$1 billion. That number figures prominently in the business roadmap for private equity firm Everstone Capital Group and its portfolio company Everise, a customer service solutions provider.
Everstone expects to raise a billion-dollar corpus for its upcoming fourth fund, while Everise has set itself a target to become a $1 billion company by 2024. The companies revealed their plans as their top executives discussed ‘Strategies to Thrive through a Crisis’ during DealStreetAsia’s latest webinar held on August 27 in partnership with Everise.
Everstone co-founder and chief investment officer Atul Kapur and Everise co-founder and CEO Sudhir Agarwal joined DealStreetAsia editor-in-chief Joji Thomas Philip for the webinar.
Kapur, who is co-founder of one of Asia’s largest PE firms with interests in diverse sectors and geographies, reaffirmed Everstone’s strategy of buying and building businesses, noting that fragmentation across sectors offers opportunities.
Meanwhile, Agarwal spoke about operating a global business with a team that was able to transition to work from home within a few weeks.
Here is the full webinar transcript, which has been edited for brevity and clarity.
Joji Thomas Philip (JP): Let me start with a big picture question. Can you take us through how it has been over the last six months?
Sudhir Agarwal (SA): This pandemic has affected not just every business or every country, but each and every one of us, globally.
From a business point of view, specifically in the tech and outsourcing industry, this pandemic has separated the men from the boys. We, as a company, have two philosophies in terms of investments—people and technology. We have been investing in our work from home (WFH) platform over the last two and a half years. When the pandemic hit us, we were able to move 98 per cent of our workforce to WFH globally, within the span of a few weeks. Even today, we are 100 per cent live and more than 90 per cent of the people are working from home.
JP: Atul, you operate across several sectors, industries, and geographies and invest across multiple stages. How has it been like for a PE firm?
Atul Kapur (AK): It has been like Groundhog Day, every day with the same thing over and over. Everybody’s locked down – you can’t attend office or meet colleagues. In Singapore, we got a whiff of this early in the year, and by February we were fearing the worst. Having experienced SARS, we wanted to be ahead of the curve and not behind.
It started with planning in February and March. April and May were probably the worst; partly because of uncertainty and lockdowns in multiple geographies. In June, certain patterns started emerging. By July, you had some semblance of stability; a little more predictability in terms of trajectory.
In August, we had our arms around most issues and started executing. As always, there are companies that are more and others that are less impacted. There are even companies that are positively impacted who stand to benefit from the situation.
By July, we had a pretty good sense of which buckets the businesses will fall in. And therefore, the ones that we think are going to be the most impacted were the significant focus of our attention and energy.
That’s where we are, at present. The worst as far as we’re concerned is behind us. It’s going to be very rare for entire countries to go into complete lockdowns – it will be on and off. But companies have figured out how to navigate this a lot better than they had in February.
As they say, plans are useless; planning is invaluable. We’ve had to consistently change our plans but the planning exercise has been fabulous where at least we can anticipate what is likely to come and our response.
JP: Sudhir, you said you were able to transition about 98 per cent of employees. How was that transition managed?
SA: Two of the biggest sectors that we operate in are healthcare and tech — over 85 per cent of our customer base. In these sectors, there are huge amounts of regulations and compliance. WFH doesn’t mean that you can just go home with your laptop. Your entire technology architecture has to be on the cloud. More importantly, it has to be compliant. There are very strict guidelines, which our clients laid out. And that’s why a lot of the other companies in our space are still struggling
Obviously, we also had to move a lot of equipment in those two weeks to our people’s homes. Which is why it took as long as it did – otherwise, we would have been up in 24 hours. It is the investments that we have made over the last two and a half years that have helped our people to WFH.
AK: To add to what Sudhir said – we thought about this two years ago – what the new generation CX business should look like. And therefore, we started experimenting with WFH well before the pandemic shift. To get the business to transition to a WFH environment started in well in advance of the pandemic. That stood us in good stead. We weren’t running to move everything to the cloud. We were already there. The execution was just about getting people enabled to start working from home.
