AVCJ Awards 2021: Exit of the Year – Small Cap; Operational Value Add: Integreon

As a secondaries specialist, NewQuest Capital Partners rarely gets involved in control situations, so the incentives to do so must be fairly convincing.

When the private equity firm acquired 100% of Integreon in September 2016, the US and Philippines-based business process outsourcing (BPO) player was mired in stagnant economic metrics despite being one of the most respected brands in its field. This offset was made all the more interesting by the company’s niche focus within the BPO space: legal process outsourcing, or LPO.

“It was – and continues to be – an exciting opportunity globally,” Sachin Khandelwal, a managing director at NewQuest who spearheaded the operational value add and exit of Integreon.

“If you look at finance, accounting, and recruitment functions, they’ve all been outsourced at a large scale for the past 20-plus years. Legal functions have been one of the last areas to get that focus where enterprises are looking to get better services at optimal costs.”

NewQuest acquired the company via its third fund, which wrote checks of USD 25-75m and exited with a more than 5x return. The growth was primarily attributable to efforts around bringing in a new management team and culture of accountability while pivoting the sales strategy toward deeper, longer-term relationships with more cross-selling.

In addition to its presence in the US and Philippines, Integreon maintains two offices in India and a footprint in the UK, with more than 3,500 employees globally. The Mumbai office doubled in size during the NewQuest hold.

BPO services span multi-lingual and around-the-clock, onshore, offshore, and onsite support in areas such as litigation, contract and compliance, legal administration, research, and business enablement. Clients include law firms, corporations, and financial institutions. In 2019, a 10-year partnership with Microsoft was recognised with the launch of a cyber incident response and subpoena processing service.

Unloved subsidiary

Under the ownership of Philippine conglomerate Ayala Corporation, between 2006 and 2012 Integreon saw its revenue grow tenfold, but cash flows had flatlined in the years leading up to NewQuest’s due diligence. This was a period of extensive M&A, with Integreon realising seven bolt-on acquisitions, sometimes of dubious relevance.

The result was a haphazard collection of business units, a bloated cost base, consistently negative EBITDA, and a lack of strategic direction. The expansion yielded a promising knowledge process outsourcing (KPO) business, but there were few synergies with the LPO offering in terms of sales and marketing. Meanwhile, everything was overseen by an inorganically grown team that never gelled.

For the owners during this period, the entire LPO-KPO opportunity was a small part of their portfolio and strategy. This is believed to have contributed to an environment in which much of the incumbent management lacked the passion to build their careers at the company and perfect the business model.

One of NewQuest’s first moves, therefore, was to split the LPO and KPO businesses into separately managed and more focused entities, with the latter continuing as Grail Insight. During the ensuing three-year period, Grail nearly doubled its revenue and increased EBITDA by about 6x.

Grail was established as a separate entity in 2018 and by the following year had begun its own expansions with the acquisition of ConStat, a US-based business technology researcher. The enlarged company eventually extended across the US, the Philippines, China, India, Singapore, Canada, Ireland, Italy, South Africa, the UK, and the United Arab Emirates.

In addition to company-level operational benefits, the spinout provided more flexibility in terms of NewQuest exiting its initial investment in a staged process. The spanner in the works was COVID-19, which had started to become a global phenomenon just as divestment plans were put in motion. At the time, the pandemic-driven rise of outsourcing and related IT businesses had not yet come into focus, with the market still in wait-and-see mode.

Likewise, although the shift to work-from-home business models due to COVID-19 naturally proved to be a net positive for Integreon, it was initially a challenge to implement internally. India and the Philippines were home to some of the hardest-hit workforces in Asia and suffered from some of the least coherent government policy support.

The situation was complicated by the fact that much of the content Integreon handles is confidential and legal in nature. This obliged the company to ensure its clients that information would be as protected in its employees’ homes as it was in more formal delivery centres.

Nevertheless, the transition enabled the company to gain market share, modernise its communication channels, reduce costs, and increase productivity. In the midst of lockdowns, NewQuest was able to complete a dividend recap, allowing it to return a substantial part of its original investment to LPs.

