30.9%) 4 (2.25%) 106.95 46.89 35.77 22.43 79.08 87.44
services
Non-Financial
22 (16.92%) 41 (31.54%) 40 (30.77%) 7 (5.38%) 13 (10%) 7 (5.38%) 14.89 15.89 22.43 16.44 31.34 48.10
Services
Others 1 (1.3%) 7 (9.09%) 26 (33.77%) 8 (10.39%) 32 (41.56%) 3 (3.9%) 7.80 15.69 14.40 34.68 16.70 80.17
GRAND TOTAL 232 304 435 59 324 41 17.02 24.83 33.76 25.01 38.05 100.31

Table 6 - Region wise Distribution of PE Investments in India
Number of Deals
Region 2004 2005 2006 2007 2008 Total
East 2 (2.9%) 6 (4.17%) 8 (3.29%) 17 (5.76%) 8 (2.84%) 41 (3.97%)
North 18 (26.09%) 26 (18.06%) 45 (18.52%) 57 (19.32%) 61 (21.63%) 207 (20.04%)
South 32 (46.38%) 54 (37.5%) 98 (40.33%) 113 (38.31%) 114 (40.43%) 411 (39.79%)
West 17 (24.64%) 58 (40.28%) 92 (37.86%) 108 (36.61%) 99 (35.11%) 374 (36.21%)
Total 69 144 243 295 282 1033
Amount Invested (in $mn)
Region 2004 2005 2006 2007 2008 Total
20.9 71.8 76.09 393.9 83.7 646.39

East
(1.95%) (3.64%) (1.29%) (4.08%) (1.07%) (2.45%)
494.4 357.4 1674.95 2346.75 2371.3 7244.8

North
(46.22%) (18.11%) (28.35%) (24.31%) (30.29%) (27.41%)
348.89 578.82 1222.71 3074.21 2710.2 7934.83

South
(32.62%) (29.33%) (20.7%) (31.84%) (34.62%) (30.02%)
205.46 965.32 2934 3839.62 2663.06 10607.46

West
(19.21%) (48.92%) (49.66%) (39.77%) (34.02%) (40.13%)
Total 1069.65 1973.34 5907.75 9654.48 7828.26 26433.48
4.1.5 Do mestic vs. Foreign Inve stors

Out of 965 PE deals for which details about PE-VC investor fund are available, almost equal numbers of deals
are funded by Domestic and Foreign investors. But if we consider the amount invested, foreign investors have
contributed nearly 73% of the total US$ 21.46 billion invested in these 965 deals. While domestic PE-VC funds
have invested considerably more in Computer-Hardware, Healthcare and Non-Financial services industries as
compared to their foreign counterparts; foreign PE funds have invested heavily in Financial Services sector.
It was seen that at the aggregate level investments in Growth, Late and Pre-IPO stages have more or less equal
contribution from both domestic and foreign investors. On the other hand, Early stage investments are
contributed primarily by domestic investors (with nearly 70% share in Early stage investments), while
substantially higher proportion of PIPE and Buyout deals are funded by Foreign investors. This probably
indicates the propensity of foreign investors to invest in more well-established businesses with faster exit
possibilities and the tendency to shy away from investing in early stage, risk-prone entrepreneurial ventures.

4.2 C omparison with leading Private Equity markets
4.2.1 Industry
The industry wise investment for all the industry classes as a percentage of total investment for India, US, UK
and Europe over the five year period are consolidated in Table 7. The investment appears relatively more
uniformly spread across different industries for India and Europe as a whole (which includes 20 European
countries along with UK). However, the investments are skewed in favour of certain industries in US and UK
with only 3 industry classes accounting for more than 70% investments as reflected in Table 7. While Financial
Services has highest share (24.1%) of PE-VC investments in India as mentioned earlier, it is Healthcare (29.4%)
in US, Non-financial services (43.7%) in UK and Manufacturing (29%) in Europe which have attracted the
highest investments.
Table 7 - Industry wise % investment across leading PE markets
INDUSTRY India US UK# Europe#
IT & ITES 13.15% 24.62% 3.96% NA*

Computers-Hardware 1.22% 16.30% 2.01% 6.88%
Healthcare 5.34% 29.44% 9.01% 10.36%
Manufacturing 9.64% 3.48% 4.91% 29.03%
Engineering & Construction 15.31% 8.79% 24.06% 6.43%
Telecom & Media 17.18% 14.04% 0.89% 12.97%
Transportation & Logistics 4.37% 0.97% NA* 3.82%
Financial services 24.10% 2.28% 10.97% 4.09%
Non-Financial Services 6.20% NA* 43.79% 19.30%
Others 3.50% 0.07% 0.40% 7.11%
TOTAL 100.00% 100.00% 100.00% 100.00%
NA* - Separate Investment data not available under these categories, included under one of the other categories.
# - Investment data available for 2004-2008(India and US), 2005-2007(UK) and 2006 & 2007(Europe)
4.2.2 Finan cing Stage
Table 8 - Financing Stage wise % investment in 2007 across different markets

Financing Stage India Asia North America Europe
Early 12.5% 8.0% 6.0% 3.0%
Expansion (Growth + Late) 45.3% 20.0% 11.0% 13.0%
Other (PIPE + Pre-IPO) 37.2% 24.0% 12.0% 5.0%
Buyout 5.0% 48.0% 71.0% 79.0%
TOTAL 100.00% 100.00% 100.00% 100.00%
Prepared on the basis of data compiled from – Venture Intelligence & Asian Venture Capital Journal databases and
PwC Global Private Equity Report 2008.
The comparison between PE-VC deals in Indian and other leading markets with reference to financing stage
presents a sharply contrasting picture. Indian PE-VC market has witnessed consistent positive growth, though
in varying proportions, for PE-VC deals across almost all the financing stages, except the Buyout deals during
2005-2007. The Buyout stage deals in India have declined steeply by 47% in 2007, when there is huge Y-o-Y
growth in overall PE-VC investments. On the other hand, in matured PE markets like US and UK, Buyouts were
the most preferred mode of investment, accounting for more than two-third of the total investments as
pointed out earlier. Table 8 provides a stage wise comparison of investment in three major market segments
i.e. North America, Europe and Asia with that of the PE-VC investments in India. The results highlight the
contrasting investment preferences in Indian markets vis-à-vis other developed PE-VC markets.
4.2.3 Y-o-Y Gro wth Rate