SA: The other point, was because we are based in Singapore, we saw the pandemic a little before the world. Our COVID plans were put in as early as February across the globe. But again, there is no substitute for planning. For example, I know, even today, how many people have COVID in our company and how we support them.
JP: A couple of related questions. When you operate across so many geographies, did you require different strategies? Also, considering you provide services across various sectors, did you need to pull in more teams because some of your clients needed support which was far higher than what they would have used in pre-COVID times?
SA: We had a global COVID strategy, but had to adapt to local needs. For example, over a weekend, three countries that we operate in announced complete lockdowns — the Philippines, Malaysia, and Guatemala.
The US never announced a lockdown, but we learned from the best practice in the countries that did. We implemented them across our eight sites in the US.
Today, there are countries that have actually opened up, but we still have people working from home. For a long time, until a vaccine comes, a majority of our people will continue to WFH.
To the second question: we are in the business of supporting our customers. It is mostly in times of trouble that we need to support them. A few clients in certain verticals needed more help and so we deployed additional resources and technology. For a few of our clients where we didn’t have a big exposure, travel, for instance, they did not need that much help. We do whatever we can to ensure that we keep our customers happy.
JP: Atul, what got you interested in the BPO sector?
AK: Both the senior management and the teams have had significant exposure to the BPO sector. We understand what the economics and the attractiveness are, but were struggling to find the right combination of a management team, vision and an asset that gave us the scale to do what we wanted to do.
We wanted to build a next-gen CX business. We had very specific criteria on the sectors we wanted it to be present in healthcare and tech. But more importantly, we were looking for a management team that understood what they needed to do in terms of right-shoring, digital overlay and growth. I met Sudhir in 2015, and he had a vision and a point of view – luckily, both were in synch.
It took us a year to find the right assets. There are many small subscale orphaned assets in the voice BPO sector in the US, that lacked one or more of these characteristics. Through our former Goldman colleagues, we found an asset – C3 – that ticked most of the right boxes. Except that the business was at that point loss-making, which was surprising. But then we liked what we saw in terms of the putty that we had to work with to refashion the business.
Sudhir put a fabulous team below him. We actually shrunk the business first, before we began to grow it. We rightsized, put the growth engines and strategies to enhance margins, and it’s been a fabulous journey. We rightshored and still have roughly 50 per cent of our manpower who are in the US. That was an important part of our proposition. Because in certain sectors, especially in healthcare, having a significant US presence is imperative. And therefore, to get the balance on right shoring right was a huge focus.
We’ve got those elements right and are currently in the US, Guatemala, the Philippines, and Malaysia. What we’ve assembled over the last four years has been a pretty good combination of a business that has all engines firing from a sector perspective, as well as management teams that are driving the business forward at a very rapid clip.
JP: Before I get into Everise’s acquisitions, Atul, I was wondering if we could talk about Everstone’s platform approach – buying a company and building it out. Are you going to continue with that strategy?
AK: Yes. Partly because there is massive fragmentation across a variety of sectors. We have executed the strategy three times over. With Everise, we bought the core that was C3 and had a bunch of add-ons and plugins.
We did a whole consolidation play in an India-based company called Ascent PharmEasy which was in both the pharmaceutical distribution space and in B2C – India’s largest online pharmacy. We made 12 acquisitions over the course of three years, and continue to build that business organically and inorganically.
And the third is a medical device distribution business in Malaysia. We have subsequently done four more acquisitions. We have added a business in Singapore, Indonesia, and India and are likely to do a couple more, to get it to the size that we want it to be, both in terms of revenues and profitability and squeeze out all the synergies, before we look to exit that business.
Buys and builds in the Western world are a lot easier because that market is used to acquisitions. In Asia, it takes an enormous amount of effort. But in both Ascent and Everise’s case, the fruits of our labour are there to be picked. But it is backbreaking work. I guess that’s what our LPs look to us to do. If it was easy, they would do it themselves, or won’t pay as much to do it.
JP: Sudhir, C3 was a big deal – 8,000 employees and reportedly worth $150 million. And then you’ve done several others. Could you take us through your acquisitions and partnership strategy?
