PRINT THIS PAGE BPO visits25/01/2006. Source: Asia Private Equity Review (APER).
Since 2002, there are 57 private equity exits known to have been initiated by investors of India-based companies, says the Asia Private Equity Review. The gross IRR ranges between 1,648 per cent to -100 per cent, with a median of 30 per cent. But known divestment results for India-based business process outsourcing companies - BPO - boast a gross IRR range of 47 per cent to 305 per cent, with 90 per cent being the median. BPO Visits
For more than three months, the possible sale of Baring Private Equity Partners (India)'s ('Baring India') shares in MphasiS has kept interested parties spell-bound. Since May, the number of investors queuing to take up Baring India's 36% stake in MphasiS has been growing. While Singapore's Business Times described its government investment arm, Temasek Holdings, as "set to be main investor" in MphasiS, the Malaysian government's Khazanah Nasional Bhd was also named as an institution vying for the same assets.
In a statement released through the National Stock Exchange of India, Mr Rahul Bhasin, Managing Partner of Baring India confirmed that "there has been a lot of unsolicited interest in the company (MphasiS) at significant premiums". Investors' thirst for MphasiS' shares and their willingness to pay a high entry price for access to MphasiS' boardroom has again placed business process outsourcing ('BPO') in the limelight.
Being Recognised
When Wipro Technologies acquired Spectramind e-Services Private Ltd. in July 2002, it was the first major recognition of the future prospects of India's nascent BPO industry. Wipro, the country's largest technology company valued Spectramind at US$126 million, which represented a 2.8 multiple on its forecast revenue for the fiscal year ended March 2003. For ChrysCapital, which parked a total of US$10.2 million in the budding BPO company back in October 2001 for a 41.3% equity stake, the investment yielded a 5.9-fold return in just 18 months.
ChysCapital's successful exit of Spectramind has laid the foundation for the country's BPO industry. More importantly, however, BPO has come to be acknowledged as an investment sector that records returns well above the median internal rate of return ('IRR') achieved by India-based companies.
Since 2002, there are 57 exits known to have initiated by investors of India-based companies. The gross IRR ranges between 1,648% to -100%, with a median of 30%. Known divestment results for India-based BPO companies boast a gross IRR range of 47% to 305% , with 90% being the median.
In 2004, the Indian BPO industry was ushered into the global limelight when a number of momentous transactions were completed during the year. IBM brought Daksh e-Services ('Daksh') onto the information technology giant's playing field when it acquired the BPO company for US$170 million. The sale of Daksh to IBM also handsomely rewarded its investors, including Actis (then known as CDC Capital Partners) and General Atlantic Partners.
Actis achieved an internal rate of return of 79% while General Atlantic Partners made a 2-fold return from its US$21 million of invested capital for a holding period of less than 18 months.
In August last year, India's BPO attained a new milestone when Tata Consultancy Services, backed by GE Capital, was listed on the Bombay and National Stock Exchanges in India. It was the largest initial public offering for the country, having raised over US$1 billion. More importantly, the debut of this giant BPO firm has set a new benchmark for others in the country. Four months later, G.E. Capital raised its glass to another successful transaction when its information services outsourcing arm, now known as GECIS, was sold to General Atlantic Partners and Oak Hill Capital Partners. The two private equity houses paid a total of US$550 million to assume a 60% equity position in GECIS, placing the company's value at US$833.3 million. The final transaction value for Baring India's MphasiS shares will be another yardstick of investors' assessment of the BPO future.
Factors of Success
Once a cottage industry, technological advancement has facilitated rapid development for Asian BPO companies allowing them to become an industrial sector keenly courted by venture investors. Of the 29 BPO investments known to have been completed in India between January 2002 and June 2005, over 55% of them have been participated in by foreign private equity houses.
India is the undisputed BPO leader in Asia commanding virtually the entire market share. Worldwide, India ranks number one among seven leading BPO markets. It is expected to clock up a compound annual growth rate ('CAGR') of 45% between now and 2008. By the end of the year, India's BPO market is expected to reach a staggering US$6.5 billion.
Although growth of the BPO market in China is speeding along at the same pace as India, its market size is expected to reach only US$600 million by the end of this year, a fraction of that captured by India.
India's closest rival in the global BPO market is Canada which led in 2002 with a market size of US$4.1 billion. By the end of the year, the giant US neighbour is expected to feel the full impact of the competitive force stemming from Asia. It is expected to trail behind India and for the next few years, as global attention focuses on the advantages offered by China, India and the Philippines. Canada's BPO industry is forecasted to decline. Asia, with India being the central player, now drives the global BPO equation.
