Written evidence submitted by Alpesh B
Patel
INQUIRY INTO SOUTH ASIA
TRADE AND
INVESTMENT OPPORTUNITIES
FOR THE
UK WITH INDIA
AUTHOR
Alpesh Patel is the UKTI Dealmaker responsible
for India. He was also in 2000 appointed by the Foreign Secretary
to the UK-India Roundtable and is a member of the Indo-British
Partnership Network chaired by Lord Bilimoria. The DTI, through
UKTI, has appointed business people as Dealmakers. Alpesh Patel
is the Dealmaker responsible for India. In this role he visits
India every six weeks to major Indian cities. (As a businessman
he is founder of Agile Partners Asset Management—a US hedge
fund).
The essence of the role is in part deal maker,
in part lawyer, in part financier and in part priest! In bringing
the global HQ of early stage intellectual property rich companies
to the UK, he is looking to bring for instance "low cost
computing to the world and to the poorest in the form of "thin
client PC developed from Indian technology" and bring to
the world through the UK through nano-innovations cleaner hospitals,
more energy efficiency, purer medicines, cleaner environment".
1. Channels to bring Indian companies to UK
Open channels from which I can receive pre-vetted
business plans eg Nasscom, TiE, IIT, IIM, ISB. This has proved
effective. I have examined over 100 business plans. I then undertake
evaluation, due diligence on financials, market opportunities,
feasibility of growth from the UK, fit with GEP objectives.
2. Targets
My target companies are early stage, IP rich
technology companies, who can be persuaded of a business case
of setting up global HQ in the UK. Ideally they should have a
realistic prospect on their business plan of achieving sales of
$20 million by year five, giving a market cap of $200 million
on a multiple of 10. After a full day of meetings and then working
on the various deal aspects, and then catching up on my own businesses,
before the next days schedule, what keeps one going is the thought
that if these companies hit their targeted earnings projections
in five years, then that is an annual market cap across five wins
a year of $1 billion brought to the UK. Few people get the chance
to create that kind of value for their country! We may only be
60 million on this small island, and the world is globalising,
but this proud trading nation will not be going quietly into the
night!
3. My role
My role, other than executing the India strategy
for finding these companies, is to evaluate them, and do deals
to make the move a reality, from working with the company on its
pitch, strategy, to working with financiers and acting as honest
broker. In this capacity promoting the UK as a strategic base
for global HQ nestled in the EU and next to the equal size US
market is key. Press coverage has helped in finding deals from
my roles as IBPN member, TiE UK Board Member, Chatham House trustee,
and author of several books relating to India business.
4. Vision
Find the most outstanding science and innovation
in India, help assist global HQ in the UK to make them global
companies. Revolutionary technology which brands the UK as innovative,
forward thinking, a home for entrepreneurship is ideal. Immense
value created for the UK and shaping the world through these innovations
and revolutions.
Alpesh Patel started writing an investment a
weekly investment column in the Financial Times in 1999. He is
the author of 10 books on investing, including Outsourcing Success.
EVIDENCE
Indian Prime Minister Manmohan Singh: "Europeans
need to show the spirit of adventure of their forefathers in exploring
the opportunities India has to offer"
1. THE BROAD
PROBLEM AND
SOLUTION
a. For the UK to retain its status as one of
the largest economies in the world in 2050 it needs to increase
its entrepreneurial gene pool, its intellectual property gene
pool by making greater use of competitive advantages whilst it
still has them.
b. Where there is market failure in exploiting
opportunities from India to improve the UK entrepreneurial and
intellectual property government should be involved.
c. There is an urgency. Think of it as climate
change for business.