SA: M&A is a very critical part of what I have done over the last 15 years. Between my last organisation and my own company, I have done over 22 acquisitions.
You buy a company to acquire capability, to enter a geography and increase your presence. Sometimes, there’s a third reason – to get a great team and an add-on to your services.
Having been in this space for over 21 years, I was very clear on the kind of company I wanted to buy. To create value, we had to do something different.
We wanted to build a next-gen company. We didn’t want to buy a company that was playing in the commodity space.
I moved to Singapore and was very clear that the firm had to be US-focused. I didn’t want to work in very many other countries which were low margin businesses. We came across this great asset – C3 – which had a remarkable book of business but was poorly managed.
My business is no different from the way Atul creates platforms. I wanted a platform on the basis of which I could grow and launch. That happened in three phases. The first was the turnaround phase where we took a $176 million company which was losing money and made it profitable.
The second was the transform phase: we augmented the best leadership team that we could. And the acquisitions: each of them was with a very specific agenda. Trusource Labs brought us capability into technology, where we work with all the unicorns you can think of. Hyperlab got us into the world AI and bots.
Because I could not find a company that services North Asia; we did a joint venture with a very good friend who owns Ubase. And with that, we entered the third phase which is thriving, which I fully believe is where we are right now. We are seeing huge growth over the last 16 to 18 months and I think it will continue. It was a well thought out strategy that we put in place, but more importantly, it’s all about execution, and indeed we are razor-sharp focused on that. There will be more acquisitions in time to come.
JP: Has COVID created a scenario where there are strategic assets that you can pick up at a bargain?
SA: M&A is an ongoing function for us like HR, operations, or sales. We look at deals all the time. COVID has absolutely got us access to more. But what we typically buy are founder-led deals. I like to buy companies from people who have founded them and have them come in and play a leadership role.
Such deals take time because there’s a relationship-building that takes place. It’s not something that can be done in 30 or 60 days. Deals have popped up, but we want to be conscious and will take our time to buy the right asset.
JP: This also requires capital. So how are you placed on that front?
SA: Fortunately, we are profitable. We have a positive balance sheet. If need be, we can run to it but most importantly, I have an amazing partner, who if I go to for capital, will never say no. To this day I have never worried about cash because I am fortunate to have a great partner. That’s his problem, not mine.
JP: But Atul, you’ve always said it’s not just about the capital. In the case of Everise, what have you brought beyond capital?
AK: I don’t think there’s any one thing. Good management teams and PE firms feed off each other’s capabilities – a symbiotic relationship between capital and talent. I’m not going to tell Sudhir what he needs to do in terms of recruitment policies. But when it comes to setting the strategic direction, what is it that we want?
In every investment that you make, you must have a gameplan. All of these are time-bound investments and every PE firm must churn them on to the next phase. If you start at Stage A and end at Stage B, you need to know what B will look like. Our job is in the thinking through of these strategies and empowering Sudhir with a toolkit that helps him to get where he wants to go.
For different companies, that means different things. We have an Everstone operating playbook where we write down the journey of a business. It’s a ‘how-to’ manual. What are the stress points that you need to worry about? How do you improve your margins? What do you need to have in terms of capabilities from a team perspective?
Our job is to be the foil for Sudhir’s execution capabilities. Our partner’s job is to take from us and then turn it into an execution game.
SA: The only other point I would add is that there are other ways to raise capital. And so, it is not the only thing that my partner brings to the table. This is my first gig as an entrepreneur and so I really have to learn. We actually sit in the same office with Everstone. There are no walls. I’ve been so fortunate to get the opportunity to learn how they manage an F&B business or a healthcare business. I have access to anything I want. It’s like one big family.
I say this very openly from what I’ve learned. It’s truly a partnership when it’s not just one thing that they get on board.
JP: Where is the partnership with Everise headed? What’s the bigger gameplan, since as a PE firm, you can’t hold on to your investments forever? Are you looking at an IPO or at a strategy sale?