With India's recognised skills in providing financial services as well as a vast low cost English speaking work force, its position in the global BPO market is unlikely to be challenged in the near future. According to research undertaken by IDC, the demand for BPO services in the financial services sector will be the highest, at 40%, followed by the healthcare segment. These, together with its rather advanced information technology infrastructure have become a powerful formula for success in the BPO domain, leaving little room for its rivals to survive.
Strengthening Assets
But BPO companies in India are not sitting in their laurels. They have been assiduously fortifying their own assets in order to sustain their competitive edge.
Warburg Pincus' WNS has acquired two companies, the UK-based Town & Country Assistance and domestic-based ClaimsBPO. The acquisitions enabled WNS to diversify its services into insurance claims management as well as into the health claims area.
Earlier in the year, MphasiS spread its tentacles into the healthcare space when it acquired El Dorado Computing, a healthcare insurance software solution company. ICICI Venture Funds Management's ICICI OneSource has continued an aggressive acquisition trail. Between May 2002 and April this year, ICICI OneSource has mobilised no less than US$90 million in bringing five BPO companies into its fold. The market is abuzz with speculation that the outsourcing company will soon be offering its shares to public investors in order to raise further capital.
The non-organic growth undertaken by India's BPO companies are in fact replicating MphasiS' recipe of success.
From a software company known as BFL Software back in 1995, it has transformed itself to become one of the largest BPO companies in India. Baring India was its earliest private equity investor, providing an estimated US$10 million and at that time, held a 52% equity stake. BFL Software grew through acquisitions. In 2000, BFL Software bought the California-based MphasiS which was in interactive architecture e-solutions businesses, and began to embark on IT-enabled and BPO services. In 2003, it consolidated its position in India's BPO space in acquiring MsourcE, a subsidiary of MphasiS. By then MphasiS BFL Software was known as MphasiS. Today, Baring India, in addition to being a 36% shareholder in MphasiS, is a holder of substantial minority stake in MphasiS BPO India.
Observation
The road ahead of the budding BPO industry, especially in India, remains long. While successes such as Spectramind, Daksh and possibly MphasiS have propelled this nascent industrial sector to new heights, the divestment results of BPO investment trail behind other sectors in the overall Asian private equity investment landscape.
Between 2002 and June 2005, there are 69 divestment results that fall into the top quartile IRR, ranging from 1,648% to 81%. Within this range, technology companies command the lion's share, in taking up 42% or 29 exit records, followed by consumer goods with 14 exits, whereas BPO claims only two.
India's BPO companies also face challenges from both China and Philippines which are aggressively positioning themselves for a bigger portion of the BPO pie. TH Lee Putnam Ventures' acquisition of the Philippines-based SPI Technologies last year is one of the very first signals that this cannot be ignored.
BPO Visits
For more than three months, the possible sale of Baring Private Equity Partners (India)'s ('Baring India') shares in MphasiS has kept interested parties spell-bound. Since May, the number of investors queuing to take up Baring India's 36% stake in MphasiS has been growing. While Singapore's Business Times described its government investment arm, Temasek Holdings, as "set to be main investor" in MphasiS, the Malaysian government's Khazanah Nasional Bhd was also named as an institution vying for the same assets. In a statement released through the National Stock Exchange of India, Mr Rahul Bhasin, Managing Partner of Baring India confirmed that "there has been a lot of unsolicited interest in the company (MphasiS) at significant premiums". Investors' thirst for MphasiS' shares and their willingness to pay a high entry price for access to MphasiS' boardroom has again placed business process outsourcing ('BPO') in the limelight.
Being Recognised
When Wipro Technologies acquired Spectramind e-Services Private Ltd. in July 2002, it was the first major recognition of the future prospects of India's nascent BPO industry. Wipro, the country's largest technology company valued Spectramind at US$126 million, which represented a 2.8 multiple on its forecast revenue for the fiscal year ended March 2003. For ChrysCapital, which parked a total of US$10.2 million in the budding BPO company back in October 2001 for a 41.3% equity stake, the investment yielded a 5.9-fold return in just 18 months.
ChysCapital's successful exit of Spectramind has laid the foundation for the country's BPO industry. More importantly, however, BPO has come to be acknowledged as an investment sector that records returns well above the median internal rate of return ('IRR') achieved by India-based companies.
Since 2002, there are 57 exits known to have initiated by investors of India-based companies. The gross IRR ranges between 1,648% to -100%, with a median of 30%. Known divestment results for India-based BPO companies boast a gross IRR range of 47% to 305% , with 90% being the median.
In 2004, the Indian BPO industry was ushered into the global limelight when a number of momentous transactions were completed during the year. IBM brought Daksh e-Services ('Daksh') onto the information technology giant's playing field when it acquired the BPO company for US$170 million. The sale of Daksh to IBM also handsomely rewarded its investors, including Actis (then known as CDC Capital Partners) and General Atlantic Partners. Actis achieved an internal rate of return of 79% while General Atlantic Partners made a 2-fold return from its US$21 million of invested capital for a holding period of less than 18 months.
