Times have changed for India’s business process outsourcing (BPO) industry. Right from its humble beginnings with a few modest call centers in the late 1990s providing customer support, the industry has evolved into a global phenomenon that services the entire spectrum of the outsourcing clients. According to NASSCOM, the BPO industry accounts for 2.5 percent of India's GDP for export earnings1.
The initial years
For more than a decade, private equity (PE) firms have been investing in India’s BPO industry and have been integral to its growth. During the early part of the last decade, PE firms essayed the role of early investors in BPO start-ups. One of the earliest PE investors in India was Citibank Private Equity, which, in 2001, invested USD 6 million in Daksh eServices 2.
Capital-raising avenues at the time were extremely limited given the newness of the industry, limited tangible assets and the shortage of risk capital to fund operations. Thus, PE provided promoters with much-needed initial capital. Further, in the case of the Blackstone-funded Intelenet Global Services, Blackstone provided significant value addition through access to its portfolio companies and their knowledge of customer needs 3.
Changing role of PE in the industry
As the BPO industry gained scale and individual firms eyed global expansion, PE firms resurfaced as central components of the emerging industry. As a whole, the industry faced two major issues during the middle part of the last decade.
Early investors looking to exit
Many BPO firms were launched as captive arms of global corporations such as GE, British Airways and Citibank. After their initial five or six years, it was felt that these captives had hit a wall and needed to look outside their parent firms to expand. The parent firms also felt they could achieve attractive valuations due to the rapidly expanding off-shoring industry during 2004–07. PE firms emerged as buyers of these captives, and one of the major deals of this period was General Atlantic/Oak Hill Partner acquiring GE’s 60 percent stake in GE Capital Information Services (GECIS) for USD 500 million in 2004 4.
BPO firms looking to gain scale
Firms such as WNS (the captive arm of British Airways) were looking at entering the next tier of mid-sized BPO firms. For such firms, the PE firm Warburg Pincus provided support in making acquisitions for inorganic growth. Warburg also helped WNS get listed on the NYSE and further utilized its network to the benefit of WNS’ business development efforts5.
PE becomes an integral part of the BPO industry
Since 2010, PE firms have emerged from the shadows and have become key drivers of change in the BPO sector. As the industry is a highly fragmented space, a number of PE buyers have recognized the substantial upside to be gained from buy-and-build plays.
According to recent news reports, BPO major Genpact is on the block, with leading PE firms such as Apax Partners and Bain Capital in the race for the 41 percent stake existing investors Oak Hill Capital and General Atlantic Partners currently hold. The transaction would value Genpact at approximately USD 3.4 billion, with the stake around USD 1.4 billion 6. Similarly, Malaysian PE firm Khazanah Group is in the race for Aegis BPO 7.
KPMG in India's point of view
PE firms are no longer content with playing a limited role in the BPO industry. They have emerged as leaders in generating change in an industry that was beginning to rest on its laurels.
While PE firms see significant traction in the BPO arena, some challenges continue to plague the overall attractiveness of the sector:
- Lack of interest from IT firms: Strategic buyers have considered acquiring BPO assets in the past, but they seem to have dropped their plans to invest significantly toward this purpose. Pure-play BPOs no longer appear to be attractive to IT firms as it they are for PE.
- Lack of a premium in BPO deals: The lack of a premium in most BPO acquisitions reflects the not-so-rosy outlook for pure-play BPO, irrespective of the firm’s size or client base.
Nonetheless, it would not be wrong to say that India’s BPO industry is going through some interesting times. As the industry transforming itself to enter the next phase of growth, PE firms are likely to continue playing a pivotal role in the sector.
1. NASSCOM Strategic Review 2011, NASSCOM, February 2011
2. “The FIR heard round the world”, Business Today, http://businesstoday.intoday.in/story/business-leaders/1/12492.html, February 2011 issue
3. KPMG in India Analysis; “Why Blackstone and Intelenet Make A Hit Pair”, Forbes India, http://forbesindia.com/article/boardroom/why-blackstone-and-intelenet-makea-
hit-pair/26122/1, June 2011 issue
4 “GAP, Oak Hill buy 60% in Gecis for $500 m”, Financial Express, http://www.financialexpress.com/news/gap-oak-hill-buy-60-in-gecis-for-500-m/118390/, November
5 “Investments – WNS”, Warburg Pincus website, http://www.warburgpincus.com/portfolio/ViewCompany,id,532.aspx, June 20, 2012
6 “Apax, Bain eye $1.4 billion Genpact stake”, Times of India, http://timesofindia.indiatimes.com/business/india-business/Apax-Bain-eye-1-4-billion-Genpactstake/
articleshow/14040755.cms, June 12, 2012
7 “Khazanah, Baring jointly offer $800m for Aegis”, AVCJ, http://www.avcj.com/avcj/news/2182927/khazanah-baring-jointly-offer-usd800m-aegis, June 8, 2012