AK: This is always tricky — when you have a good thing, why disrupt it? This business has significant legs to continue to grow and double easily over the next four years. But we are also in the business of buying and selling companies.
What Sudhir and his team have pulled off has not gone unnoticed. We are in the process of reviewing what we do next. There’s been a lot of inbound interest for people who want to acquire the business and take it to the next level.
If I had the liberty of permanent capital, I would probably hold on to this. Typically, each business has a four-to-five-year journey. Suffice to say, we’re scratching our heads and trying to figure out what should be the next leg. We have not come to a decision yet. But by the end of the year, we would have our views crystallised in terms of what we are looking for.
JP: You mentioned a lot of inbound interest. Are we looking at a $400 million to $500 million deal?
AK: I would not like to comment. This business is great; one of the few that are based in this part of the world that have the scale, size, right sectoral exposure, and a fabulous management team. Time will tell.
JP: So, Sudhir, let me put that number across to you differently. In the past, you’ve said that you want to become a $500-million company by 2022. We are two years from the target. With an acceleration in terms of growth through the pandemic, do you see yourself hitting that target earlier?
SA: I am not obsessed with revenue. When I say ‘I want to be a half a billion-dollar company’, I look at it more from a value point of view – what I create for my partners and shareholders. With the pandemic, companies have shrunk from minus 20 per cent to a few that have grown at about 10 to 12 per cent. We will grow by at least over 25 per cent this year. If we keep the track record that we have demonstrated, we will be a half-billion-dollar company by early next year. It’s going to be earlier than we initially projected. I am now working on my new blueprint, which is how by 2024, we can be a billion-dollar company.
JP: To hit a billion dollars; you would be looking at more acquisitions and partnerships. Getting acquisitions right involves integrating multiple different teams across different geographies. How have you handled this?
SA: Acquisitions fail, not because you did not identify or buy the right company; but because you did not integrate. Fortunately, even before I started this journey, I had done 19 acquisitions. I have had my fair share of learnings and mistakes. We have a playbook on how we integrate. From start to end, it takes 100 days, irrespective of size and sphere of activity. At the end of three months, the companies get integrated. It does not just mean we have just changed people’s email ids. It means they come on to our platform on the HR and finance side.
The leadership team is extremely important. During the acquisition process, we actually sit with the founders and openly draw what the org chart will be on day one. We are very open about key roles that we don’t need since we do not want duplication.
Also, we never buy a company until the earlier acquisition is complete. We had two acquisitions in 2018, and pretty much through the entire 2019, we did not do anything on that front.
JP: Atul, you spoke of a playbook and toolkit. Where do layoffs feature in that toolkit? Especially in these times, I’m assuming some of your companies in certain sectors may have had to let staff go.
AK: This is a tricky one. If you have a surgical approach and find that certain leadership roles are either not needed, or that the people are not growing to their capability, that’s easier. You are dealing with white-collared people, with whom you can have a rational conversation. Where it gets trickier is when the numbers get large.
F&B businesses are large employers of people, but the businesses themselves have been stuck. It’s very hard to build teams and easy to break them. Our first approach has been to keep teams together. Now in any business, there’s always attrition. People leave, get married, or find other jobs. Businesses are always backfilling attrition. What we’ve done in order to right-size businesses, that for whatever reason, have had to slim down during this pandemic, is we’ve managed the backfill of the attrition sensibly. That has been a big determinant of getting the businesses right-sized.
In times like this, you also have to adopt a reasonably humane approach, if you’re letting someone go. You have to work to properly outplace them. This is not a great time for people to find jobs. There’s no one approach, but a combination of everything.
Looking at our portfolio as a whole. I think we’ve been very fortunate that we haven’t had to face these really tough decisions on what to do with the mass of workers we haven’t been able to afford. I will say we’ve lucked out.
JP: Are there any new sectors that you have focused on, post-pandemic?
AK: Trends have accelerated but I don’t think new sectors are being discovered. Someone gave me the statistic, that pre-COVID 16 per cent of all retail in the US was e-commerce. Now, it’s approaching 30 per cent, which they thought would happen only over 10 years.
