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VCs not interested in Indian BPOs
By agencies
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Tuesday, 14 June 2005, 19:30 IST
BANGALORE: Venture capital funding in the Indian business process outsourcing (BPO) sector seems to be drying up, with just one investment deal reported so far during 2005 as against over $150 million raised by 10 BPO companies during 2004.
Industry officials say the lack of VC activity is hitting the new generic customer support, which are struggling to raise funds for expansion.
The single VC funding during 2005 was the $7.5 million investment by Singapore's Temasek Capital and JP Morgan in the Apollo Hospitals group's healthcare BPO company, Apollo Health Street.
There has been a perceptible decline in the quantum of VC and private equity funding in the sector over the past two years. Of the $1.1 billion invested in 66 Indian companies by VCs/PE funds during 2004, a little over $150 million came into the BPO sector.
In 2003, the BPO sector accounted for over 20 percent of the total $774 million VC and PE funding in India. The BPO sector had witnessed 22 deals worth $160 million during 2003.
Industry officials say VCs and private equity funds are not losing interest in the sector, but are turning selective and focusing on companies in niche sectors.
"Until mid-2003, most of the VC investment in the BPO sector went into plain customer support/call center kind of firms. But, after that, VCs have focused more on specialized and vertical BPOs including companies like OfficeTiger (equity research), QuEST (engineering services), Technovate (travel) and Ephinay (finance and accounting)", says TSJ Media editor Arun Natarajan.
VC funds are now looking at the size of the company, potential to scale up and the customer profile as the key pre-requisites for investing in the sector, besides the management team and marketing and sales divisions. In some cases, private equity funds have provided additional funding to existing portfolio companies.
Bangalore-based UTI Venture Funds Management Co CEO & MD Raja Kumar thinks that there continues to be a lot of attractive opportunities in the BPO sector. "The BPO sector remains very much on the radar of VCs and PE funds. Several funds including us are actively evaluating opportunities in this sector", he adds. Opportunities for investment in the niche segment of the Indian BPO space like knowledge process outsourcing are rather limited at the moment for VCs and PE funds as compared to opportunities in voice-based BPOs, which account for as much as over 75 percent of the BPO activity in India.
But, the non-voice space is slowly but steadily growing and several companies are moving up the value chain. Several companies have combined voice-based operations with non-voice related transaction processes.
"India retains its edge in the BPO space. Though several small companies are struggling with manpower and quality issues, there are enough opportunities emerging in the KPO sector to warrant attention from VCs and PE funds", added a top official of a leading KPO.
Nasscom sees significant latent potential for KPOs especially in areas like F&A (finance and accounting), healthcare-pharmaceuticals and biotechnology, legal support and research, design and development for automotive and aerospace industries and animation and graphics for the entertainment sector.
In future, considering that the ITES-BPO segment, which accounted for 30 percent of the total IT-ITES exports from India and saw 44.5 percent growth to reach $5.2 billion in 2004-05, is expected to clock revenues of $7.3 billion in 2005-06, opportunities for VCs and PF funds for sound investments are expected to increase.