Bain Capital and Advent plan to exit Quest Global at $3bn valuation [Private Equity Insights]

Private equity firms Bain Capital and Advent International are looking to exit Quest Global Services, six years after investing in the engineering outsourcing firm, said people aware of the matter.

The two funds together own about 33% of the company. Singapore investment firm GIC, which owns a 2-3% stake, may also look to join them.

Investment banks JP Morgan and Barclays are initiating a formal stake sale process — expected in the coming weeks — only for financial investors. The amount of stake on sale will depend on deal talks and could include a primary fundraise as well.

Valuation 20x FY23 Ebitda

Plans for a stake sale by Bain and Advent were expedited after earlier efforts to list the company in India or the US fizzled out as technology stock valuations faced a global meltdown.

ChrysCapital and True North were part of an investor consortium that picked up less than 10% stake in the company at a $1.8-billion valuation last year. They are not exiting for now.

The company is expecting a $2.5-3 billion valuation for this round, said the people mentioned above. That translates to around 20 times the FY23 Ebitda.

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A Quest Global spokesperson said, “The information proposed in your article is both inaccurate and speculative. We do not comment on market speculation.” Bain Capital and Advent declined to comment.

Growth trend

Headquartered in Singapore, Quest Global posted revenue of $598 million in FY21, down from $699.5 million in FY20. Profit after tax was $52.4 million in FY21, against $81.2 million in FY20, according to Tracxn data. Earnings before interest and taxes (Ebit) for FY21 were $87.9 million, against $107.6 million a year ago.

Quest chief executive and cofounder Ajit Prabhu told the Hindu Business Line in April that the company has revenue of $620 million. It is expecting an FY23 Ebitda of $125-135 million, said people with knowledge of the matter.

By the end of FY22, the company witnessed almost 50% growth in the engineering team for the medical devices vertical alone, making it confident of reaching $1 billion in revenue by 2025.

Founded by former General Electric engineer Prabhu, along with Aravind Melligeri, in 1997, Quest has Pratt & Whitney, Rolls Royce, BMW, Airbus and GE among its clients. With operations in 17 countries and 56 global delivery centres, the company specialises in the aerospace and defence, automotive, energy, hi-tech, healthcare, medical devices, rail and semiconductor industries.

Prabhu remains the largest and controlling shareholder, with close to 50% in Quest.

Over the years, the company has been a PE favourite. It raised $6 million from the Carlyle Growth fund in 2003. Subsequently, the founders bought back the stake with a credit line from ICICI Bank.

In 2010, Warburg Pincus bought into the company by investing $75 million, exiting in 2016 as Bain, Advent and GIC deployed $350 million.

Strategic play

Quest has made 14 acquisitions in the past 25 years and continues to look for inorganic growth opportunities, especially in adjacent businesses.

“That’s been their secret sauce. They have been acquisitive from early on and have managed to integrate those companies well,” said a technology analyst. “They started out doing mechanical work for clients — aerospace, auto design etc — but then diversified into electronic design services for healthcare and medical devices companies by acquiring Thiruvananthapuram-based Nest Software. Afterwards, they also added the software aspect of product designing by buying Exilant Technologies, and that helped clinch clients like Apple.”

The company even had a manufacturing arm that was hived off early on, in order to focus on tech services.

The technology sector has seen deals worth about $4 billion in the first half of 2022, against $16 billion in the year earlier, according to IVCA-EY. The total PE investment size of 2021 was $70 billion.

“The IT/BPO sub-sector saw significant traction within verticalised business niches and benefited from the convergence of tailwinds enabled by pandemic-induced business transformation agendas,” said a Bain & Co India Private Equity Report. “Market opportunities in digital IT services are expected to grow at 18-20% and will invite larger investments into the sector.”

Direct digital transformation investment is growing at a compounded annual growth rate of more than 15%. Investment is pegged at more than $6.8 trillion between 2020 and 2023, according to IDC’s 2020 estimates.

However, studies show that only 30% of all the digital transformations succeed. Of this, only 16% of companies saw significant improvement in key performance indicators.

Source: Newswires