Analysts say PEs come in with two major growth drivers - fund at a time of business transition and the portfolio companies at least start new business with. Some set of analysts compare the support of PE portfolio business with Tata Consultancy Services getting business from Tata Motors.
Blackstone Advisors India invested nearly $825 million in April 2016 with more than 60 per cent stake in the company. The company, analysts said, has started showing some results in the recent pasts barring some initial hiccups ever since Blackstone acquired stake.
The Baring Asia Private Equity Fund V, a fund managed by Baring Private Equity Asia, invested $389.44 million in Mumbai-based Hexaware Technologies Ltd for 61.47 per cent stake from Promoter Entities. The company has reported more than 8 per cent revenue growth in 12 months to December 2016 period and said it expects double-digit growth in the current year.
Large firms such as Wipro, TCS, Infosys, Tech Mahindra, HCL Technologies at the same time has seen single-digit growth varying between 6-8 per cent and a slow digital technology turnaround.
"PE firms bring in medium to long term capital to fund geographic expansion, invest in building out deeper technology capabilities and most importantly they also provide access to their portfolio companies in getting new business to IT service firms. PE firms also bring in strong product technology capabilities as they tend to operate innovative product companies in various geographies. They do a great job in getting their investee companies focused on creating value," said Malay Shah Senior Director, High Tech sector for Alvarez & Marsal India, adding PE firms are more efficient in capital allocation.
Compared with technology transformation journeys at large publicly-listed firms, PE backed firms Hexaware Technologies, Cyient, Zensar Technologies, Tata Technologies, Mphasis, Intelenet have taken big jumps in terms of investment in new and digital technology expansion areas.
"PE firms usually strike a good balance in offering flexibility and creating value. Sound Private Equity firms do not interfere in day to day operations while still playing an important role in shaping their strategy, providing adequate governance and in creating value," added Shah.
Apax Partners LLP had put in $133 million to pick up 23.22 per cent stake in Pune based Zensar Technologies in October 2015. Zensar has made faster digital transformation and currently garners close to 36 per cent of revenues from digital technology services.
A close look at the market cap growth of PE-backed companies and large Indian IT firms give a prospective picture for PE-backed companies. While for large firms market cap has grown marginally and declined in the past one-two years, for PE supported companies, barring a drop in the past one year, saw a sharp rise.
Technology shift plays an important role in PE investments.
"With deal size and terms are squeezing dramatically in IT services, the way of doing business is changing starting from technology to people and geographies. Taking that jump (of transformation takes anywhere between 36-48 months. In that timeframe, companies have to invest a lot of money and PEs see that as great opportunity of business transition," said Sanchit Vir Gogia, chief executive officer and founder, Greyhound Research.
Gogia added that large listed firms have their commitments to deliver quarterly numbers while driving change, unlike PE-led companies.