2021, A Blowout Year for PE Investments in Tech Services, says Zinnov
~ 670+ PE-led deals took place in Tech Services in 2021 alone ~
~ India emerges as a mature market for PE deals in Tech Services ~
BANGALORE, India, July 13, 2022 /PRNewswire/ — 2021 was an extraordinary year for Private Equity (PE) investments in the Technology Services industry. The year not only bore witness to India-based Tech Services assets gaining increasing traction from PE investors, but also saw some of the largest value Tech Services deals taking place in the Indian market. A clear indication of India’s maturing Tech Services ecosystem was reaffirmed by Blackstone and Carlyle’s investment in Mphasis and Hexaware at a staggering value of USD 2.8 Bn and USD 3 Bn respectively.
The high-octane growth in Tech Services assets, has been fueled by the pandemic-induced digital transformation of enterprises, leading to the increased investor interest in the space – not just in India but globally as well. However, to capitalize on this trend, services companies have been masquerading every other asset as a Digital Services asset, to ride the high valuation wave. A deeper analysis of this ‘digital asset masquerade conundrum’ by Zinnov revealed that only 20% of all investments made were in truly digital assets. Zinnov, in its latest study titled,’Convergence of Tech Services through a Digital Lens‘, focused on the PE Investments landscape, highlighting the key trends driving the growth of the Technology Services ecosystem and the underlying phenomenon that have the potential to shape the growth and return on investments for both investors and providers in this space.
The study includes an in-depth analysis of 670+ PE investment transactions including buyouts, growth capital, and add-on acquisitions in the Technology Services space for the year 2021. Each deal has been evaluated and analyzed extensively across 20+ parameters to understand the high flow of investments in the space. On the buyer side, some of these parameters include details of the PE investors, deal types and sizes, valuations, and multiples. On the asset side, the analysis points include quantitative parameters such as revenue, EBITDA, growth, headcount, etc., and qualitative parameters such as delivery regions, type and quality of service offerings, and the rationale behind the investment.
Digital Asset Masquerade Conundrum
The Digital Asset Masquerade Conundrum was one of the most revelatory findings of Zinnov’s analysis. The implication is that truly Digital Services firms (where at least 60% of the workloads are digital), are only a small fraction of the target assets involved in the PE deals. Only 20% of the 670+ target firms seem to qualify as being truly digital. It is increasingly clear that the spike in valuations of Digital Services firms when compared to their traditional contemporaries, has brought with it the phenomenon of more firms trying to sell themselves by ‘claiming’ to be truly digital. This has resulted in PE players needing a more comprehensive framework to assess and measure each asset through a Digital Lens. PE firms that lack the ability to identify the truly digital assets from those masquerading as digital face the risk of investing in lower growth companies at higher valuations, impacting both portfolio growth and returns.
As enterprises grow at speeds faster than ever before, Technology Services Providers are increasingly taking on digital workloads from these enterprises, making themselves more attractive targets for investors. In order to capitalize on the growing convergence in enterprise spends across IT, ER&D, and BPO to enable intelligent outcomes, Service Providers are transforming and projecting themselves as ‘end-to-end’ digital players, making them more viable targets for investors. The deal environment continues to remain at an all-time high, with investors vying to get a piece of this highly fragmented market, with vast growth potential.
Key themes driving PE Investments in Tech Services
The study highlights some of the key acquisition themes that will continue to drive PE investments in Technology Services in the coming years. This includes factors such as hybrid engagement models, virtual collaboration, digital talent, digital-first customer experiences, and technology innovations – all responsible for bringing digital to the core of investment decisions. On the buyer market side, a key trend that has emerged is the rise in technology-focused SPACs and Funds. Some of these funds and SPACs are being managed by tech industry veterans, with niche focus on digital segments such as Artificial Intelligence/Machine Learning, Design & Development, Analytics, etc.
With economies shrinking, inflation and interest rates peaking, regulatory changes, geopolitical unrest, an expected slowdown – valuations have dropped from 2021’s high. All technology investments are likely to be under intense scrutiny, making value creation strategies an integral part of the PE playbook.
Vimal Menon, Partner, Zinnov, said, “Our expansive expertise in the Digital Services space and our role as commercial advisors for various PE-led deals, make us firmly believe that to create real value, Private Equity players need to identify truly digital assets. With the convergence of IT, BPM, and ER&D spends and digital continuity at play across enterprise activities to enable intelligent outcomes, it becomes critical now more than ever for PE investors to place bets on truly digital assets. To earn the right to win, PE stakeholders will need to assess and recognize the evolving industry landscape, the growth opportunity, and ascertain the right valuation of assets based on their position on the Digital Services spectrum. Additionally, PE investors will also need to leverage under-tapped geographies such as India, countries in LATAM, etc., that are rich in talent for Digital Services, to create long-term value.”
About Zinnov
Founded in 2002, Zinnov is a leading global management and strategy consulting firm, with presence in New York, Santa Clara, Houston, Bangalore, Gurgaon, Paris, and Pune. Over the past 20 years, Zinnov has successfully consulted with over 250+ Fortune 500 enterprises and technology companies to develop actionable insights that help them create value – across dimensions of both revenue and optimization. With core expertise in Product Engineering, Digital Transformation, Innovation, and Outsourcing Advisory, Zinnov assists clients by:
- Identifying top technology disruptors and key growth areas that drive future growth;
- Advising global PE firms in asset shortlisting and target evaluation, commercial due diligence, and value creation;
- Growing revenue for companies’ products and services in newer markets through account intelligence, market entry, and market expansion advisory;
- Structuring and implementing Digital Transformation levers enabled by technologies like AI/ML, Cloud, IOT, and RPA.
With their team of experienced consultants, subject matter experts, and research professionals, Zinnov serves clients from across multiple industry verticals including Enterprise Software, BFSI, Healthcare, Automotive, Retail, and Telecom in the US, Europe, Japan, and India.
Media contact:
Nitika Goel,
Chief Marketing Officer, Zinnov
[email protected]
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