India has experienced consistent positive growth in PE-VC investments for all the sectors except IT & ITES,
Computer-Hardware and Healthcare for each of the years during 2004 - 2007 over the previous year. On the
other hand, the US has consistent positive growth only for Engineering & Construction industry. Table 9
compares the Y-o-Y growth rates for industry-wise investments in India and US over the five year period. While
Indian PE-VC investments has grown at a astonishingly high rates of 378% and 118% in 2006 & 2007 over the
previous years, the deceleration in investments by 63% in 2008 after the global economic crisis has been
equally severe with all the sectors showing a negative investment growth of more than 30% over the previous
year.
During the same time, US being a developed market, the rise and fall in PE investments is relatively less volatile
and Y-o-Y growth rates (positive or negative) are moderate.
TABLE 9 - Industry wise Y-o-Y growth rate in PE investments

Y-o-Y Y-o-Y Y-o-Y Y-o-Y
INDUSTRY (2004-05) (2005-06) (2006-07) (2007-08)
India US India US India US India US
IT & ITES -65% -4% 827% 7% -41% 12% -34% -5%
Computers-Hardware -17% -6% 69% 1% 269% 4% -47% -29%
Healthcare 70% 0% 77% 20% 27% 21% -35% -14%
Manufacturing 46% 6% 203% 25% 41% 23% -55% -24%
Engineering & Construction -34% 10% 752% 128% 142% 69% -24% 43%
Telecom & Media 38% 21% 1484% 22% 214% -1% -74% -15%
Transportation & Logistics 1496% 31% 606% -13% 80% 81% -57% -32%
Financial services 316% 75% 482% -49% 365% 21% -88% -6%
Non-Financial Services 353% NA* 136% NA* 96% NA* -48% NA*
Total 20% 3% 379% 14% 118% 16% -63% -8%
NA* - Separate Investment data not available under these categories, included under one of the other categories.
4.2.4 Compo und Annual Growth Rate

The comparison of compound Annual Growth Rate (CAGR) of PE-VC investments in India, US and UK shows
that India has highest CAGR of 47% over the period from 2004 to 2008 which is considerably higher than that
of the CAGR of investments in US (6%) for the same period. India’s CAGR over 2004-08 is also marginally higher
than that of the UK (39%). Exhibit 9 shows a graphical representation of comparative CAGR of PE-VC
investments across industries for India, US and UK.
Interestingly if we compute the CAGR for the period from 2004 to 2007 (i.e. period before the economic
downturn) then this gap between CAGR becomes even wider. Thus while PE-VC investments in India has grown
with a CAGR of 88% over 2004 to 2007, CAGR for US is only 8% over the same period. The industry-wise

comparative CAGR for the three countries is plotted in Exhibit 9 which again confirms our earlier observations
regarding industry-wise growth patterns across India, US and UK.
Prepared on the basis of data compiled from – Venture Intelligence & Asian Venture Capital
Journal databases, PWC-NVCA (2008), BVCA (2007) & EVCA (2006) Annual performance reports
4.2.5 Size of Inve stmen t vs. Number of De als
If the 1395 PE investment deals are classified in terms of amount invested per deal i.e., Size of Investment, it
was found that 48% (or 664) deals are below US$10 Million in value and another 26% are valued between
US$10 Million and US$20 Million. Only 5% (or 68) of total number of deals are above US$100 Million. Exhibit
10 provides the distribution of the PE investment deals in India across different slabs of deal size. The trend
observed in Indian markets is quite consistent with the respective trends in major VC markets like UK where
approximately 77% of the companies received funding below £10 Million over 2005-2007.

4.2.6 Utilization of Funds and Share in Worldwide Investme nts

According to Global Private Equity Report 2008 by PwC, while fundraising has grown at a CAGR of 14.7%
worldwide, Global PE-VC investments have risen at a CAGR of 17.44% over the last 10 years. But in absolute
terms, though a sum of US$459 Billion were raised globally by PE-VC funds in 2007, only US$297 Billion out of
it were utilized or invested. If we consider the utilization ratio i.e. ratio of funds invested to funds raised across
the markets, it is consistently greater than 1 for Asian markets as against North America (where it is less than
0.5) and Europe (where it is between 0.5 and 1) over 2004-2007 as per the report.
A closer inspection also reveals that for Asian PE-VC markets, CAGR of funds invested (37.5%) is much higher
than CAGR of funds raised (24.2%) for the period from 2004 to 2007. India has consistently experienced higher
utilization ratio (much higher than 1) as well as have highest CAGR (over the ten year period- 1998-2007) as
per the Global Private Equity reports by PwC for 2004 to 2008.
Total PE-VC investments in India as a percentage of GDP have surged from merely 0.4% of GDP in 2004 to
more than 1.5% of GDP in 2008 whereas the total PE-VC investments amounted to 0.77% of GDP in US and
1.4% of GDP in UK in 2008 (according to PwC Global Private Equity Reports for 2004 to 2008). From being
th
ranked 14 with a share of only 1.5% of total PE investments worldwide in 2004, India has covered
rd
considerable ground in relatively short span (between 2004 to 2007) given that it was ranked 3 worldwide
with 7% share in total PE-VC investments in 2007.
Comparing it against the other major markets, it has been observed that though the US and UK have retained
the top two ranks in PE-VC investments over the five years, India has overtaken bigger Asian giants like Japan
and China in terms of attracting PE-VC investments to finish third worldwide and highest in Asia-Pacific.
Table 10 – PE-VC investments vs. Capital Market movements

