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PE-controlled firms beginning to look at India

Indian outsourcing firms are winning deals from overseas entities controlled by private equity (PE) firms that are growing more comfortable with farming out work both as a way to reduce costs and leverage on the technology talent in Asia’s third largest economy.

PE-controlled firms are typically privately held and lack the size and scale to outsource technology and back-office services. But as global economic growth slows and cost-cutting becomes imperative, PE and venture capital firms are cutting deals with outsourcing firms that can apply across their portfolio companies.
“These are organizations which traditionally haven’t looked at globalizing their businesses, but are trying to do it now,” says Rohit Kochar, who advises PE firms on outsourcing possibilities. “These organizations have been languishing, and they are beginning to look at how to leverage India.”
High-profile examples include Tata Consultancy Services Ltd’s $1.2 billion (Rs4,740 crore in October) pact with Nielson Co., which is owned by Blackstone Group and Kohlberg Kravis Roberts and Co., and a $120 million deal with Cerberus Capital Management Lp. for Chrysler Llc.
London-based 3i Group Plc. in 2006 hired Akshaya Bhargava, former chief of the outsourcing unit of Infosys Technologies Ltd, India’s second largest software exporter. Bhargava, who had the mandate of overseeing 3i Group’s business process outsourcing (BPO) investment, recently set up the group’s Portfolio BPO Service unit.
That unit negotiated prices with Infosys to apply across the firm’s portfolio so that its companies could have access to a top service provider even though they don’t have the size to contract with Infosys on their own.
“There are very few big deals that happen in a year, but private equity is pushing outsourcing quite strongly,” Bhargava says, “and chances of success are much greater with a tier I provider.”
Other firms have experimented with outsourcing to a provider within the firm’s portfolio.
After purchasing the human resources outsourcing firm, Secova, in 2006, Barings Private Equity Partners India Ltd acquired some companies in the US, and transferred much of their back-office work to Secova, Barings’ managing partner Rahul Bhasin said.
The PE firm also used to give work from its portfolio companies to Mphasis BFL Ltd, a tech and BPO company that Barings used to own.
Blackstone bought the back-office provider Intelenet Global Services Pvt. Ltd last year, and has since used Intelenet to service many of its portfolio companies. Blackstone’s India offices did not respond to questions for this story.
With the US economy in a slump, some of the most innovative tie-ups are happening in distressed-asset situations.
Quatrro BPO Solutions Pvt. Ltd, for example, has done “triple digit million” dollars worth of business in the past few months for a PE-owned company with a large distressed mortgage portfolio, says Quatrro chairman Raman Roy, one of earliest back-office businessmen in India.
Roy declined to name the private equity firm or the company, but did say that the offshore work includes processing transactions on the company’s more reliable mortgages.
Outsourcing advisory firm Tholons Inc. started working with PE firm Robert W Baird and Co. in 2006 to offshore back-office functions for the firm’s portfolio companies, and has since advised other PE firms specifically as they use outsourcing to turn faltering companies around.
RW Baird has a portfolio heavy on the services company side—including payment processing, recruitment, analytics, and health care—which is conducive to an India-focused strategy.
“Turnarounds are much easier to do with companies that are obvious candidates for offshoring,” says Tholons managing director Avinash Vashishta. “(The fact that they) have not done it is the very reason they are in the red.”
PE firms have a history of outsourcing manufacturing as a central turnaround strategy, but many haven’t seriously looked at services in India.
The combination may have taken a while to come together, but it’s one that makes sense.
“If you look at private equity generally, it invests in companies where they believe they can create value,” says 3i’s Bhargava, “and outsourcing, offshoring is one good way to create value.”
Source: Livemint

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