Indian IT drives PE interest despite global headwinds

The number of private equity firms holding stake in Indian IT services companies has doubled between 2019 and 2022 to more than 50 now, data by Avendus Capital show.

Institutional shareholding in IT services companies listed in India has also increased — by 9% for large-cap players, and 16-18% for mid-cap and small-cap firms over the last 12 months. There has also been a spate of acquisitions led by PE firms such as ChrysCapital and Carlyle.

With Indian IT services becoming an increasingly attractive investment area for a spectrum of investors including PE firms, many more M&A deals are in the works, said experts.


This even as the startup ecosystem in the country has somewhat soured. IT firms are seeing interest as they are considered “safe”, having demonstrated a tried-and-tested business model and profitable growth over many years.

“We are observing an uptick in activity in both M&A and growth funding considering the companies are able to demonstrate both scale and profitable growth,” Shobhit Jain, managing director and co-head, enterprise technology and services Investment banking, Avendus Capital told ET.Earlier this year, homegrown PE firm ChrysCapital announced the acquisition of US-based Xoriant which further acquired Thoucentric of Bengaluru. Other major deals in recent weeks were led by Carlyle, which acquired a 28% stake valued at around $500 million in Quest Global. Belgium-based Proximus group is acquiring a 58% stake in communications service provider Route Mobile for about Rs 5,922 crore.

“In 2019, around 25 PE funds were invested in the IT services space; this number has grown to 50+ now,” said Jain. Multiple new funds have emerged in the US and India which are looking at the Indian IT space closely, he said.

Akshat Babbar, MD-IT and business services at ChrysCapital, expects the IT sector prospects from a PE investment perspective to remain “very strong” over the next 3-5 years. “…that is what drives us even in this environment to be actively looking at investments, despite the current volatility. And I would suspect, many other investors will also feel similarly,” said Babbar. “I do expect the investment business sector to pick up with the coming quarters, particularly as uncertainty around demand,” he added.

Babbar said the long-term secular growth outlook as well as very highly profitable and cash generating business models of IT services companies translate into a high return on capital investment for PEs. This has led to ChrysCapital also tweaking its investment strategy in this space. “Our focus has shifted meaningfully to doing buyouts, as with the likes of Infogain and most recently Xoriant,” he added.

Arun Prabhu, partner & head – technology and telecom, Cyril Amarchand Mangaldas, said the law firm has seen increasing PE interest in the IT services sector. This has ranged from large exits to smaller, strategic transactions on IP-heavy assets.

“Entities enabling AI and Cloud, as well as conventional large-scale service providers in spaces like insurance, health and more conventional areas like software development have seen interest,” he added.

Investors look to find robust, compliant and scalable business models with long-term stickiness, providers who are deeply embedded, either through strategic IP such as enablers and accelerators, or through specialised subject matter knowledge, are particularly valuable, said Prabhu.

This sentiment is seen even in the publicly listed segment despite the larger uncertain environment flagged by the IT services sector. Kumar Rakesh, associate director, BNP Paribas, said rising interest rates, slowing demand and macroeconomic concerns have added to a level of bearishness among IT investors over the past 12-18 months.” However, some of the mid- and small-cap IT services companies with strong niche capabilities have continued to see strong growth and have attracted investor interests,” said Rakesh.

Carlyle-owned Hexaware is looking at utilising the current market environment to acquire companies, chief executive R Srikrishna told ET during a recent interaction. “We are looking at closing one or maybe two acquisitions this year to add service line capabilities rather than just adding capacity,” said Srikrishna.