Private Equity

Private Equity Investment and Investment Banker

FeaturedLeave a comment

Private EquityThere are tons of Investment Bankers right from bulge brackets (read Goldman Sachs, JP Morgan, Morgan Stanley) to small ones (ones with 2 – 3 people) who provide their services in Private Equity. While the bulge bracket will not do deals below USD 100 million, the others also have some sort of minimum deal size they target at to report a minimum revenue per deal to cover their cost and expenses per month.

In our experience, most of the start-up Clients, we have worked with, need some sort of consulting (especially for a 5-year strategic plan) before pitching the idea to investors. This consulting, in our opinion, is essential to ensure your business idea and business model is in sync with the business strategy, the financial projections (also known as financial model), the market trends and the competitive forces/analysis. These 6 parts form the major ones from the business idea perspective.

Market segment (and market trends) plays a major role because you will operate and grow within it (remember, B2B and B2C segments have different business dynamics with its own cost and revenue drivers. Because of this, investors evaluate them deeply from at least 5 years down the line. Off late, Robotics in India, for example, is doing well. So, Investors would explore the market for it, your idea to address and tap the market, the team and the initial traction).

However, we should keep in mind that an Investor always invest in the Entrepreneur – it is s/he who converts the business idea into a tangible sustainable business and give the investor a successful exit. Hence, a credible team goes by far to attract investors and get funded.

For example, an e-commerce business, at the core, should have a CEO (sales), COO (operations) and CTO (technology). The core team may be surrounded by Advisors of respective fields to help them formulate business plan and make strategic decision. We have seen most successful businesses with this structure. As and when you grow, a CFO needs to be present in the core team.

Whether investors would like to see traction at the initial stage depends on the idea, its stage and the investor’s investment philosophy. For example, there are technology companies that gets funded even at idea stage (the company is not on the ground yet). Such cases require a strong large untapped market, commendable business plan, sustainable and scale-able business model and a strong team. B2B businesses are not highly scale-able (at least to the best of my knowledge), but usually have steady cash flow after 3 years, especially once they win large / long-term contractual agreements.

Ideally, an angel investment takes 75–90 days, and a VC round 4 – 6 months (first discussion to receiving the money into your bank account). This is assuming that your information memorandum is ready. Once invested, an angel investor would stay invested ideally for 3 years on an average and exit with 2x – 4x returns, and a VC stays invested up to 7 years (depends on the fund) and exit with up to 10x returns. For example, Tiger Global, one of the top VC investors, is estimated to make a partial exit from Flipkart with 3x return; EVC Ventures, an early-stage VC fund, exited from Milkbasket with 200% IRR of their initial investment.

Our story: Let me introduce you to Garg Partners

logoGarg Partners is a management consulting and investment banking firm dedicated to helping start-ups, small and mid-size enterprises improve organizational performance and with private equity and M&A advisory.

In the last 3 years, Garg Partners helped (pre-revenue) start-ups, high-growth and distressed businesses across 13 industry verticals (retail & e-commerce, manufacturing, logistics, travel & transport, food & beverages, fashion & apparel, automotive, specialty chemicals, engineering, technology, media, bio-technology and healthcare) develop 5-year strategic plan, improve organizational performance (operational efficiency, sales, inventory, gross margin, EBITDA/EBIT margin, cash flow and profitability), develop marketing and branding strategy (including celebrity brand endorsement), initiate strategic partnerships, restructure organization, restructure debt and originate strategic M&A transactions. We had built investor-facing pitch-deck and 5-year financial model for 43 products and 19 countries with manufacturing plant and R&D facility for raising equity capital, constructed accretion/dilution analysis for buy-side M&A (51% stake acquisition with 25% cash and 75% stock), calculated the market size for 75 products, designed CEO compensation, prepared numerous pitch-decks and financial models for sell-side M&A and performed valuations, besides various corporate advisory projects.

Over the past 5 years, Garg Partners has built relationship and understood the investment philosophy of 450+ Private Equity and Venture Capitalists (incubator, accelerator, seed, early-stage, growth and buyout) across India, Hong Kong, Singapore and USA, 340 accredited Angel Investors and 10 large business houses in India for strategic minority investments.

