Global PE investors eye bigger pie of India’s software services sector
Global PE investors eye bigger pie of India’s software services sector
Manish Poddar - Partner - Corporate Finance and Investment Banking
There has been a notable surge in interest from global private equity (PE) firms and PE-backed entities in acquiring Indian information technology (IT) and software services companies.
This is fuelled by a substantial increase in growth capital investments within the IT services sector by global PE funds, which was not prevalent earlier.
The number of PE firms holding majority stake in Indian IT services companies had doubled between 2019 and 2022 to more than 50, as per Avendus Capital data. According to more recent data from GrowthPal, an M&A deal sourcing platform, inbound deals from global investors betting on Indian firms rose 35% in 2023, faster than the previous year’s growth rate of 25%.
Indian IT firms are trading at a premium to their global counterparts due to their growth performance and potential, industry executives said, citing this as one of the reasons for the PE interest. Also, the startup space has become risky due to corporate governance and sustainability issues, leading to increased interest in the IT space where — even though these deals involve small and midsize firms — the models are time tested.
“While only around 10 PE funds held majority investments in the IT services sector between 2008 and 2013, today, this number has jumped to over 50 funds with majority stake in IT services (2018-2023),” said Shobhit Jain, managing director and co-head of enterprise technology & services for investment banking, Avendus Capital. “Overall, the total value held by PE firms in the sector has quadrupled, going from $13 billion in 2013 to $55 billion today,” he added.
HIG Capital-backed 3Pillar Global’s acquisition of Chenoa in September 2023 and Tailwind Capital-funded Onix’s purchase of Datamatica in October were among such deals in the past one year, Jain said. “This trend is evident and gaining strong prominence in minority investment situations as well. For example, a $50 million investment by US-based Brighton Park Capital in TheMathCompany; a minority stake acquisition in Celebal Technologies by US-based Norwest Venture Partners.”
HIG Capital, Tailwind Capital and Brighton Park Capital did not respond to emails seeking comment.
In 2023, there was a decline in M&A activities across all sectors due to valuation mismatches, geopolitical situations, higher interest rates on deal financing, funding constraints and regulatory risks. However, the IT services sector bucked the trend.
“We are witnessing an increasing demand from Indian players looking to buy small to mid-sized IT services companies globally to get access to global clients, expand new geographies, build onshore and nearshore teams, and have a global footprint. Similarly global companies are looking to buy small to midsize companies in India to build offshore teams, expand capabilities and verticals,” said Maneesh Bhandari, cofounder and chief executive of GrowthPal.
As companies are looking to shift towards high-end services due to higher margins and customer stickiness, even small to mid-sized companies with revenues $10 million to $100 million are being very acquisitive and are looking to do tuck-in acquisitions globally, Bhandari added.
PE firm EQT (formerly Baring Private Equity Asia), which has closed 13 deals in the space and more than 50 bolt-on acquisitions since 1998, believes there is a broad realisation of India’s structural advantage, with it producing three times more STEM (science, technology, engineering and mathematics) graduates annually compared with the US.
“For the first time in the last five years, Indian IT companies are trading at a premium to their global counterparts, driven by resilient performance,” said Hari Gopalakrishnan, partner, EQT, which acquired a majority stake in digital engineering firm Indium Software through its mid-market growth fund in December.
In the same month, ET reported that Luxembourg-based PE firm CVC Capital and US-based Warburg Pincus were in a race with three more global strategic companies to snap up digital technology services company To The New.
“EQT likes assets in the fast growth digital tech services space which encompasses digital engineering, cloud, data, etc., and those which can use GenAI as an enabler for growth in their offerings,” Gopalakrishnan said.
In fact, global funds are increasing their presence in India to scout more assets in the IT/IT-enabled services segment. Some foreign companies are also helping these funds work closely with their portfolio firms that have offshore operations in India.
Shiv Chaudhary, managing director, Norwest India, said: “These companies cater to global markets resulting in a large addressable revenue and margin pools. Structurally India has the advantage of a large working population of young English-speaking engineers who are hardworking and ambitious.”
“As India’s institutional private equity market continues to develop rapidly, a variety of funds are active across the funding lifecycle of companies, starting with $5 million early venture deals to $50-150 million growth equity deals to $250-million-plus buyout deals,” he added.
“In the last 12-18 months, growth funds which were more active in ecommerce and new-tech segments have started tracking and scouting for opportunities in the IT/ITES segment. These funds are typically looking to invest $15-40 million. They are primarily interested in companies specialising in hyper-scalers, data analytics, digital engineering, and ER&D,” said Manish Poddar, partner, Corporate Finance and Investment Banking at BDO India.
Global funds are looking to invest, provided the companies are domiciled in the US or Europe and have offshore operations in India, he added.
Within IT services, the demand for digital transformation, cloud services, and data analytics services continues to surge, fuelling strategic acquisitions and partnerships.
