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PE investors eye better valuation in BPO sector

Source : BUSINESS_STANDARD
Last Updated: Wed, Jan 02, 2013 20:50 hrs

Private equity (PE) investment in the business process outsourcing (BPO) sector has reported a significant growth in 2012. In value terms, the sector attracted $2,214 million, a huge growth compared with the $216 million funding the industry received in the whole of 2011.

What explains the heightened interest? According to experts, one major reason is that the sector offers good exit for investors.

Recently, two PE funds — Temasek Holdings and One Equity Partners — exited from Apollo Health Street (AHS), a BPO arm of Apollo Hospitals. According to sources, Temasek exited with 3X (three times returns) — it had invested around Rs 16.32 crore in 2005 and sold its stake for Rs 51 crore after seven years. The acquirer, Sutherland Global Services, bought the entire stake of AHS for an enterprise valuation of around Rs 1,000 crore. JP Morgan and Symphony Capital Partners have also exited with 1.16X and 1X, respectively.

Experts say that there are dozens of funds waiting in the wings to exit since the valuations were down due to economic slowdown in 2008. These funds will now start exiting, they add, since the valuations are favourable now.

According to Venture Intelligence, the BPO sector attracted around $2,919.29 million from 2008, across 41 deals. The major chunk, in terms of value, was reported in 2012 including GIC and Bain Capital investment of $1,000 million in Genpact and JP Morgan’s investment of $1,100 million in M*Modal. During the current year, a total investment flow into the sector was $2,214 million.

Among the factors making the BPO sector attractive is the bleak economic situation in the US and Europe. Companies there are forced to cut costs by outsourcing their projects to BPOs. Institutional funds are also looking at the sector since the benefits of outsourcing and cost cutting measures would reflect on their portfolio, says a senior official from a PE fund.

According to Raman Roy, chairman and managing director of Quatrro Global Services, the BPO industry, especially the specialised sector, will attract more investment. Segments such as health care and human resources in the BPO sector could go up in valuation. For instance, AHS is in the segment of health care, which is one of the biggest verticals and has one of the biggest opportunities going forward. Sutherland has now set a target of $900 million turnover over the next two years from $700 million this year, primarily driven by its AHS acquisition.

Dilip Vellodi, founder chairman of Sutherland Global Services, says that the healthcare market is a sizable business in the US and in some parts of Europe. The acquisition will help Sutherland become a leading health care service provider with comprehensive information technology and business process integrated solutions, and consolidate its presence as a dominant player in the $38-billion US healthcare BPO market.

On the question of if the industry would see consolidation, industry representatives say, “It started happening and on the flip side. We will also see niche players emerge, that don’t necessarily have scale but bring competency and capability at a high end.”

Roy says consolidation is happening by way of acquisition, not mergers. There are some transactions and discussions are happening now on the merger side, and these discussions are not in billion dollar. They are less than $100 million transactions.

“Two years ago, the ability to talk of a merger was not even there. Today, people are realising if there is nobody to acquire them, they could find a similar player, join together and get better penetration in the market.” says Roy.

According to experts, the BPO industry will see niche players, specialisation, scale, dramatic growth, and different business models. In some segments, even increasing customer participation will be there, while in others it will be seen lesser.

Rohit Kapoor, CEO and vice-chairman of EXLservice, the country’s fourth largest BPO, recently said in an interview that he is bullish on the sector. According to him, PEs, which are typically long-term investors, look for stabilised growth. With around 15-20 per cent growth, the BPO sector offers a steady growth.

Kapoor’s company has made five acquisitions during its 13-year existence. In the past two years, the company has seen a drop in valuations and assets are available at a reasonable price.

Recently, EXL saw the exit of Oak Hill Capital Partners, which exited after 11 years with the company. It was reported the PE firm had sold 17-18 per cent of its holding in the company since September 2011, realising $120 million in the process.

The investors are primarily taking secondary transactions, where one PE is selling stake to another. For instance, in August 2012, Bain Capital Partners picked up a 30 per cent stake in Genpact for $1 billion from two PE funds — General Atlantic and Oak Hill Capital Partners — which had invested around $500 million in Genpact in 2004.

Similarly, the Blackstone Group sold its stake in Intelenet Global Services, a back-office service provider, to UK-based Serco for $634 million. This provided a return, which is more than double its original investment in absolute terms. The transaction had yielded an internal rate of return of 26 per cent to Blackstone.

However, PE funds are playing the waiting game. A combination of factors including a desire among their PE investors to cash out while market conditions are good, and the continued pressure on profitability may see more pure-play BPO firms coming on the block.




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