Indian PE-VC
Year BSE-SENSEX NSE -CNX NIFTY
investment
2004 1759.85 5563.09 1755.87
2005 2108.90 7392.89 2268.91
2006 10095.19 11440.04 3357.09
2007 22014.06 15563.60 4571.29
2008 8117.91 14454.30 4339.11
Correlation Summary
India
India PE-VC Investment vs. Sensex 0.8456
India PE-VC Investment vs. CNX NIFTY 0.8320
Other international markets
US PE-VC Investment vs. DJIA 0.9254
US PE-VC Investment vs. S&P 500 0.8544
UK PE-VC Investment vs. FTSE-100 0.9082
Brazil PE-VC Investment vs. Bovespa 0.9825
Prepared on the basis of data compiled from – Venture Intelligence & Asian Venture Capital
Journal databases, Various venture capital associations like NVCA, BVCA, EVCA and historical
index data from BSE, NSE and other major stock exchange websites.

4.3 In vestment Trends: Private Equit y vs. Cap ital Markets

PE investments by PE-VC funds are primarily sourced from High Net-worth Individuals (HNIs) and Institutional
investors. PE-VC funds generally invest in small and medium privately held enterprises with high growth
potential. Venture capitalists nurture and develop these companies through participation in management in
addition to financial assistance, in the anticipation of a realization event like IPO or trade sale in future which
will generate handsome returns for them. This process generally takes around 3 to 4 years or more in most of
the cases thus making PE investments, an investment over medium to long term time horizon depending upon
the financing stage.
Table 11 - Industry wise PE-VC investments vs. Capital Market movements in India
Industry
Year
IT &ITES Fin. Services Healthcare Manufacturing Engg & Const.
2004 750.69 68.5 195.4 267.56 214.8
2005 259.77 285.3 332.54 390.13 142.84
2006 2408.47 1660.85 588.93 1182.37 1216.88
2007 1430.62 7721.24 748.05 1663.26 2942.68
2008 947.26 890.47 488.47 745.9 2233.9
Corresponding BSE Sectoral Index
Year
BSE-IT BSE-Bankex BSE-HC BSE-CD BSE-CG
2004 2059.78 2845.50 2439.85 1119.69 2330.38
2005 2928.59 4284.37 2799.18 2136.16 4109.91
2006 4228.30 5580.57 3560.18 3134.53 7947.28
2007 4772.00 8427.60 3795.72 4491.13 13445.30
2008 3537.16 7175.97 3749.54 3522.01 11512.20
Correlation Summary
IT & ITES 0.6759
Financial Services 0.7747
Healthcare 0.9123
Manufacturing 0.9001
Engineering & Construction 0.9841
Prepared on the basis of data compiled from – Venture Intelligence & Asian Venture Capital Journal databases, historical data of BSE
Sectoral indices from BSE website
As PE-VC investments are the one with relatively long term perspective, this should lead one to believe that
ideally there should be little association between stock market developments and PE-VC investments over a
given time period. However an analysis of the movement in historical values of major stock market indices
worldwide vis-à-vis the PE-VC investments in the respective countries over the five year period, indicates that
there is a very strong positive correlation between them. Moreover this trend was not only seen in the Indian
markets but also in developed markets like the US, and UK as well as in other emerging markets like Brazil.
Table 10 shows the correlation coefficient (r) between total PE-VC investments and the movement in stock
market indices in major developed and emerging markets. Average of the daily values of the respective index
for the whole year was considered for calculating these correlations.

During this analysis, it was also found that for most of the sectors except IT & ITES, even the industry wise PE-
VC investments in India are very strongly correlated with corresponding movements in BSE sectoral indices
(Table 11). This supports the argument that Investments in any industry are mostly driven by sentiments and
availability of liquidity in addition to the fundamentals. Buoyant overall stock markets or sectoral indices
create strong positive sentiments as well as more liquidity, thereby attracting more investments in that
industry.

5.0 Private Equity Financing: A Complete Lifecycle

Two interesting factors in the study of PE-VC Financing are the stage of the investee firm at the time of
investment and the timing and mode of exit. Hence it was felt that an analysis of complete investment lifecycle
of a firm receiving PE-VC investment i.e. different rounds of PE-VC funding and subsequent exit will help to get
additional insights to understand the dynamics of PE-VC investments.
Out of many different attributes which define PE-VC investment lifecycle, duration of investment is probably
most significant. As mentioned earlier, complete data for both investment and exits was available for 98 out of
1503 firms which received PE-VC funding in India during 2004-2008. One of the most striking findings of PE-VC
financing lifecycle analysis is that while normally PE investments are considered to be medium to long term
investments spanning over a minimum of 3 to 4 years, average duration of investment in India is remarkably
low i.e. 17 months.
5.1 Round wise Investments of PE-VC firms
If round wise break-up of total amount invested by PE investors is considered, a staggering 82% of total PE-VC
investments in terms of amount invested are Round 1 investments or fresh investments as can be observed
from Exhibit 11. Thus only 18% investments are follow-up investments which is slightly worrying trend as it
indicates less inclination on the part of PE-VC funds to finance ventures in successive stages of development.
This pattern also possibly suggests that a large chunk of new ventures may not be having sufficiently profitable
operations which can attract PE-VC funds for subsequent investments after the first round and may also point
to higher rate of failures of new ventures. This trend can also be attributed to the fact that PE-VC funds are
continuously in search of sectors providing higher returns in quicker time and accordingly modify their
investment behavior and choices so as to meet the immediate objectives and targets for returns.
5.2 Number of Rounds of PE fu nding

We also analyzed the number of rounds of funding received by companies in different industries. An in-depth
analysis of available data of PE-VC funding received by 1503 companies across ten industry classes over the
five year period reveals that 1226 out of 1503 (around 81 %) companies has received only one round of
investment which corroborates the earlier statement that 82 % of total amount is invested in Round 1.

