Big money, small bytes: Why PE firms are crushing on smaller tech ventures

Private Equity's New Target: India's Nimble Tech Titans

India's under-$250 million IT services sector is experiencing a surge in private equity (PE) investment. Global giants like Blackstone Inc., EQT AB, and Multiples Alternate Asset Management are pouring capital into these smaller, but rapidly growing, tech firms. This trend is driven by their impressive growth trajectories, lean operations, and product-focused strategies.

Experts point to several key factors fueling this investment boom:

• Higher Growth Potential: Smaller IT companies consistently outperform their larger counterparts, achieving double-digit growth in contrast to larger firms' 3-5% growth.
• Leaner Teams and AI Adoption: Nimble teams and the swift adoption of AI contribute significantly to their efficiency and rapid expansion.
• Product Focus: Many of these smaller firms concentrate on developing software products, offering higher revenue potential and asset-light operations.

Case Studies:

• Multiples Alternate Asset Management: Invested $200 million for a controlling stake in QBurst in February 2024, its largest tech services investment to date. Multiples highlights QBurst's agility and scalability as key drivers for their investment. QBurst states that Multiples is providing strategic guidance and support in their transformation.
• EQT AB: Acquired WSO2 in August 2023 and Indium Software in December 2023. WSO2 credits EQT's investment with accelerating product development and market expansion. EQT's investment strategy emphasizes supporting the next phase of growth for companies like Indium, leveraging their global expertise and network.
• Blackstone Inc.: Acquired a majority stake in R Systems International Ltd. in November 2022, further demonstrating the significant interest in this sector.

Ramkumar Ramamoorthy, partner at Catalincs, a tech growth advisory firm, emphasizes the opportunity for PE firms to restructure and enhance the business models of these mid-sized IT firms, ultimately driving substantial value creation.

Pramod Gubbi, founder of Marcellus Investment Managers, highlights the attractiveness of these smaller firms due to their asset-light nature, agile teams, recurring revenue streams, and the potential for significant AI-driven efficiency gains.

While this current wave of PE investment is significant, it's not unprecedented. Previous investments in companies like Mphasis and Hexaware demonstrate a long-term interest from PE firms in the Indian IT sector. The current focus on smaller, nimble companies, however, represents a distinct shift in strategy, driven by their exceptional growth prospects and potential for future value.

The bottom line? Small may be the new big in the Indian IT landscape, attracting substantial private equity investment and promising continued growth in the sector.