NMIMS BANGALORE

PGDM 09

Private Equity End Term Exam

SUBMITTED TO:
Prof. Rajesh Madhavan

SUBMITTED BY:
LP Group 2
Aayush Goyal C002
Khusboo Jain B023
Medha Mirpuri B030
Subham Goel B059
ANSWER 2a

Aegis Inc. should adopt a Relative Valuation approach based on the EBITDA multiple. The
EBITDA multiple should be used over other multiples because it normalises for the
differences in companies in terms in capital structure, fixed assets, taxes etc. It is a holistic
approach whereas other measures only focus on one aspect of the business, be it revenue,
profits, etc.

The current EBITDA multiple in the industry is 5 times and the EBITDA value of the firm, 5
years from now, it projected to be $14 million which gives the enterprise value as $70
million. With a debt of $3 million and a cash balance of $1 million, the Equity Value of the
firm at end of 5 years comes up to $68 million.

The Series A funding of $10 million with an expected IRR of 30% would amount to $37.13
million after 5 years. Thus, the shareholding pattern would be as follows:

INVESTOR PERCENTAGE OF FUNDS HELD

Based on the stated IRR, the post-money value of equity is (10,000,000 / 54.60%) = $18.31
million and the pre-money value of equity is (18.31-10) = $8.31 million.

It is not recommended to opt for the multiple rounds of funding because of the following
reasons:

 The revised original shareholding pattern changes and the proportion of shares held
by the shareholders gets reduced with subsequent rounds of funding.
 It causes of dilution of control as the promotor’s share and the first VC’s share in the
company get reduced.
 It may signal a negative sign in the minds of the public highlighting liquidity issues in
the company and thus would discourage further potential investments during times of
growth.
ANSWER 2b
TERM SHEET
This term sheet is made on 13th April, 2020 between Venture Capital Series A and Aegis Inc.
and outlines the terms relating to the proposed investment being made in Aegis Inc. This term
sheet is for discussion purpose only and is not a legally binding document.
Issuer Aegis Inc.
Investor Venture Capital Series A (Lead investor), Series B, Series C,
Series d
Business Software Solutions Products
Horizon 5 years
Amount $10,000,000 (investor A), $3,662,875 (investor B), $2,197,725
(investor C), $1,933,998 (investor D)
Closing Date 30th April, 2025
Use of Funds To provide for expansion in operations of the company
Exit Options  Strategic M&A or a Leveraged Buyout by a bigger
competitor for industry consolidation
 IPO
ESOP Pool The company will create an ESOP pool of 3% on closing
Non-Disposal The promoters shall not sell their stake in the company without
Undertaking prior approval from all the investors.
Affirmative Rights The Promoters and the Board of Directors of the company shall
not take any decisions regarding amendments in the
Memorandum and Articles of Association of the Company,
Acquisitions and mergers, changes in capital structure, sale of
any substantial asset of the company without prior consent from
all the investors.
Investors Right of If the promoters intend to transfer their stake to the third party,
First Refusal the minority investors will have the first right to purchase the
proposed shares.
Tag Along Rights If the promoters wish to transfer their shares to a third party,
then the investors will have the right to tag along in the sale of
equity in accordance with the same terms of sale.
Liquidation In the case of liquidation of the company, the investors will
Preference receive the amount of their investment along with any unpaid or
accrued dividends in full before paying off the promoters.
Inspection Rights The company will permit the investors to inspect the properties
of the company after providing reasonable notice for the same.
Expiry of Offer Investors are required to communicate their acceptance of the
offer made through this term sheet within 20 days from the
receipt of the offer post which the offer will be deemed to have
been lapsed.
ANSWER 3

Changes to existing fund documents:

1. Commitment Period Extension: Due to the current scenario, the GPs are looking for an
extension in time required to fulfil their commitments to the LPs. The PCs will benefit as
they get necessary relaxation from their commitments to the GPs. For example, the RBI
has permitted all banks to postpone the interest collections for a 3-month period due to
the which the burden on the PCs to pay their interest obligations gets reduced. On the
other hand, LPs would lose out on such a deal as the returns expected by them would go
down. They have to set new targets and expectations in terms of returns from the GPs.
2. Follow-on Investments: PCs would require additional funding from the GPs at an
affordable interest rate. The GPs will thus have to pool in the uncalled capital from the
LPs. This will give boost to the PCs by providing them with means to stay operational in
the economy. However, the GPs and LPs would get lower returns and face the risk of
losing out the entire pool of fund in case the PCs do not perform good even after
additional funds being infused into the business.
3. Borrowing: GPs may require more capital from the LPs to meet the increased demand
from the PCs. Given the massive decline in the US treasury rates, interest rates have come
down significantly in the last few weeks and borrowings can be made at relatively
cheaper rates. Thus, the PCs would get these funds at marginal interest rates. However,
the LPs would be burdened with the additional requirement of capital.
4. Guarantees: PCs might look for additional funding during the current crisis in the form
of borrowings and would want GPs to act the guarantor for such borrowings. Considering
the uncertain market and the stocks of many large companies across the globe declining,
it seems likely that most companies would take time to get back to profitable ways of
business and thus it will be difficult for them to cope up with the added liability.
Moreover, banks and NBFCs across the globe have crashed so granting loan to companies
would require adequate guarantee and thus the GPs would be held liable to pay in case of
default.
5. Changes to Investment Objectives and Restrictions: GPs would be looking for
investment opportunities to improve the ROI. After a thorough analysis, if the GP decides
to invests in a particular avenue or explore a new segment or geographic area, then the
PCs would stand to lose as they would not be able to procure more funds from the GPs in
times of need and would have to look for other avenues. The GPs and thereby the LPs
 would stand to gain as they would get to diversify their portfolio and might also get a
greater ROI from a much profitable investment. However, the situation is uncertain hence
it will be difficult to evaluate the prospective project for making a fresh investment. There
lies the difference between the current situation and the case of a financial crisis. In the
current situation, everything is unpredictable and predictions cannot be drawn. On the
other hand, in case of a financial crisis, the economic parameters change significantly but
predictions and forecasts can still be made to form an understanding of the market.
6. Extension of term: GPs would want LPs to wait longer for the exit to take place since it
will take time for the GPs to realise the investment leading to significant changes in the
investment horizon of the fund. The PCs would stand to gain as it will relieve the pressure
on them to pay off the PE and they can continue to focus on improving the operational
efficiency. GPs and LPs would stand to lose as they would have to wait longer to get back
their investments and the ROI would also take a hit. This, however would be different
from the financial crisis in 2008 as most of the PE funds were at their native stage and
because of a fall in the market, activities fell steeply. This may not be the case this time as
PE market has grown exponentially and the GPs have assets that are expected to mature
soon. Exit might not take place at the said time frame but the extension might not be long
enough as the PE market is expected to recover faster as soon as the situations in the
economy improve.

Ongoing Fund Formations:

1. Sharing information: GPs act as the link between the LPs and the PCs not only in terms
of fund procurement and allocation but also in terms of information sharing. The current
scenario would necessitate flow of information from PCs to LPs. If GPs decide to provide
this information, after consultation with the PCs, it would mean more transparency for the
LPs which is a good sign. However, some relevant information of the PCs might go to the
LPs, and as a matter of fact PCs might lose out on the prospective investment if the GPs
decide to withdraw the fund and invest in other profitable opportunities.
2. Reporting Deadlines: Because of the uncertainty, PCs may delay reporting the required
information to the GPs who in turn might delay reporting to LPs which might delay the
internal management decisions of the LPs. Thus, GPs have to take in necessary steps to
reduce this hindrance. They can adopt to virtual means of sharing information or might
organise meetings between the LPs and PCs on virtual platforms to speed up the process
thereby leading to continuous flow of information and deadlines will be met.