In FY19, Garg Partners clocked a growth of 313% by revenue and 100% by new Client acquisition over FY18. Reference Client base grew 60% over the last year and contributed 39% to FY19 revenue. This year’s performance is followed by a revenue growth of 46% in FY20 and 23% in FY21.

Write to me: nitin@gargfinanceblog.com

Advertisement

Why should you consider Singapore for your company registration?

Nitin Garg6 Comments

singaporeLast week, one of my e-Commerce Clients in the B2C segment asked me this question: “Where can I register my company, other than in India? Is Singapore a good option?”

This is a common question every Indian startup Entrepreneur explores, keeping in the mind the FDI and taxation policies that Indian government has. So, let’s take a close look at why you should consider Singapore as your destination while exploring foreign company registration

FDI Policy

The Government of India recently introduced Foreign Direct Investment (FDI) policy did not permit FDI in the multi-branded retail (B2C segment). As such, foreign venture capitalists have restrictions while funding an Indian online retail operation.

Take the example of Flipkart, India’s largest e-commerce private company. When the Indian Government turned down the proposal for allowing FDI in the retail sector, investors of Flipkart were left with 2 options: (i) sell the company at the best price or (ii) sell the risky part of the business (logistics and delivery) and move the profitable part to a country with more relaxed regulations. It’s very obvious for the Bansals (Sachin Bansal and Binny Bansal, the Co-founders of Flipkart) to agree to the second option; they registered their company in Singapore. Flipkart’s investors now can infuse the capital in the parent company, and can direct the funds to its India arm

[Click to continue reading]

2015 Recap: Angel, Venture Capital and Private Equity

Nitin Garg2 Comments

Angel and Venture Capital investment set a new stage in Year 2015, both in value and volume, which in effect drove the overall private investments to a new high

According to VCCEdge, Angel and VC investors closed a total of 1,096 deals in 2015, an increase of 68% from last year, a record jump and also the highest early-stage investment in India. Of these, angel and seed investors funded 632 deals, whereas VCs closed the remaining.

PE_Value

PE_Volume

In value terms, angel and VC firms together contributed 24.5% of the total private investments in 2015, a growth of 17.2% as compared to last year. On a standalone basis, angel funding crossed US$ 300 million for the first time, an increase of nearly 60%, from US$ 196 million in 2014,. VC funding showed a similar trend, clocking deals worth US$ 5.183 billion, a growth of nearly 127%, as against US$ 2.287 billion last year.

Year 2015 also witnessed highest funding in eCommerce and Technology industries. According to Padmaja Ruparel, President, Indian Angel Network “The technology and e-commerce sectors have been in the limelight in 2015, and our country is the fastest-growing start-up ecosystem in the world, right now. 11 of the 68 ‘unicorns’ globally, (companies that are valued at over US$ 1 billion) are of Indian origin.”

Currently, India is home to over 18,000 start-ups valued at US$ 75 billion and employing 300,000 people. This makes India the world’s second largest start-up ecosystem while the growth rate is estimated to be highest here.

Leveraged Buyout (LBO): Economics and Return Analysis

Nitin GargLeave a comment

EconomicsIn this part, the Part 4 of my article on LBO, I’m going to run you through its economics – the metrics used to judge an LBO candidate and how it generates returns. But before reading further, you may want to take a glimpse of my previous articles on LBO through the following links so that we’re on the same page.

Part1: Leveraged Buyout – An Overview

Part2: Leveraged Buyout – What Makes a Strong LBO Candidate?

Part3: Leveraged Buyout – Key Participants

Metrics Used To Judge An LBO Candidate

There are two metrics that defines the attractiveness of an LBO candidate – (1) Internal Rate of Return (IRR), and (2) Cash Returns.

IRR is the primary metric that measures the total return on the sponsor’s equity investment (which includes additional capital infused or dividends received) during the investment period. For everybody’s benefit, an IRR is the discount rate at which NPV of all the cash flows (inflow and outflow) becomes zero.

The drivers that affect IRR are:

  • target’s financial performance
  • acquisition price
  • financing structure, especially the equity contribution made
  • exit multiple, and
  • holding period.