Table 12 - Industry wise number of firms receiving specific number of rounds of PE funding
Number of Rounds of PE funding
Industry Total
1 2 3 4 5 6 7 8
Computer-Hardware 36 5 1 1 43
Engineering & Construction 137 21 6 1 1 1 167
Financial services 110 30 5 3 2 1 151
Healthcare 92 19 6 2 1 120
IT & ITES 295 53 12 3 1 364
Manufacturing 214 25 6 3 2 250
Non-Financial Services 133 12 5 2 1 153
Others 65 10 3 1 79
Telecom & Media 93 15 4 112
Transportation & Logistics 51 8 3 1 1 64
Grand Total 1226 198 51 17 3 4 2 2 1503
With another 198 companies managing only two rounds of investments, only little more than 5% (or 79) of the
1503 companies have received more than two rounds of PE funding. Table 12 shows industry wise number of
companies receiving different number of rounds of PE funding. The trend is by and large similar across
industries and is proportional to their share in total investments.
5.3 Time Interval betwe en successive ro unds of PE fundin g

While discussing multiple rounds of PE-VC funding, one more aspect worth looking at is the time interval
between successive rounds of funding. Table 13 presents average time interval in months between different
rounds of PE funding (for Round 1 to Round 4) across industries. With average investment duration of PE-VC
investments in Indian markets being only 17 months, time period between successive rounds is also
predictably low and hovers around 10 to 15 months in most of the industries with only Healthcare, Non-
financial services and Computer-hardware having higher than one year time-interval between successive
rounds consistently. The average time interval between Round 4 and Round 3 may not be a very good
indicator as there were very few companies who have received more than three rounds of funding in our
dataset (as seen from Table 12).
5.4 No. o f deals at differe nt time intervals sin ce in corporation

A different, but nevertheless significant perspective of PE-VC investments from lifecycle point of view is
presented in Table 14. It provides details about the number of PE-VC deals at various financing stages in terms
of different time-slots or intervals since incorporation of the company. This is an altogether different approach
of looking at PE-VC deals and throws some light on how much time it takes for the firms to attract PE-VC
funding since incorporation (although few VC investments like those in the form of seed capital to start-ups,
etc. may be before incorporation) as well as how long after incorporation the companies are still able to
attract PE investments.
This analysis is performed for a total of 722 deals for which date of incorporation of the company which
received PE-VC funding was available. The analysis provides some surprising insights in almost opposite
directions –

• As can be observed, 17% (or 25) of total 147 early stage investments are as many as 10 years after the
incorporation and
• At the same time, 7.5% (or 22) of total 300 late stage investments are in less than 5 years since
incorporation.
Table 13 - Average Time Interval between successive rounds of PE funding (in

Months)
Industry R2-R1 R3-R2 R4-R3
Computer-Hardware 14.43 16.72 N.A.*
Engineering & Construction 17.13 4.88 23.87
Financial services 12.28 7.44 5.07
Healthcare 14.89 14.22 20.27
IT & ITES 15.64 12.43 7.12
Manufacturing 11.58 10.14 2.07
Non-Financial Services 13.93 16.57 14.20
Others 8.46 6.03 N.A.*
Telecom & Media 11.16 15.23 N.A.*
Transportation & Logistics 9.54 9.63 1.03
TOTAL 13.69 10.91 11.25
NA* - No Round 4 investments for these industries as per the available data.
Table 14 - Number of deals at various financing stages in different time intervals since incorporation
Financing Time since incorporation (in years)

Total
Stage <1 1 to 3 3 to 5 5 to 8 8 to 10 >10
Early 20 51 37 13 1 25 147
13.6% 34.7% 25.2% 8.8% 0.7% 17.0%
Time since incorporation (in years)
<3 3 to 5 5 to 8 8 to 10 10 to 15 >15
Growth 22 26 68 36 31 53 236
9.3% 11.0% 28.8% 15.3% 13.1% 22.5%
Late 7 15 25 19 61 173 300

2.3% 5.0% 8.3% 6.3% 20.3% 57.7%
Pre-IPO 3 0 6 3 13 14 39
7.7% 0.0% 15.4% 7.7% 33.3% 35.9%
But one of the most compelling observations which attracts immediate attention is that 351 out of 722 (nearly
50%) PE deals analyzed are investments after more than 8 years after incorporation which again highlights
increasingly risk-averse attitude of PE-VC funds and hence the propensity to invest in established firms.

6.0 Exits in PE-VC Financing

One of the most significant aspects in PE-VC financing from investors’ point of view is the choice and timing of
the exit from investee firm. Different possible exit choices play a major role in PE-VC financing and likely
availability of favorable exit opportunities in quick time is one of the key criterion used by PE-VC investors
while evaluating different investment options.
6.1 Classification of PE-VC Exits

PE-VC investments differ mainly from traditional financing in the sense that it is inherently more risk-prone
and therefore higher returns are expected in the limited period of time in the form of a realization event like
IPO or Trade sale. Though other exit methods like Buyback by management of the investee firm are in practice,
Initial Public offers (IPOs) and Trade sale through M&A (Mergers & Acquisitions) are the more prevalent and
preferred methods of exit in Indian PE-VC markets.
Table 15 - Classification of companies with PE-VC funding on Investment and exit basis for 2004-08
Number of Exit Method (If any)

Category of company
Companies IPO M&A
Companies with both investment round(s) and exits 98 56 42
Companies with only investment round(s) and no exits 1276 - -
Companies with no investment and only exits* 129 28 101
TOTAL 1503 84 143
*No investment in these companies during the study period (2004-2008) as per the available data
Table 15 presents a classification of 1503 companies for which PE-VC investments and exit data was available.
As indicated, only 98 (or less than 7%) of the total 1503 companies have both investments as well as exits
during these five years. Another 129 companies have seen PE-VC exit events in these five years but no
investment data is available for these companies during the period under study and thus PE-VC investments in
these companies could have been before 2004.
6.2 C omparison of Exit Methods

