The business process outsourcing (BPO) sector in India has been hitting the headlines due to proposed private equity transactions in majors such as Genpact and Aegis.
Though it is likely to witness the largest of private equity (PE) exits, the sector has been out of PE and venture capital (VC) investors’ radar on fresh investments. Contrary to big-ticket deals in 2006 and 2007 when the BPO sector was at its peak, the past couple of years have seen few PE/VC deals.
According to data from VCCedge, last year witnessed four deals, worth a mere $51 million. The year 2007 had seen the largest chunk of PE deals in BPO space, with 18 deals worth $599 million.
PE/VC deals in BPOs from 2005 to 2012 YTD
|YTD: Year to date; Source: VCCedge
Rahul Chandra, MD of Helion Venture Partners, said: “The BPO sector (voice functions) has reached maturity, with predictable revenues and moderate growth rates. Moreover, India-centred services are back to being globally competitive.” Though very few investments took place in 2011, last year saw the largest size of PE exits — seven worth $554 million. The year 2006 had seen nine exits worth $351 million.
Top three private equity deals in BPO sector from 2011 to 2012 YTD
||New Enterprise Associates, IndoUS Venture Partners I LLC
||Canaan Advisors, Helion Venture Fund I,
Sequoia Capital India Advisors
||RURALSHORES BUSINESS SERVICES
||Lok Capital II
Secondary transactions, where one PE is selling stake to another, are driving more exits. But valuation mismatches still create hurdles over the deals’ closing. PE entities such as Kohlberg Kravis Roberts & Co, Bain Capital, Carlyle and BPO-information technology players such as Genpact and Cognizant had apparently shown interest in acquiring a majority stake in the Warburg Pincus-backed WNS. However, the deal could not get through due to valuation mismatch. Earlier this year, Warburg cut stake in the company to 29 per cent from 48 per cent, through a secondary sale on the New York Stock Exchange.
ICICI Bank and its holding companies hold around 20 per cent in Firstsource, a Mumbai-based BPO firm. The bank has not been able to divest its stake.
Recent reports say Bain Capital is the front runner to take a 40 per cent stake, owned by General Atlantic and Oak Hill, in Genpact. In 2010, GA and Oak Hill cut the stake to around 40 per cent from 60 per cent via a secondary sale.
Sanjeev Krishan, executive director at PricewaterhouseCoopers (PwC), said, “Higher PE interest in the BPO space is expected in the near future, owing to certain anticipated secondary transactions, including WNS and Genpact. However, there is no doubting that valuations have tempered since the heady days of 2006 and 2007, which may impact secondary deals, particularly if the funds have internal return expectations.”
Several other BPOs from Indian conglomerates are also reducing stake in their BPO arms. Essar is looking to dilute 30 per cent stake in Aegis before it goes for an initial public offering. “Over a period of time, Essar might exit the company. But the exit will depend on the valuation,” said Aparup Sengupta, managing director of Aegis, in an earlier interview with this newspaper.
Aditya Birla Group is looking to dilute stake in its BPO-IT business, Aditya Birla Minacs, through the PE route.
“As the cost arbitrage reduces for BPO businesses, the focus has to be on specialising in a few verticals, and offering high-margin and specific capabilities and skilled services. As a result, it would be expected that the BPO space may see some consolidation through overseas acquisitions as they try and gain scale, customers and expertise,” added PwC’s Krishan.