According to Poddar, M&A buyers have been more aggressive with hyperscalers and data & analytics companies.
Source:- Economic Times
This is fuelled by a substantial increase in growth capital investments within the IT services sector by global PE funds, which was not prevalent earlier.
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The number of PE firms holding majority stake in Indian IT services companies had doubled between 2019 and 2022 to more than 50, as per Avendus Capital data. According to more recent data from GrowthPal, an M&A deal sourcing platform, inbound deals from global investors betting on Indian firms rose 35% in 2023, faster than the previous year’s growth rate of 25%.
Indian IT firms are trading at a premium to their global counterparts due to their growth performance and potential, industry executives said, citing this as one of the reasons for the PE interest. Also, the startup space has become risky due to corporate governance and sustainability issues, leading to increased interest in the IT space where — even though these deals involve small and midsize firms — the models are time tested.
“While only around 10 PE funds held majority investments in the IT services sector between 2008 and 2013, today, this number has jumped to over 50 funds with majority stake in IT services (2018-2023),” said Shobhit Jain, managing director and co-head of enterprise technology & services for investment banking, Avendus Capital. “Overall, the total value held by PE firms in the sector has quadrupled, going from $13 billion in 2013 to $55 billion today,” he added.
HIG Capital-backed 3Pillar Global’s acquisition of Chenoa in September 2023 and Tailwind Capital-funded Onix’s purchase of Datamatica in October were among such deals in the past one year, Jain said. “This trend is evident and gaining strong prominence in minority investment situations as well. For example, a $50 million investment by US-based Brighton Park Capital in TheMathCompany; a minority stake acquisition in Celebal Technologies by US-based Norwest Venture Partners.”
HIG Capital, Tailwind Capital and Brighton Park Capital did not respond to emails seeking comment.
In 2023, there was a decline in M&A activities across all sectors due to valuation mismatches, geopolitical situations, higher interest rates on deal financing, funding constraints and regulatory risks. However, the IT services sector bucked the trend.
“We are witnessing an increasing demand from Indian players looking to buy small to mid-sized IT services companies globally to get access to global clients, expand new geographies, build onshore and nearshore teams, and have a global footprint. Similarly global companies are looking to buy small to midsize companies in India to build offshore teams, expand capabilities and verticals,” said Maneesh Bhandari, cofounder and chief executive of GrowthPal.
As companies are looking to shift towards high-end services due to higher margins and customer stickiness, even small to mid-sized companies with revenues $10 million to $100 million are being very acquisitive and are looking to do tuck-in acquisitions globally, Bhandari added.
PE firm EQT (formerly Baring Private Equity Asia), which has closed 13 deals in the space and more than 50 bolt-on acquisitions since 1998, believes there is a broad realisation of India’s structural advantage, with it producing three times more STEM (science, technology, engineering and mathematics) graduates annually compared with the US.
“For the first time in the last five years, Indian IT companies are trading at a premium to their global counterparts, driven by resilient performance,” said Hari Gopalakrishnan, partner, EQT, which acquired a majority stake in digital engineering firm Indium Software through its mid-market growth fund in December.
In the same month, ET reported that Luxembourg-based PE firm CVC Capital and US-based Warburg Pincus were in a race with three more global strategic companies to snap up digital technology services company To The New.
“EQT likes assets in the fast growth digital tech services space which encompasses digital engineering, cloud, data, etc., and those which can use GenAI as an enabler for growth in their offerings,” Gopalakrishnan said.
In fact, global funds are increasing their presence in India to scout more assets in the IT/IT-enabled services segment. Some foreign companies are also helping these funds work closely with their portfolio firms that have offshore operations in India.
Shiv Chaudhary, managing director, Norwest India, said: “These companies cater to global markets resulting in a large addressable revenue and margin pools. Structurally India has the advantage of a large working population of young English-speaking engineers who are hardworking and ambitious.”
“As India’s institutional private equity market continues to develop rapidly, a variety of funds are active across the funding lifecycle of companies, starting with $5 million early venture deals to $50-150 million growth equity deals to $250-million-plus buyout deals,” he added.
“In the last 12-18 months, growth funds which were more active in ecommerce and new-tech segments have started tracking and scouting for opportunities in the IT/ITES segment. These funds are typically looking to invest $15-40 million. They are primarily interested in companies specialising in hyper-scalers, data analytics, digital engineering, and ER&D,” said Manish Poddar, partner, Corporate Finance and Investment Banking at BDO India.
Global funds are looking to invest, provided the companies are domiciled in the US or Europe and have offshore operations in India, he added.
Within IT services, the demand for digital transformation, cloud services, and data analytics services continues to surge, fuelling strategic acquisitions and partnerships.
According to Poddar, M&A buyers have been more aggressive with hyperscalers and data & analytics companies.
Source:- Economic Times