PE-VC fund exits from their investee firms can be broadly classified in to two types: 1) Through a public offer
(IPO) and 2) Through Trade sale – M&A. Table 15 indicates that PE-VC investors exited through an IPO in a total
84 investments while PE-VC investors in 143 companies opted for M&A-Trade sale as the exit route. Thus there
were total of 84 PE-backed IPOs (for the 84 companies) and 168 M&A deals (in 143 companies) during the
period from 2004 to 2008.
First let us look at the ratio of IPO exits to M&A exits across industries. The overall ratio of IPO to M&A exits is
exactly 0.5. The number of exits by IPOs is considerably lesser than the number of M&A exits across industries,
with the exception of Engineering & Construction and Transportation & Logistics sectors, where the ratio is
above 1.3. Exhibit 12 graphically represents the ratio of IPO to M&A exits for all the ten industry classes.
Computer-Hardware, IT & ITES and Healthcare – all traditionally attractive industries for PE-VC investments
show a strong inclination towards M&A exit routes with the ratio of IPO to M&A exits being less than 0.4.

Table 16 presents average number of PE-VC funding rounds before exit for different industries for both the exit
routes. Except Computer-hardware and Engineering & Construction industries – both the industries have
contrasting but strikingly different and higher average numbers of rounds of funding before IPO and M&A exits
respectively – rest of the industry categories has shown little difference between numbers of rounds of
funding for both the type of exits as is evident from Table 16 and Exhibit 13.
Table 16 - Average number of rounds before exit across

the industries
Industry IPO M&A
Computer-Hardware 4.00 1.50
Engineering & Construction 3.27 5.50
Financial services 3.44 3.27
Healthcare 2.25 2.82
IT & ITES 1.83 1.44
Manufacturing 1.82 1.67
Non-Financial Services 1.89 1.78
Others 2.50 2.00
Telecom & Media 2.00 1.69
Transportation & Logistics 2.50 2.00
The overall average number of rounds - for all exit deals considered together over the period of five years - are
only marginally higher for IPO exits (2.35) as compared to that for M&A exits (1.97). This trend is also reflected
in Exhibit 13 for all the industries apart from two industries mentioned above. Thus while the average hovers
around 3 rounds for financial services industry, it is around 2 rounds for rest of the industry classes for both
the exit methods with the curve for IPO being slightly above the M&A curve (with the exception of Engineering
& Construction and Healthcare industries).

Similar comparative analysis of IPO and M&A exits is next performed for the exit deals year wise for each year
from 2004 to 2008 to check whether there are temporal variations if any. First let us look at the ratio of IPO
exits to M&A exits over the years. Exhibit 14 graphically presents the ratio of IPO to M&A exits over the five
years. As it is already known that the overall ratio of IPO to M&A exits is exactly 0.5, the ratio expectedly varies
in the range of 0.3 to 0.6 for most of the years except in 2006 when it is significantly high (> 0.8). This can
probably be attributed to the higher preference to IPO exits over M&A exits owing to flourishing IPO markets
during 2006-07.
The pattern of variation in average number of rounds for the two exit methods over the years is mapped next.
While the average number of rounds of funding for those companies which had IPO exits show considerable
variations and fluctuations over the years, it is more or less constant for those companies which had exits
through M&A routes. Details are given in Table 17 and Exhibit 15. While the average number of rounds before
IPO exits is more than that of M&A exits for all the five years, they are nearly equal for 2006 & 2007 with
average numbers of rounds dipping to 2 rounds even for those companies that had exits by an IPO. This could
be attributed to the urge on the part of PE-VC investors to tap the booming IPO markets in 2006-07 to achieve
higher returns.
Table 17 - Average number of rounds before exit

across the years
Year IPO M&A
2004 1.67 1.43
2005 3.12 2.03
2006 2.13 1.97
2007 2.00 1.98
2008 3.11 2.39
6.3 No. o f deals fo r d ifferent duration of In vestments

While PE-VC investments in different stages were classified into different time-intervals in Table 14 depending
upon time elapsed since incorporation of the firm, here the emphasis is on classifying the PE-VC investments at
various financing stages according to the duration of investment. Duration of investment is simply the
difference between time of exit and time of investment. Table 18 presents number of deals at various
financing stages segmented into different time intervals depending upon the duration of investments. This
analysis was possible only for the 98 companies (total of 110 deals for these 98 companies) for which both
investment and exit data was available.
The findings from Table 18 are consistent with the findings indicated earlier in this report. Main findings from
the above table are:
• 75% (or 22) out of 29 investments even at the growth stage are exited in a time interval of less than
two years.
• For late stage investments, the proportion of exits within two years is 87%.

Both of the above observations underlines the overall short average duration of PE-VC investments in Indian
markets.
The study also revealed that the average duration of investment for firms with IPO and M&A exits is 12 and 23
months respectively. This result, though it confirms with overall average duration of 17 months should be
validated further as and when data on more PE-VC exits become available.
Table 18 - Number of deals at various financing stages for different duration of investments
Financing Duration of investment(in years)

Total
Stage <1 1 to 2 2 to 3 3 to 4 4 to 5 >5
Early 0 2 0 0 0 0 2
0.0% 100.0% 0.0% 0.0% 0.0% 0.0%
Growth 14 8 6 1 0 0 29
48.3% 27.6% 20.7% 3.4% 0.0% 0.0%
Late 35 15 6 1 0 0 57
61.4% 26.3% 10.5% 1.8% 0.0% 0.0%
Pre-IPO 20 2 0 0 0 0 22
90.9% 9.1% 0.0% 0.0% 0.0% 0.0%
6.4 Performance of Companies re ceiving PE-VC funding

Our study indicates that during the five year period, there were 1276 companies (more than 80% of total 1503)
in companies which did not have any exits for investors (Table 15).
One of the major concerns while analyzing these companies is the present status of these companies. This
leads us to question whether their operations are profitable/ financially viable and whether these companies
will be able to survive and grow in the future.
Table 19 - Industry wise number of companies with no exits