If you look at our Fund 3, 81 per cent of the allocation is in two sectors: IT services and healthcare. We had no inkling of the pandemic, but both those sectors have been huge beneficiaries because of it.
As we look forward, we will continue to allocate capital along those vectors. Even within, there are things that are going faster.
When it comes to transitioning to digital, till the end of last year, companies had a choice. I don’t think they have one anymore. They are now asking themselves, ‘How much money do I have to spend, and how quickly can I get into the digital domain?’ rather than ‘Do I need to get there?’ Companies that did not require customer service, need it now in a digital domain since people can’t walk into stores or offices. We are looking at all these trends and doubling down on what we think are going to be the winners, for the next five years. Within healthcare and IT, we will find businesses that have accelerated tailwinds, that get them to outpace the market or their competitors.
JP: Sudhir, 95 per cent of your business was voice-driven. Now, I understand its 75 per cent. Is it possible for it to hit 50 per cent?
SA: Even in the tech industry, we have never seen a disruption like COVID. Companies are opening up and realising that they are doing too much of the same thing, with the same partners.
Until about three years back, when I used to go with my sales guys and ask about selling bots, companies would say ‘please go to the CTO’. Anything to do with technology was a CTO discussion. Today, whether you’re a chief people officer or COO, or a CFO, digital and technology are a part of your agenda. That’s a big difference.
Our order book has grown by 30 per cent in the last five to six months. When we bought C3, it was 95 per cent pure voice; today we are closer to 70 per cent. You can use technology to a point, but you can never take away the human brain. Voice will probably end up at about 55-60 per cent over the next two to three years, and that’s where it will stabilise.
JP: An audience question for you, Sudhir. For the BPO sector, what is it that has really changed? Because when it comes to consumer complaints, they still have the same problems with the whole sector. What are you doing differently at Everise?
SA: No one calls a BPO, or emails or chats, unless they have a problem. Every company is good, but there are a few that are great. The difference is nothing but customer experience.
Singapore Airlines is the best in the world, by far. They use the same planes as other airlines, but it all boils down to service and customer experience.
We partner with those companies that want to be great. Irrespective of channel – voice, email, chat – we want to deliver the best customer experience for the best companies out there so that we can make fans out of their customers.
JP: Atul a few questions on Everstone, specifically. What’s the status of Fund 4?
AK: We are putting up plans to raise Fund 4 since we are almost done with investing capital from Fund 3. We have a little more firepower to go, and in the latter part of this year, we will be talking with our investors about raising incremental capital.
JP: Will it be a billion-dollar fund?
AK: That only my LPs can tell me. But yes, given what’s happening, the reality is that investment sizes are increasing. Bigger checks in more mature companies are, in our view, a better risk-reward ratio. The businesses are more mature, have better management teams and have more runway to do things with. The reality is that this region still grows – 6 per cent real and 9-10 per cent on a nominal basis. We started investing in India when GDP was $1.6 trillion; it’s now $3 trillion.
If you take 2020 out and pencil in kind of a 9 per cent to 10 per cent nominal GDP growth. The size of businesses keeps on increasing and therefore, what we need in terms of buying those businesses at those sizes also keeps on increasing.
I think we would like to increase. The last fund was about $730 million in size. We will through our core investors put in a billion dollars of capital – that’s the range.
JP: On to the private credit space, because you’ve always looked at that as a huge opportunity. Is the dedicated fund that you had planned on schedule?
AK: Yes. As you know, we have through Fund 2, an NBFC called Indostar, a non-banking finance company and that’s been a very successful investment for us. As we look at the massive disruption in the credit sector in India, we think that sector requires a significant capital solution. We are well on our way through structured vehicles to enable us to exploit that opportunity. We have our teams ready to go and are in conversations with people on strategy.
We will probably have a better idea of targets towards the latter part of the year. Once we get that capital locked down, we will be out, communicating with a wider audience as to how much money we have and what we are looking for.
JP: An audience question for both of you. With the trend of SPACs (Special Purpose Acquisition Company) in the US, do you see this form of listing as a way for private companies to go public?