As mentioned in my first article – LBO: An Overview –, a sponsor seeks a minimum of 20% return on their investment over their holding period of five years. So, it’s obvious (looking at the drivers of IRR) that minimizing the equity contribution and acquisition price, while exiting at a higher valuation by boosting the financial performance of the target, fetches handsome returns.

[Click to continue reading]

Leveraged Buyout (LBO): Key Participants

Nitin GargLeave a comment

ParticipantToday, let’s discuss the key participants involved in an LBO transaction and the role they play in leading the LBO to its success. But before proceeding further, you may want to take a glance at the following parts that highlight my previous write-ups on LBO.

Part1: Leveraged Buyout: An Overview

Part2: Leveraged Buyout: What makes a Strong LBO Candidate?

I’ll start this article with the financial sponsors and investment bankers, and offer insights in detail, followed by a note on investors and target’s management. As you read through it, you will unearth each of the stakeholder’s activities and how they look at the transaction. You will also discover that the sponsor, I-Banker and target management drive the deal.

(1) Financial Sponsors are the private equity firms (PE), merchant banking divisions of investment banks, hedge funds, venture capital (VC) funds and special purpose acquisition companies (SPACs). PE firms, hedge funds, and VC funds raise majority of their investment capital from third-party investors such as pension funds, insurance companies, endowments and wealthy families / individuals (also known as HNI).

This raised capital is organized into funds that are usually established as limited partnerships, in which the General Partner (GP) – the sponsor – manages the day-to-day activities of the fund and are compensated with 1-2% of the committed fund as management fee, besides 20% “carry” on the investment profit.

[Click to continue reading]

Leveraged Buyout: What Makes A Strong LBO Candidate?

Nitin GargLeave a comment

In this article, I’ll discuss the characteristics that define a strong LBO candidate, but before proceeding further, you may want to review my previous article on “Leveraged Buyout: An Overview”.

During the due diligence process, the financial sponsor evaluates the characteristics of an LBO candidate (including its strengths and risks). Most of the time, an LBO candidate will be one or combination of the following, but irrespective of the situation, the target becomes a LBO opportunity only if it can be acquired at a price and using a financing structure that generates acceptable returns with a viable exit strategy.

  • Non-core or under-performing business unit of a large enterprise
  • Distressed company with a turnaround potential
  • A public company that is perceived as undervalued
  • A public company that is considered as a high growth potential but not being exploited by its current management
  • A solid performing company with a compelling business model, defensible competitive position and strong growth potential. This may also tally with the above point
  • Companies in fragmented markets that can be consolidated into a single entity with higher size, scale and efficiency. This is called roll-up strategy.

[Click to continue reading]

Leveraged Buyout (LBO): An Overview

Nitin GargLeave a comment

LBOIn the past two weeks, I have written 22 articles, covering finance concepts, business strategy and advanced finance. This week onwards, I’m thinking of dedicating my articles to advanced finance, spending the next few weeks on one of my favorite topics in finance, the Leveraged Buyout (LBO), which is nothing but an acquisition of a target by some smart investors using debt to finance a large portion of the purchase price.

While it’s unclear about its history, it’s generally believed that LBOs were carried out in the years following World War II. Back in 1970s and 1980s, firms like Kolberg Kravis Roberts and Thomas H. Lee Company saw an opportunity to profit from companies that were trading at a discount to their net asset value through bust-up approach – buy the company, break them up and sell off the pieces (what is called the corporate raiding).

In this article, I’m going to present an overview on LBO, followed by a series of articles, discussing its characteristics, sources of capital, financing structure, economics and exit strategies. After reading this post, do leave your sincere thoughts in the comments section below.

As briefed above, a leveraged buyout is an acquisition of a company, business, division or asset that is financed with a combination of equity and borrowed funds (also called debt). The equity portion contributes 30 – 40% to the purchase price and debt portion 60 – 70%. This disproportionately high level of debt is secured by the target’s projected free cash flow (FCF) and asset base which enables the sponsor to contribute a relatively small portion of equity to the acquisition price. The ability to borrow such high levels of debt based on a small equity investment is vital to the financial sponsor to earn an acceptable return. This high level of leverage also provides a tax shield – they save on the taxes because interest expense on debt is tax deductible. The image above depicts the flow of funds and how it works. Pay attention to the arrows.

[Click to continue reading]