From COVID to exit

A dual-track exit process resulted in NewQuest receiving 18 term sheets for Integreon and six for Grail. They were sold simultaneously in June last year to separate US buyers, respectively private equity firm EagleTree Capital and analytics advisory player Escalent. The holding period was 4.7 years.

“At the macro level, the way we thought this investment would play out for us went pretty much according to plan, COVID notwithstanding,” Khandelwal said. “But in our experience managing other portfolio companies, the only thing that you can count on definitely happening is that things will go wrong.”

For Integreon, most of the hiccups came in personnel, which was perhaps to be expected given the extent of the staffing overhaul. Seven of the top eight management team members were replaced as well as the company’s board of directors and a majority of the second-level management team.

The incoming CEOs of Integreon and Grail were largely left to build out the new teams at their discretion, with NewQuest’s main intervention being guidance on the appointment of CFOs. A long-term employee incentive plan and a system of key result areas (KRAs) were implemented to promote the desired behaviour and alignment across the leadership team.

Massive changes were also made among lower-ranking staff, with the size of the salesforce reduced by 46%. Swapping out talent in this end of the business involved some mismatching of expectations and cultural challenges, often tied to the significant domain expertise requirements of LPO-specific selling.

The core agenda was to focus more on “farming,” the cultivation of deeper cross-selling client relations, rather than “hunting” for new clients. After a few iterations in developing a new structure for this approach – along with the implementation of a new commission system – sales per staff improved 57%.

At the same time, high-cost delivery locations were replaced with lower-cost alternatives and investments were made in infrastructure to better manage staff productivity and increase efficiency. This included the opening of a new delivery centre in the US. The result was a 26% reduction in cost-per-seat during the holding period, as well as a doubling of delivery headcount despite an only 33% increase in facility area.

“Do you organise the go-to-market team with a central salesperson who drivers everything with experts coming in, or do you have separate sales teams focused on their own stuff? That’s the classic dilemma since time immemorial for most companies,” Khandelwal said.

“What we’ve learned from this investment and others is there is no easy answer. And the answer you choose for any particular company could change over time, or it could be different depending on the company units or the people in them.”

Aligning interests

Overseeing a holistic change in sales strategy was arguably NewQuest’s key contribution to the Integreon story. This effort had the most direct impact on achieving about a two-thirds increase in consolidated revenue and turning around from a negative EBITDA margin to margins in the high teens.

“There are some areas where we could have created even more value, but we got it to a level where the new shareholders have a strong runway to continue the work we’ve done. Getting the sales engine working properly was one,” Khandelwal said.

“We did a lot of trial-and-error to get it right, and by the time we found a model that really suited Integreon, we had to start looking for an exit.”

The creation of transparent accountability measures, including weighable performance outcomes was no small part of the restructure. At the time of investment, non-sales staff were predominantly compensated with fixed salaries with no variable outcomes or long-term incentives. Similarly, the sales team operated under a short term-oriented commission structure.

“Now, everybody can pick up a calculator and know that if you meet certain KRAs, this is what you are going to make,” Khandelwal said. “There is always some objectivity in this area, of course, but the idea was they could project it with 90% accuracy. That just gives a lot of confidence and clarity to people.”

NewQuest encouraged further alignment by allowing Integreon employees to have skin in the game. At the time of investment, the private equity firm had warehoused 2% of Integreon’s shares for investment by incoming management. The long-term incentive plan also allocated 10% of profits at the time of exit to management.

“We didn’t limit it to the top five or six people – we went quite deep to make sure that everyone felt that this was a common joint mission, where everyone was working together for an outcome,” Khandelwal said. “That was an important learning for us that we’re taking forward as we look at our next investments and try to find the right ways to align management teams.”

Pictured: Bonnie Lo of NewQuest speaks at the awards ceremony

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• Topics
• Southeast Asia
• Support services
• Technology
• Trade sale
• NewQuest Capital Partners
• Philippines
• AVCJ Awards