AK: The domicile for those vehicles will continue to be the US. That market understands the mechanism of raising capital from a SPAC and listing the resulting entity that gets acquired. I think it’s unlikely that other markets will have an investing infrastructure that lets SPACs come in, anywhere outside the US.
But as you know, there is a great amount of flexibility for those SPACs to acquire businesses and those businesses may be acquired from anywhere around the world. So will SPACs be yet another capital solution, either for owners of businesses or private equity to exit out? Absolutely. Historically, most SPACs in the US — and I am generalising here — have bought US businesses, partly because businesses in Asia haven’t been able to get that size.
But I think that’s changing. I will not be surprised if you see SPACs, where capital is raised in the US and those SPACs, are then used to acquire businesses in different parts of Asia. I think that trend is on its way.
JP: Sudhir, have you thought of this option for Everise?
SA: Atul and I keep discussing multiple options. Especially for SPAC, the US understands it way better than any other country. Will other markets open up? Probably yes, but I don’t think it will happen in the near future. We are still evaluating options and our strategy will be clear by the end of the year, on which route we pick.
JP: Another audience question for Atul – do you see Everstone getting into special situations investing in India, or Southeast Asia, or even in other locations?
AK: We are providers of capital solutions – you can call it by any name you want. Our PE strategy is control growth-oriented. We’d like to own a majority stake in the businesses and help management teams drive the goals that we set out, as far as investment is concerned. The debt businesses are pure debt businesses, the credit businesses are pure credit businesses.
We do not want to be a minority investor and provide a capital solution to a company that may be in trouble. I don’t think we will venture down that path. Our capital provisioning on the credit side will always be on the debt side of the balance sheet. That may or may not extend the definition of special situations. But on the equity side, it has to be a control-oriented play, otherwise it’s hard for us to get excited.
JP: One more question to Atul: What is the value of information for a PE fund, at a time when it’s not possible to meet people or do physical inspections?
AK: In a year’s time, if the world continues to be where it is, people will have to figure out how they will manage the risk of buying businesses where they cannot meet management teams or see facilities. It has less to do with visiting factories and more with trying to understand how management teams are driving the businesses forward.
People work with people. You don’t buy a company for what it is — you buy it for the way it’s managed and is likely to be managed on a go-forward basis.
We just bought an IT services business in the US last week. The work had begun way before COVID, in the last quarter of last year. We had done all the qualitative assessments. And then the quantitative stuff followed during the lockdown. But without the qualitative part, it’s going to be difficult.
Necessity is the mother of all invention and we will have to figure out a way to manage this using technology. But we are not there yet.
JP: Sudhir, 12 months from now, where do you see Everise?
SA: At least two more acquisitions and $125 million to $120 million to our topline. And working to the plan of being a billion-dollar company. It’s an audacious goal but we have to get cracking.
We have already interacted with a lot of the people in charge of the deals that are in our M&A pipeline. What’s going to be really interesting is: how do you do a deal, if you haven’t met the people? That’s the scary unknown which, unfortunately, I don’t have an answer for. Hopefully, this time will pass pretty soon and we can get on with our M&A engine. Other than that, I hope our teams keep doing the great job that they do and that we keep growing organically as well.
JP: Atul, do you see the next 12 months to be devoted to full steam fundraising? Or will the investment thesis change due to the COVID-19 situation?
AK: I don’t think the investment thesis has changed. On the real estate side, we have been huge beneficiaries of the switch to e-commerce. Because of our warehousing businesses, we’re seeing unprecedented demand from players in the e-commerce world who are desperate to scale their businesses, at a faster clip.
On the energy side, we are partners with British Petroleum. Given all that’s going on with climate change and the government in India propagating the use of alternative energy, we continue to see massive momentum in that business, in terms of building out our portfolios and our platforms.
On credit, we are in the process of raising capital. We will be in the deployment mode over the next 12 to 18 months on that strategy.
Different asset classes are in different stages of capital raising and deployment and they are asynchronous. That cycle will continue. The treadmill never stops. Unfortunately, we are in a business where you have to run to stand still.