About

One of the largest pension funds in India with AUM of over Rs.20,000 crores We provide retirement and health benefits to more than 18 million public employees, retirees and their families We administer a hybrid system as part of a comprehensive financial security package for members

Mr. Pradip Chowdhury, President

Sector Insights Mobile Apps

Of the 4 billion mobile phones 1.08 billion are smart phones By 2014, mobile internet usage to overtake desktop internet usage The Apple App Store now has over 650,000 apps and the Google Play Store has over 600,000 apps. IOS users have downloaded over 30 billion apps from the Apple App Store. Mobile app revenue amounted to $8.5 billion in 2011 and $30 billion in2012. The most common type of mobile apps used are email apps. 79% of the time spent using mobile apps is spent using social media and gaming apps. In 2011, the average number of apps installed on each smartphone was 32. In 2012, that number has grown to 41.

Sector Insights Mobile Apps The India Story

India is the 3rd fastest growing app market in world 12% MoM growth in app downloads in 2011 6 million Android & iOS devices downloaded 300 million apps in 2011 25 billion mobile app downloads in 2011 Estimating 75 billion downloads in 2012 Indian user spends 52 minutes per day using mobile apps 80% usage / time spent is on Games & Social Networking apps Top 5 downloads categories: Games, Entertainment, Utilities, Social Networking, Lifestyle

Investment Strategy-Concerns

Unprecedented Short sighted Screening process is more Market Research than Due Diligence Steps out of the traditional PE/VC role No clear or satisfactory EXIT strategy

General Partner Contribution

GP should contribute at least of 5% to the capital This contribution should be made at each stage in the preset proportion It should be in form of cash and not management fees waiver GP should not withdraw funds without the prior approval of Limited Partners Excess fund requirement for operations (more than budgeted) should be met by the GP, and not by reduction of capital GP should not co-invest in selected underlying deals, rather it should be via the fund

Management Fees
It should be charged on the basis of capital committed and should not exceed 2% in initial stage and decrease to 1.5% at the end of 3 years The details of the expenses that management fees cover and if possible estimate of each expense should be provided The arrangement of GP and placement agents to be given and GP to bear these expenses Fees should be reduced to 1% if the fund term is extended Details of the expenses that are not included in management fees should be borne by GP Limited Partners Advisory Committee should have the right to review the partnerships expenses on periodic basis preferably quarterly

Carried Interest
It is the share of the profits of an investment or investment fund that is paid to the investment manager (GP) in excess of the amount that the manager contributes to the partnership. Concerns: Carry Waterfall model to be used Capital Invested to be Returned initially Minimum Return on Capital needed 12% before any carried interest is disbursed 20% of profits as carried interest

Clawback
It is a clause in a limited partnership agreement protecting LPs from paying more than the agreed upon carried interest percentage when factoring losses Concerns: Hedge against subsequent losses against investments Setting up of Carry Escrow Accounts with 30% of carry distributions Additional reserves to cover potential clawback liabilities

Exit Strategy
Secondary buyers to be searched that would get the maximum valuation to the investment Since the fund is investing in applications and not the company, it should have provisions to ensure minimum interference of the company Disbursement should be done in a fair manner without affecting the interest of Limited Partners Management to continue to work diligently till all the investments are exited and should provide attention properly till the very end

Size of Fund
Size of the fund Average Deal Size = 2.5 Cr Estimated number of Deals = 100/2.5 = 40 If takedown period is 4 years, deals/yr = 10 Observations: 1. Number of deals are large, which increases the chances of poor due diligence conducted before investing 2. Too many deals will also make the governance difficult post investment

LP Involvement
A Limited Partners Advisory Committee (LPAC) should be formed with representatives of the Limited Partners whose role would be to give input on (and in some cases, consent to) such as waiving off the investment restrictions LPs should be appraised of the performance of the fund in the quarterly, annual & special meetings
Transparency

Role of the Advisory Committee

Governance Alignment of Interest

Investment Restrictions
Giving advisory committee the rights to waive off the below mentioned restrictions if really required A maximum of 5 crores of the total fund can be invested in any one portfolio company without consent 75% of the funds committed capital must be invested prior to raising a subsequent fund GP should use 75% of the money raised from us in 3 years Co investment Opportunities the ability to co-invest in the event the deal size would enable additional investment beyond the investment by the fund Capital Call - A notice should be given 10 business days prior to making a capital call Borrowing should be done only To provide interim financing In anticipation of the capital contributions The following should be immediately disclosed to LPs upon occurrence of: Any inquiries by legal or regulatory bodies in any jurisdiction Any breach of a provision of the LPA or other fund documents

Defaulting Limited Partners

Limited partners might commit to invest but not follow through when the capital call is made Will the commitment period be suspended or terminated? How will the GP prevent LP default, especially those with small contributions? How will the GP mitigate the risk of LP default? Will it be through Escrow of capital contributions or guarantees/credit support? In extreme cases, will interest be forfeited? And will this be transferred at discount to other LPs?

Key-Person Provisions
Skill and experience of the GP is critical Succession issues are another area of great importance, as age plays a key role Will the termination provisions be tied to management changes or key-person departures? New management in place should be acceptable to a majority or a super majority of the LPs Further capital calls should be allowed to be made only when new management has been accepted

Other Concerns
If funds have multiple closings then subsequent Limited Partners should share the organizational expenses on a pro-rata basis in a retrospective manner Fund should be flexible enough to track investment opportunities related to the investment strategy GP should have the expertise to source the deal and LP to provide details Details of previous funds performance should be provided Tax distribution to be done in a fair manner without affecting the interest of LP Any fees generated by an affiliate of the GP, such as an advisory or in-house consultancy, whether charged to the Fund or an underlying portfolio company, should be reviewed and approved by a majority of the LPAC If investors are exposed to exchange rate risk, then GP fund should address this risk