Time elapsed since last investment (in years)
Industry Total
<1 1 to 2 2 to 3 3 to 4 4 to 5
Computer-Hardware 10 11 6 4 1 32
Engineering & Construction 57 54 34 6 2 153
Financial services 44 60 29 2 1 136
Healthcare 36 28 32 9 2 107
IT & ITES 98 94 69 12 15 288
Manufacturing 54 70 66 23 5 218
Non-Financial Services 46 56 19 9 130
Others 18 16 22 11 67
Telecom & Media 35 38 12 3 2 90
Transportation & Logistics 19 22 13 1 55
Grand Total 417 449 302 80 28 1276

One of the factor which can give some idea about the present status of these companies is the time elapsed
since last PE-VC funding round in these companies. If the time elapsed is say, less than two years, it can be
assumed that the firm is alive and is being reasonably successful as the firms’ operations were viable enough
to attract PE-VC funding at least once in last 24 months. If the time interval is less than 3 years since the last
PE-VC investment, it may be attributed to specific conditions and requirements of funding for the particular
firm or the industry in which it operates.
But for firms which had neither a subsequent round of PE-VC funding nor an exit event for more than three
years, the possibility of the firm not performing well is very high. Even if the firm is not dead, its operations
could be making losses or the business growth could be negative. Thus this analysis helps us to throw some
light on mortality rate of PE-VC backed firms.
Table 19 indicates industry wise number of companies according to time elapsed since last PE-VC investment.
It presents a positive picture where there are only 108 (less than 10%) out of the 1276 firms are having more
than three years since last investment. With more than two-third (or 866) of the 1276 firms under the two-
year bracket, it can be said that the jury is still out on the success of the investments in these firms.

7.0 Private Equity Financing: A Statistical Analysis

This section presents the results from the advanced statistical analysis done on the dataset. The details of the
analysis are given below:
• Duration of Investment and Type of Exit Method were taken as the dependent variables
• Variables like Industry, Financing Stage, Region and Type of PE-VC fund were considered as
independent variables.
The main objectives of doing the statistical analysis was –
• To determine if there is any degree of association between the dependent and independent variables
and to gauge the extent to which the variations in dependent variable can be explained by
independent variables and
• To test the predictive power of available data – i.e. for a given set of combination of independent
variables, the degree to which the probable exit method can be predicted correctly.
Two different multivariate data analysis techniques were used in the analysis to achieve the above objectives,
namely, multiple regression to determine the association and discriminant analysis to explore the predictive
capabilities.
7.1 M ultip le Regression

The main characteristics of the dataset are:
• All the independent variables except Amount are non-parametric i.e. they are multiple-level
categorical variables on nominal scale. For e.g. There are 10 different Industry classes, 4 different
categories of Financing Stages (as PIPE & Buyout stage deals as explained earlier are not considered
for this analysis of exits), 4 different regions and 2 types of PE-VC funds.
• One of the dependent variable, Duration of investment is metric while the other (Type of exit
method) is non-metric i.e. two-level categorical variable (IPO or M&A-Trade sale).
Therefore to do a multiple regression involving categorical variables, dummy variables were used. Thus all the
categorical variables are first coded into fixed discrete values and then converted into dummy variables having
corresponding fixed value in binary form. In general, any categorical variables having K levels can be identified
uniquely with K-1 dummy variables because if K dummy variables are used to represent K levels, then a linear
relationship will exist between dummy variables (Multicollinearity condition) making estimation of coefficients
impossible.

Table 20 - Multiple Regression using dummy variables

Dummy Variables used
Sl. No. Independent Variables Categories (No.)
(No.)
Computer-Hardware, Engineering &
Construction, Financial services.
1 Industry Healthcare, IT & ITES, Manufacturing, Non- X1 to X9 (9)
Financial Services, Telecom & Media,
Transportation & Logistics, Others (10)
2 Stage Early, Growth, Late, Pre-IPO (4) X10 to X12 (3)
3 Region East, North, South, West (4) X13 to X15 (3)
4 Type of PE-VC fund Domestic, Foreign (2) X16 (1)
Illustration of coding and interpretation using dummy variables
Dummy Variables
Region
X13 X14 X15
East 0 0 0
North 1 0 0
South 0 1 0
West 0 0 1
7.1.2 Inte rpretation o f results

As indicated in Table 20, we used a total of 16 dummy variables X1 to X16 to represent the four categorical
independent variables i.e. Industry, Financing stage, Region and Type of PE-VC fund.
For e.g. in the above illustration, Four regions are represented with 3 dummy variables – X13, X14 and X15.
This arrangement defines “East” as the base constant (as it is represented with A1=A2=A3=0) and the
coefficients obtained from multiple regression will define the shift of the function for North, South and West
regions (i.e. relative increase or decrease) as compared to that by East region.
Table 21 presents a summary of results obtained from bivariate and multivariate regressions performed using
SPSS. Key inferences from the table are:
• Bivariate regressions indicate the relative individual impact of each independent variable on the
dependent variables i.e. Duration of investment and exit mode. The results indicate that variation in
duration of investment can be best explained by financing stage while the variations in choice of Exit
mode are more closely related with industry class as compared to other independent variables (As in
both these cases value of coefficient of determination- R-square are higher and high value of F-ratio
and very low p-values (sig.) in analysis of variance indicates that the regression as a whole is
significant).
• The multiple regressions indicate the combined impact of various independent variables on duration
of investment, exit mode and amount invested. Exit mode shows higher predictability among the
three dependent variables (Again with higher coefficient of determination along with low sig. value
indicating the regression being significant).

