Deal focus: Electra plays the long game

After Apax Partners bought his firm's 23.2% stake in India-based Zensar Technologies, John Levack, managing director at Electra Partners Asia, spent more than six hours on the phone, thanking the people he had worked with. After all, some of these relationships had been cultivated over a holding period that lasted 18 years.

When Electra invested in the business, it was a software services subsidiary of a struggling listed computer hardware manufacturer. The parent, RPG Enterprises, used the $9 million it received from Electra to pay off the listed entity's debt so the business could be wound up. The software services unit then performed a merger with the remaining shell, which was renamed Zensar.

"There were consulting reports at the time saying this wasn't the core activity of the group," Levack recalls. "We were able to say, ‘It is a great growth area, we have put our money where our mouth is, and we want to help build the business," and this gave the management team confidence."

Electra helped put the corporate governance mechanisms and management team in place for Zensar to operate as an independent business. Over the years it has also played a role in 4-5 bolt-on acquisitions.

The company has since ridden the wave of growth in India's business process outsourcing (BPO) industry, expanding headcount from 900 to 8,000. Zensar provides software development services to large corporations, on site or from facilities in India, and reported revenue of INR26.3 billion ($406.4 million) for 2015, a 13.48% year-on-year increase. Net profit was up 11.41% at INR2.64 billion.

The exit to Apax, for $129 million, translates into a 16x return and an IRR of 18% for Electra. Even then, the firm was of two minds about selling - Levack's recommendation was for Electra to offload only half of its holding, but Apax, unable to accommodate so small an equity check, insisted it was all or nothing.

Electra's long tenure as an investor, and its reluctance to pursue a full exit, is explained by the nature of the ultimate shareholder, London-listed investment trust Electra Private Equity. The trust has made a pledge to shareholders that it will achieve annual capital growth of 10-15%, but Zensar was consistently expanding at a rate of 12-18%.

"Every six months or so we would sit down, do a review, and conclude that this was a business valued at a discount to its peers and planning to grow at or above the maximum rate of return Electra is looking for," says Levack. "We were able to take the view that this is a business we known well and we understand the risks well, so why sell when it is beating the return promised to shareholders?"

The decision to sell was more driven by a change in Electra's investment strategy that has resulted in a reduction in exposure to Asia. The firm's regional portfolio, which dates back to 1995, has generated a 5x return with a couple of small positions remaining.

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• Topics
• Exits
• Technology
• South Asia
• PIPEs
• India
• Exit
• Electra Partners Asia
• PIPE
• Technology
• Apax Partners