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Last month, Essar sold off its stake in outsourcing major Aegis to Capital Square. And last month, KKR sold its stake in product engineering company Aricent after building it into a lucrative company over almost a decade. While the business process outsourcing/business process management (BPO/BPM) and information technology-enabled services (ITeS) sector has long moved past its heyday in India, there is still a sizable investment in these companies from investment bigwigs. “The IT/BPM sector offers opportunities to venture capital (VC) entities, large equity players and strategic investors. VCs can invest in early-stage companies looking to innovate and scale up. Typically, companies with a top line below $50 million,” said sector veteran Raman Roy, chief executive of Quattro. He adds that strategic acquirers (like large infotech companies) see big opportunity in start-ups and early-stage companies to improve their own capability and capacity. Whereas large private equity (PE) players see more of an opportunity in consolidating their play across IT and BPM. However, unlike the BPO wave of the previous decade, the current interest is not based on pure-support services. Sector watchers say identifying and honing the right company for an eventual buyout by a strategic investor remains one of the key incentives to continue putting money into this sector. “Investments in fintech and e-commerce in India has been largely driven by VCs or new ecosystem investors.
Traditional or mature PE firms have continued to invest in services companies that are still targeting IT/BPO spending in North America and Europe. Alpha (return on investment) in deals is driven by active ownership and PE firms that have the domain expertise to do so lead the pack,” said Gaurav Sharma, associate partner, McKinsey & Company.He adds that the sectoral growth has been driven by ‘NextGen’ services like analytics, data engineering, artificial intelligence, social media and mobile-based ones. In recent times, Quess Corp bought a majority stake in Tata Business Support Services and Ebix a large stake in BPO company VARA, among non-PE consolidation deals. According to a report by consultancy PwC, with 78 deals worth approximately $2.7 billion, the IT & ITeS sector held a major lead over the others in the September quarter. SoftBank’s $1,400 million investment in One97 Communications and Warburg Pincus’ $360 mn investment in Tata Technologies are some of the largest across sectors lately. Exit values can be anywhere between six and 20 per cent of operating earnings, a function of the asset outlay and level of transformation during the engagement. IT & ITeS was the top sector in terms of PE exits in the September quarter, with a total of 14s worth $718 mn, said the report. The top exit in this quarter was of SAIF. Investment in BPO specifically jumped from $65 mn in the June quarter to $645 mn, led largely by the Aegis deal. Essar sold its stake in Aegis to Singapore-based Capital Square Partners for a little over Rs 2,000 crore. The core interest for PE investors in this sector has changed over the years from a cost arbitrage-based model to a larger performance-based one, say analysts. “The increasing relevance of advisory and business outcome related services, commercial models and a lot of merger and acquisitions are some of the major trends. Vendors able to ride on these trends are seeing greater interest from investors,” said Sharma.