CPPIB Acquires an IT Giant?

Indulai PM and Jochelle Mendonca of India's Economic Times report, Apax Partners sells 48% of GlobalLogic to CPPIB in $1.5 billion deal:
Apax Partners has sold half its 96% stake in GlobalLogic, an IT outsourcing firm founded by four IT Titans, to Canada’s CPP Investment Board.

The financial terms weren’t disclosed, but people in the know said the transaction valued the digital products development company at $1.5 billion (Rs 10,235 crore). That means a big payday for Apax, as the private equity firm will end up making more than three times money on a four-year-old investment.

Apax acquired GlobalLogic in 2013 for $420 million from a clutch of financial investors, including a PE fund managed by Goldman Sachs, Westbridge, New Atlantic Ventures and Sequoia. It will continue to own 48% of the US-based firm, with the management team holding the rest, the people said. Both CPPIB and Apax will become co owners of the company.

The transaction would be one of the biggest private equity exits in the technology sector post Capgemini’s $4 billion acquisition of Nadasdaq-listed iGate, which was also backed by Apax Partners.

Ryan Selwood, managing director and head of direct private equity at CPPIB, called it a “compelling opportunity” for the Canadian pension fund. “GlobalLogic’s market-leading position, exceptional track record and deep customer relationships will enable it to continue capitalising on technology megatrends,” he said.

“GlobalLogic has seen significant returns from early investments in customer focus and in building differentiated capabilities to drive digital transformation for a number of large customers,” said Rohan Haldea, partner at Apax Partners.

Founded by Rajul Garg, Sanjay Singh, Manoj Agarwala and Tarun Upadhyay, San Jose, California-based GlobalLogic has its core operations in India. The company was initially founded as Induslogic in 2000, with headquarters in Vienna, Virginia and had a delivery centre in Noida.

It provides product development services, including experience design, product engineering, content engineering, and labs. It specializes in big data and analytics, cloud, design, DevOps, embedded, Internet of Things, mobile, and security practices.

“In the past three years with Apax, we’ve enjoyed a 20%+ compound annual growth rate, consistently outperforming the broader product engineering services market,” said GlobalLogic Chief Executive Shashank Samant.

GlobalLogic is one of the larger players in the outsourced engineering research and development industry. The company is forecast to post around $450 million in fiscal 2017 revenue, with a 20% operating margin. It has more than 11,000 employees and delivery centres, called ToyFactories, in India, the US, Eastern Europe and Argentina.

Engineering R&D services have been growing faster than regular IT services, though over a smaller base. The sector has seen some consolidation, with over 15 niche players having been acquired over the last two years.

GlobalLogic was also looking at potential acquisitions, and could consider at bolting niche consulting firms in the future. India’s technology sector has matured and has more challenges to face, but analysts believe growth can still be achieved with the right business mix and people.

“Despite having a cautious outlook on growth/margins and the overall Indian IT space currently, we still maintain our view that if the business mix is right, the proposition is right and execution is right — the IT services industry still has growth left,” Nomura Securities analysts Ashwin Mehta and Rishit Parikh wrote in a note in September.

Apax, which started investing in India 10 years ago, has invested $1.5 billion across half a dozen companies, but has already returned $2.3 billion cash to its investors, even though it has yet to exit some of its portfolio companies. The performance makes it one of the most successful global private equity funds in India. The UK-based investment firm, which manages $20 billion globally, has invested predominantly in the technology space. Apax backed iGate to acquire India’s Patni Computer Systems in 2011 for roughly $1 billion and sold it off to Capegemini four years, making a nearly fourfold return.

It also made bets in the healthcare and financial services space in the country. It acquired an 11% stake in Apollo Hospitals in 2007 for $100 million, which it sold off in 2013 making a 3.5-time return. The PE fund has a Rs 500 crore exposure to the Murugappa Group’s Cholamandalam Investment & Finance Co.
Someone from the Street.com contacted me on Friday to give my thoughts on this deal. I said it was a great deal for all parties involved and referred her to Mark Machin and Ryan Selwood at CPPIB.

First, Apax the private equity giant which acquired GlobalLogic in 2013 for $420 million made more than three times its money in a little over three years. That is a great return for Apax and its private equity clients which are pretty much the who's who in the pension and sovereign wealth fund world.

Second, CPPIB through its fund and co-investment program just got a big stake in one of the fastest growing companies in a very hot industry. The way it works is like this. CPPIB invests billions in private equity, exclusively through funds like Apax which it pays hefty fees to. But it also gets to co-invest alongside them in some big deals (paying no fees) or gets first dibs when these private equity funds sell part of their stakes in their portfolio of companies. It wasn't by accident that Apax approached CPPIB to sell them half their stake in GlobalLogic.

On co-investments, CPPIB pays no fees but when it acquires a stake in a private company which is part of the private equity portfolio through its fund investments, it pays a premium to the general partner, in this case, Apax. Now, if GlobalLogic continues to grow at a healthy clip, CPPIB will turn around in three years and exit this investment via an IPO in public markets and make multiples on its investments, boosting its returns in private equity (Apax will also make a killing in the process).

What does GlobalLogic gain? In addition to Apax, it gains a strategic long-term partner/ owner with tentacles around the world that will provide solid long-term strategic advice to its management and if needed, patient capital to fund new projects.

It's through co-investments and private equity deals like this that CPPIB and other large Canadian pensions are able to juice their private equity returns. These gains benefit their beneficiaries but it also allows senior pension fund managers to reap big gains relative to their private equity benchmarks to collect big bonuses in their own personal compensation.

I had a discussion with someone in public markets yesterday who told me flat out "they should strip away these co-investments and big deals from CPPIB's private equity returns", adding "it's not like they sourced them, they get them just because they are big and are able to invest huge sums in private equity giants like Apax."

True but if you are Ryan Selwood at CPPIB, you can argue that you work hard to invest in Apax and cut deals like GlobalLogic so you deserve to reap the rewards of such deals. Nobody forced Apax to sell its stake to CPPIB, negotiations happened at the highest levels and it is an excellent deal all around.

The Globe and Mail had a big report on CPPIB's appetite for risk, which isn't anything new. CPPIB has comparative advantages over many other large investors and it will use these advantages to make strategic long-term investments at the right time (click on image):

It's not about taking on more risk, it's about taking on smarter risk. What CPPIB is doing makes great sense and you don't need a PhD in finance to understand it.

The key thing to understand is that in a raging bull market, CPPIB will typically underperform its peers and many other public funds but when a bear market develops, it will use its competitive advantages to get to work and make strategic long-term acquisitions across public and private markets all over the world, and these investments will benefit the CPP Fund over the long run.

Again, it's not rocket science, it's understanding their long-term competitive advantages and capitalizing on them at the right time by taking very smart long-term risks.

Below, as part of his strategy to create more dynamic user experiences for a digital subscriber base, The Economist’s Chief Digital Officer, Jora Gill, engaged GlobalLogic as the organization's dedicated software development partner. Listen carefully to his comments, very interesting.