2. EXISTING WEAKNESSES
IN ATTRACTING
INVESTMENT FROM
INDIA INTO
THE UK
a. From my regular visits to India weaknesses
in attracting early-stage companies to establish their global
head-quarters in the UK include the following:
b. Cash-shells on AIM rules have changed and
tightened, whilst listing on Offex (ProMarkets) is an alternative,
it is a shame AIM have tightened their rules for listing on their
market. Recommendation: re-consider tightness of rules on AIM
for cash-shells.
c. An angel network with know-how on doing cross-border
deals:
(i) Whilst angel investors here have interest
and capital in funding Indian deals coming to the UK, they often
lack the know-how. Market failure therefore needs government intervention
to plug.
Recommendation: Angel
networks need more information and a catalyst from entrepreneurs
who have done such deals. It is not difficult finding the networks,
and the know-how. The marriage of the two has not happened in
the UK in the way it has in the US. To some extent I am doing
this through the Indo-British Partnership Network and TiE (www.tie-uk.org)
but a broader push is needed.
d. Poor media perception:
(i) Recommendation: Despite the Public
Diplomacy Initiative, an on-going effort is needed to get across
the message that the UK is entrepreneurial. Business plan competitions
help. Associations with UK business schools eg University of Bedfordshire
where I am a Governor or Oxford Business School; playing to our
strengths in education and in business.
(ii) Recommendation: Fund journalist
Fellowship at our Universities to bring business journalists for
a term to the UK. A journalist is a multiplier.
3. POTENTIAL
WORLD CLASS
INTELLECTUAL PROPERTY
TO THE
UK—OPPORTUNITIES AND
HURDLES
a. Below are examples of some outstanding intellectual
property I have brought to the UK with their Global HQs here.
b. Key problems and bottlenecks include:
(i) Cost of set-up in the UK. Recommendation:
Promote in India through entrepreneurs who have successfully used
them the UK's incubation centres which are geared up as hot-houses
for low-cost set-up for start-ups.
(ii) Lack of know-how amongst start-ups in
India of the services of UKTI and Foreign Office. Recommendation:
If the UK is serious about India and driving deal flow from India
to the UK, then it needs to add resources now. Our High Commission
and Trade Offices do a sterling job, but more funding for more
initiatives to get the word out about the support and services
in the UK is vital. UK Plc needs to add more resources to its
high growth India division.
(iii) India's top scientific institutions
lack a spin-out environment. Indian institutions such as the IITs
(Indian Institutes of Technology) and the biotechnology institutes
in Bangalore lack the same commercial spin-out know-how we have
created in the UK over years. Yet they produce outstanding technology.
Recommendation: The business
schools of our universities look for alliances to tie-up with
IITs to access their technologies for spin-outs. Thereby take
advantage of the new Indian rules permitting foreign universities
to establish in India.
(iv) UK companies outside the FTSE 100 make
relatively few connections with India. This is not a private markets
problem, it is a market failure problem warranting government
intervention. British companies due to lack of information or
misperception, especially SMEs are not taking advantage of opportunities.
Recommendation: Target
CEOs of the FTSE Small Cap and FTSE Fledgling companies on invitations
from UKTI on opportunities and counterparts and databases available.
Nanotech: The benefits to UK include lower cost
and more efficient production of medicines, reduction in greenhouse
gas emissions, improvements in hygene etc
Indian scientist feted by the Indian President
with new innovative patented process to make lower cost, higher
quality nano-metals. After successful incorporation of global
HQ in UK, I have been developing the business strategy for the
UK company, drafting the legal documentation with the financiers
for the floatation on Offex. Negotiations are on-going with the
Indian side on warrants, options over patents, convertible loans
but an Offex listing is planned with a share pricing making the
market capitalisation at £20 million.
Low Cost Computing: The benefits to UK include
lower cost computing in the education market and also bridging
the digital divide
The company out of Chennai is IP rich and willing
to have its global HQ in the UK after detailed discussions with
me on the opportunities to tap EU and N.American markets. Thin
client, pay per use PC, with reduced cost because all software
and processing power is held centrally not on the PC. Asian Red
Herring 100 winner. 7 Patents. Looking for $8 million. UK company
would then own Indian company with latter as wholly owned subsidiary.