Table 21 - Summary of results of Bivariate and Multiple Regression

Std. Error ANOVA
Sl. Dependent Independent R Adjusted
R of the
No. variable variable(s) Square R Square F Sig.
Estimate
Bivariate Regression
Duration of
1 Industry 0.318 0.101 0.007 10.853 0.938 0.498
Investment
Duration of
2 Stage 0.387 0.150 0.118 10.157 4.755 0.004
Investment
Duration of
3 Region 0.159 0.025 0.011 10.876 0.696 0.557
Investment
Duration of
4 Type of PE-VC fund 0.278 0.077 0.066 10.453 6.952 0.010
Investment
5 Exit mode Industry 0.544 0.296 0.212 0.423 3.506 0.001
6 Exit mode Stage 0.429 0.184 0.154 0.439 6.093 0.001
7 Exit mode Region 0.221 0.049 0.014 0.474 1.389 0.252
8 Exit mode Type of PE-VC fund 0.115 0.013 0.001 0.477 1.105 0.296
Multiple Regression
Duration of Industry, Stage, Region,
1 0.643 0.413 0.275 9.211 2.990 0.001
Investment Type of PE-VC fund
Industry, Stage, Region,
2 Exit mode 0.714 0.509 0.394 0.371 4.410 0.000
Type of PE-VC fund
Industry, Stage, Region,
3 Amount 0.565 0.319 0.159 95.851 1.990 0.026
Type of PE-VC fund
7.2 Discrimin ant Analysis

Discriminant Analysis is typically used for the prediction of categorical or non-metric variable being classified
into two or more mutually exclusive categories. The crucial factor in Discriminant Analysis is the choice of
independent discriminating variables which are associated with the probability of the dependent variable
falling into one of the two or more categories.
Discriminant analysis was used in our study to predict the probable exit route for an investment, given the
dependent variables. The different categories of exit used were IPO exits and M&A exits. Independent
variables were the same that were used for multiple regression i.e. Industry, Financing Stage, Region, Type of
PE-VC fund.
One of the most significant outputs from Discriminant analysis results is the proportion of the cases correctly
classified. This proportion also indicates the efficacy and relevance of the application of Discriminant analysis
to the available data for predicting the classification. Discriminant analysis was done on the investment and
exit data of 85 out of 98 companies (for which all necessary details were available). Out of the 85 Companies,
56 have preferred IPO exits while 29 opted for M&A route.
Table 22 presents the summary of the results of the Discriminant analysis performed to determine the
predictability of exit method choice. As can be seen from Table 22 –
• 49 out of 56 IPO exits and 24 out of 29 M&A exits were correctly classified, thus leaving an error of 12
out of 85 cases. Overall 85.9% cases are correctly classified.

• Another aspect of Discriminant analysis is the cross-validation of results which increases the validity
and reliability of the test results. In cross validation, each and every case is classified using a
Discriminant function derived by all the cases other than that case. It was found that even after cross-
validation, 80 % of the cases were correctly classified.
Table 22 - Discriminant Analysis - Exit Method Classification Results

Dependent Predicted Group
Variable (Y) Membership #
Total
i.e. Exit
1 (IPO) 2 (M&A)
Method
1 (IPO) 49 7 56
Count
2 (M&A) 5 24 29
Original
1 (IPO) 87.5 12.5 100.0
%
2 (M&A) 17.2 82.8 100.0
1 (IPO) 45 11 56
Count
Cross- 2 (M&A) 6 23 29
validated* 1 (IPO) 80.4 19.6 100.0
%
2 (M&A) 20.7 79.3 100.0
Notes -
* - Cross validation is done only for those cases in the analysis. In cross validation, each case
is classified by the functions derived from all cases other than that case.
# - 85.9% of original grouped cases correctly classified and 80.0% of cross-validated grouped
cases correctly classified.
Both these results points towards reasonably good predictive power of the available data in prediction of exit
method choice. This conclusion is also consistent with our inference from Multiple regression that exit method
exhibits highest predictability among different dependent variables.

8.0 Conclusion
8.1 Brief Summary of outco mes
The study was primarily aimed at analyzing the PE-VC investments and exits to explore the various industry
wise, financing stage wise, year wise, region wise, investor wise trends in PE investments, the perspective of
investment lifecycle in investee firms and the choices of exit methods.
It was found that PE-VC investments in India have become more inclusive over the years, and not restricted to
just a few industry sectors. When compared with the markets worldwide, both the CAGR and Y-o-Y growth of
Indian PE-VC investments are much higher. The PE-VC investments also show a very strong positive correlation
to capital markets.
As far as the investment lifecycle of PE-VC funded firms are concerned, the average duration of investment as
well as time-interval between successive rounds of investment is very low in Indian markets. A worrying factor
is that a major proportion of total investments by PE-VC funds during the five year period are fresh
investments. Follow-up investments account for only 18% of the total investments. This indicates that PE-VC
investments are risk averse, as they are investing more in established firms rather than new inherently risk-
prone ventures, to invest.
Two most preferred exit methods in Indian markets are IPO and M&A. The overall ratio of IPO to M&A exits is
0.5 and is relatively constant over the years and across the industries barring a few exceptions. Owing to
overall short duration of PE investments in Indian markets, it is observed that bulk of the PE investments; even
the ones made as the growth stage investments exit within two years of investment. Though the jury is still out
on this, it looks like the mortality rates of PE-VC investments in India are not very high.
8.2 P olicy Implications

No one can deny the importance of having a conducive and unambiguous policy environment in place for
investments to flourish in any market. This applies to PE-VC investments as well. A well-defined regulatory and
legal framework along with fiscal (taxation), foreign investment (both direct and institutional investments) and
currency exchange policies would go a long way in positively influencing the PE-VC investment in the country.
As mentioned at the onset, one of the primary objectives of VC Financing is to fill the void left by traditional
financial institutions in funding innovative, promising entrepreneurial businesses that are inherently risky. The
results from the report indicate that most PE-VC funds are inclined towards generating handsome returns in
shortest possible time, without fulfilling the broader objectives of providing risk capital to innovative
businesses. Suitable policy incentives should be formulated to encourage start-up / early stage investments
especially in small and medium enterprises and promising ideas by new entrepreneurs. Also policies that are
designed should actively support and reward follow-up investments.
According to “Global Trends in Venture Capital 2006 Survey” by Deloitte, access to high quality entrepreneurs
and low cost locations were among the most significant reasons cited by investors for preferring India to
invest. The policy makers and Indian industry needs to think beyond to create new points of difference for
attracting investors apart from above mentioned strengths.
The future outlook for PE-VC funding over medium-to-long term looks very promising for India. Though India
has emerged as a leading destination for PE-VC investments in the global stage in last five years (2004-2008), it
needs to consolidate over these gains and grow further. India needs to attract and retain more and more PE-
VC investors to meet the ever increasing need for funds across the sectors to fuel its economic growth as well
as to nurture and promote its entrepreneurial talent. This can be achieved only through coordinated efforts by
the government, regulatory agencies and most importantly the industry itself to create a positive and vibrant
investment environment for PE-VC Financing in India. Thus to conclude, while it can be said that India is one of
the leading VC-PE markets in the world, it still has many more miles to go in terms of fulfilling the expectations
of Indian entrepreneurs and investee companies.