In August last year, India's BPO attained a new milestone when Tata Consultancy Services, backed by GE Capital, was listed on the Bombay and National Stock Exchanges in India. It was the largest initial public offering for the country, having raised over US$1 billion. More importantly, the debut of this giant BPO firm has set a new benchmark for others in the country. Four months later, G.E. Capital raised its glass to another successful transaction when its information services outsourcing arm, now known as GECIS, was sold to General Atlantic Partners and Oak Hill Capital Partners. The two private equity houses paid a total of US$550 million to assume a 60% equity position in GECIS, placing the company's value at US$833.3 million. The final transaction value for Baring India's MphasiS shares will be another yardstick of investors' assessment of the BPO future.
Factors of Success
Once a cottage industry, technological advancement has facilitated rapid development for Asian BPO companies allowing them to become an industrial sector keenly courted by venture investors. Of the 29 BPO investments known to have been completed in India between January 2002 and June 2005, over 55% of them have been participated in by foreign private equity houses.
India is the undisputed BPO leader in Asia commanding virtually the entire market share. Worldwide, India ranks number one among seven leading BPO markets. It is expected to clock up a compound annual growth rate ('CAGR') of 45% between now and 2008. By the end of the year, India's BPO market is expected to reach a staggering US$6.5 billion. Although growth of the BPO market in China is speeding along at the same pace as India, its market size is expected to reach only US$600 million by the end of this year, a fraction of that captured by India.
India's closest rival in the global BPO market is Canada which led in 2002 with a market size of US$4.1 billion.
By the end of the year, the giant US neighbour is expected to feel the full impact of the competitive force stemming from Asia. It is expected to trail behind India and for the next few years, as global attention focuses on the advantages offered by China, India and the Philippines. Canada's BPO industry is forecasted to decline. Asia, with India being the central player, now drives the global BPO equation.
With India's recognised skills in providing financial services as well as a vast low cost English speaking work force, its position in the global BPO market is unlikely to be challenged in the near future. According to research undertaken by IDC, the demand for BPO services in the financial services sector will be the highest, at 40%, followed by the healthcare segment. These, together with its rather advanced information technology infrastructure have become a powerful formula for success in the BPO domain, leaving little room for its rivals to survive.
Strengthening Assets
But BPO companies in India are not sitting in their laurels. They have been assiduously fortifying their own assets in order to sustain their competitive edge.
Warburg Pincus' WNS has acquired two companies, the UK-based Town & Country Assistance and domestic-based ClaimsBPO. The acquisitions enabled WNS to diversify its services into insurance claims management as well as into the health claims area.
Earlier in the year, MphasiS spread its tentacles into the healthcare space when it acquired El Dorado Computing, a healthcare insurance software solution company. ICICI Venture Funds Management's ICICI OneSource has continued an aggressive acquisition trail. Between May 2002 and April this year, ICICI OneSource has mobilised no less than US$90 million in bringing five BPO companies into its fold. The market is abuzz with speculation that the outsourcing company will soon be offering its shares to public investors in order to raise further capital.
The non-organic growth undertaken by India's BPO companies are in fact replicating MphasiS' recipe of success. From a software company known as BFL Software back in 1995, it has transformed itself to become one of the largest BPO companies in India. Baring India was its earliest private equity investor, providing an estimated US$10 million and at that time, held a 52% equity stake. BFL Software grew through acquisitions. In 2000, BFL Software bought the California-based MphasiS which was in interactive architecture e-solutions businesses, and began to embark on IT-enabled and BPO services. In 2003, it consolidated its position in India's BPO space in acquiring MsourcE, a subsidiary of MphasiS. By then MphasiS BFL Software was known as MphasiS. Today, Baring India, in addition to being a 36% shareholder in MphasiS, is a holder of substantial minority stake in MphasiS BPO India.
Observation
The road ahead of the budding BPO industry, especially in India, remains long. While successes such as Spectramind, Daksh and possibly MphasiS have propelled this nascent industrial sector to new heights, the divestment results of BPO investment trail behind other sectors in the overall Asian private equity investment landscape.
Between 2002 and June 2005, there are 69 divestment results that fall into the top quartile IRR, ranging from 1,648% to 81%. Within this range, technology companies command the lion's share, in taking up 42% or 29 exit records, followed by consumer goods with 14 exits, whereas BPO claims only two.
India's BPO companies also face challenges from both China and Philippines which are aggressively positioning themselves for a bigger portion of the BPO pie. TH Lee Putnam Ventures' acquisition of the Philippines-based SPI Technologies last year is one of the very first signals that this cannot be ignored.
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
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