TeNeT—IIT Chennai Spin-out Village BPO:
The benefits to UK include centre of next wave of BPO and social
change globally
Spin-out from IIT Chennai. Company with proprietary
software IP permitting outsourcing from West of BPO work to villages
with high number of educated but poor women. Has VC interest of
upto $10 million. Looking for "smart money" and seeding
of $300k in three to four months. Willing to set up in UK Global
HQ. Turnover in year 3 est to be $5 million at top end. Have UK
clients already.
ADDITIONAL INFORMATION
Typical Trip
1. Meet existing wins—two to three meetings.
2. Meet follow-up pipeline clients based on
previous meetings to move forward.
3. Meet new leads generated through own networks
(eg TiE, Nasscom), emails from PR received, any new ones from
High Commission etc.
4. Visit two to three cities. (Coverage equals
Mumbai, Delhi, Hydrebad, Bangalore, Chennai. To add Ahmedabad,
Pune, Ahmedabad, Kolkotta, Kanpur).
5. Typically four to five meetings daily per
City per trip.
6. One trip every six weeks.
Returns
The return to the UK is $200 million market
capitalisation companies in year 5 (calculated by year 5 earnings
of pre-tax earnings of $20 million and a market multiple of 10.)
Approximately five to six wins annually. On
average each completed deal to win takes approximately 300 man
hours of the Dealmaker. Sifting through deals which do not fit
totals est 300 man hours totally annually.)
Evaluate deal opportunity
1. Does it meet criteria:
(a) realistic potential of pre-tax earnings
of $20 million in year 5, so on a multiple of 10, a market cap
of $200 million introduced into the UK.
(b) early stage IP of exceptional, international
cross-sectoral application.
(c) UK global HQ of independent entity make
business sense.
2. Due Diligence: if initially meets criteria,
take financial projections and pass to accountant for due diligence
and my own staff for evaluating market feasibility.
Business Plan Preperation
1. Full plan and financials amendments usually
needed, P&L, cash-flow, balance sheet.
2. UK marketing and growth strategy.
3. Compliance and iteration for requirements
of each VC prior to pitch.
Business Operations
1. Assist in gaps in Non-exec directors, sales,
MD, CEO.
2. Location, costings of offices—operational
roll out plan options.
Find Financiers
1. Based on relationships.
2. Remit of financier, sector focus, investment
criteria.
3. Iterate business plan where necessary to
fit remit, and match and liaise with entrepreneur's own strategic
outlook.
4. Approach informally VCs etc to gauge interest
and meet.
5. Arrange roadshow for entrepreneur.
6. Presentation rehearsal and VC pitch materials
review and revision with entrepreneur.
Negotiations with financiers
1. Ideally seek to create competitive tension
between financiers.
2. Equity stakes of both parties.
3. Negotiate quantum of convertible loan for
financier, strike price, duration.
4. Negotiate quantum of warrants for entrepreneur
for earn-in based on sales (strike price, duration).
Negotiation with IP lawyers
1. Ownership rights over patents, transfers.
2. Jurisdictional holdings.
3. Vetos.
Negotiation with Tax lawyers
1. Acquisition by UK HQ of Indian shareholding.
Implications for existing Indian shareholders, UK entity.
2. Transfer implications of Patents from Indian
entity, options over patents.
Negotiations with entrepreneur
1. Equity for investment. Internal rates of
return, investment requirements.
2. Payment for signing.
3. Warrants/earn-in.
4. Dividends policies.
5. Shareholder agreement—eg tag along
rights.
6. Initial cash-injection, convertible loans,
loan. Debt/equity ratio.
7. Shareholder/entrepreneur asset injection
for shares—valuations.
8. Management meeting requirements.
9. Share structure—classes.
10. Earnings—dividends, loan repayments.
11. Deadlock provisions.
Alpesh B Patel
3 December 2006
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