Important References
Online Databases –
• Venture Intelligence ( www.ventureintelligence.in )
• Asian Venture Capital Journal ( www.avcj.com )
Web Publications -
• Venture Capital & Private Equity in India, October 2007. ( www.indiavca.org )
• 2007 European Private Equity Activity Survey by PEREP.( www.evca.com )
• EVCA Quarterly Activity Indicator Survey, December 2008 by PEREP.(www.evca.com)
• PricewaterhouseCoopers / NVCA MoneyTree Report, January 2009. ( www.nvca.org )
• BVCA Private Equity & Venture Capital Investment Activity Report 2007, July 2008.
(www.bvca.co.uk)
• BVCA Private Equity and Venture Capital Report on Performance Measurement and Investment
Activity 2008, May 2009. (www.bvca.co.uk )
• PricewaterhouseCoopers Global Private Equity Report 2004, 2005, 2006, 2007, 2008.
• “Global Trends in Venture Capital 2006 Survey” by Deloitte & Touche USA LLP.
• “How to teach a big baby to walk: Case of Indian Venture Capital Industry” by K.B.Subhash, Journal of
Private Equity, Fall 2006.
• “The structure and governance of venture-capital organizations” by William Sahlman, Journal of

financial Economics, December 1990.
• “Venture Investing in India : Think twice” by Shashank Singh, Shailendra Singh and Ashok Dylan
Jadeja, Journal of Private Equity, Fall 2005.
• “Private Equity in China and India” by Roberto Ippolito, Journal of Private Equity, Fall 2007.
• “Investing in Indian PIPEs” by Tarun M. Stewart and Cyril S. Shroff, Journal of Private Equity, Summer
2007.

Contact Information
Dr. Thillai Rajan A.

Assistant Professor
Department of Management Studies
Indian Institute of Technology Madras
Chennai, India.
thillair@iitm.ac.in
+91-9444926442
Ashish Deshmukh
ashdesh27@gmail.com
+91-9962761100

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India Venture Capital and

Private Equity Report

On top of the World;

On top of the World; Still miles to soar

An analysis of Venture Capital and

Department of Management Studies

We trust that you find this report useful.

© Indian Institute of Technology Madras (i)

1.0 Execu tive Summary 1

2.0 Private Equity Financ ing in India: Introdu ction 5

3.0 Objective and Analysis Methodology 8

4.0 Private Equity Inv estmen ts 11

5.0 Private Equity Financ ing: A Complete Lif ecycle 27

© Indian Institute of Technology Madras (ii)

6.0 Exits in PE-VC Financ ing 30

7.0 Private Equity Financ ing: A Sta tis tica l An alysis 36

8.0 Conclus ion 40

Important Ref erences 42

© Indian Institute of Technology Madras (iii)

2 Financing Stage Classification Details 9

7 Industry wise % Investment across leading PE markets 21

8 Financing Stage wise % investment in 2007 across different markets 21

9 Industry wise Y-o-Y Growth in PE investments 22

10 Private Equity vs. Capital Market Investments 24

11 Industry wise Private Equity vs. Capital Market Investments in India 25

12 Industry wise number of firms receiving specific number of rounds of PE funding 28

13 Industry wise Average Time Interval between successive rounds of PE funding 29

16 Average number of rounds before exit across the industries 31

17 Average number of rounds before exit across the years 33

18 Number of deals at various financing stages for different duration of investments 34

19 Industry wise number of companies with no exits 34

20 Multiple Regression using dummy variables 37

21 Summary of results of Bivariate and Multiple Regression 38

22 Discriminant Analysis - Exit Method Classification Results 39

© Indian Institute of Technology Madras (iv)

2 Comparison of Investment Pie in 2004 and 2008 12

3 Industry wise total number of deals for 2004-2008 12

4 Year wise amount Invested vs. No of deals 14

5 Industry wise average amount per deal for 2004-2008 14

6 Trends in Early and Late Stage investments over the years 15

7 Financing stage wise total PE Investment for 2004-2008 16

8 Financing stage wise total number of deals for 2004-2008 16

9 Comparison of CAGR (over 2004-2008) for Industry wise PE Investments 23

10 Size of Investment vs. Number of Deals 23

11 Round wise PE-VC Investments over 2004-2008 27

12 Ratio of IPO Exits to M&A Exits across the industries 31

13 Average Number of Rounds before Exit across the industries 32

14 Ratio of IPO Exits to M&A Exits over the years 32

15 Average number of rounds before Exit over the years 33

© Indian Institute of Technology Madras (v)

1.0 Executive Summary

1.2 P rivate Equ ity Financin g: Investment s

© Indian Institute of Technology Madras

© Indian Institute of Technology Madras

1.3 P rivate Equ ity Financin g: Lifecycle and Exits

1.4 P rivate Equ ity Financin g: A St atistical Analysis

© Indian Institute of Technology Madras

© Indian Institute of Technology Madras

2.0 Private Equity Financing in India: Introduction

2.2 P olicy Ou tloo k and Regulatory Frame work

1. K.B. Chandrashekhar Committee (2000) –

© Indian Institute of Technology Madras