Successful fundraising deals and attractive returns have resulted in burgeoning assets across PE funds globally. The value of these assets crossed an astounding USD4tn for the first time. The PE space has not only been growing but evolving and has adopted outsourcing as one of its boosters for growth. As per PwC, 70% of PE firms in Europe are actively outsourcing. Among US-based PE firms, approximately 30-40% have been outsourcing.
PE funds have been outsourcing areas such as the tax function, compliance reporting, fund accounting, technology and even investor relations. Unsurprisingly, India is emerging as an outsourcing hub for PE firms.
Here are some of the leading reasons why PE firms are outsourcing to India:
PE firms need to comply with several legal and regulatory requirements. For instance, as per the Foreign Account Tax Compliance Act and the Alternative Investment Fund Managers Directive, PE firms need to provide accurate and timely financial reports. Preparing these reports for these reports is a time consuming and vital task.
Indian firms have capable accounting professionals and robust infrastructure to manage repetitive yet critical tasks such as on-demand financial reporting and accounting. The Indian outsourcing sector has been in existence for nearly two decades and is well equipped to take on such projects. This enables in-house PE professionals to focus on their core competencies, which include raising funds for unlisted companies.
A mature PE landscape
India emerged as the second-largest deal market in Asia-Pacific (APAC) in 2019 with more than 1,000 PE and venture capital deals valued at USD45bn. Large-scale PE firms in India have created a mature PE landscape in the country. India's share in the APAC deal market increased to ca.25% in 2019, with the value of investments increasing by 70 compared to the previous year. The consumer technology space attracted deals amounting to almost USD7.7bn. Sectors such as e-commerce, on-demand services, healthcare and software as a service (SAS) are poised to experience tremendous growth. Thus, India already has a mature PE landscape: there are individuals as well as processes that could play a crucial role in supporting PE infrastructure abroad.
Access to world-class talent
India has a huge talent pool of engineers, managers and accountants who are proficient in English. With the proliferation of cheap and accessible internet, Indian students and professionals have been investing in upskilling themselves. This talent pool is a compelling justification for PE firms to outsource their operations to India.
Outsourcing offers long-lasting benefits and one of the most significant is cost reductions up to 30-70% in PE fund operations. Therefore, a significant share of management fees may be booked as fund profits. Outsourced solutions require less spending compared to in-house professionals.
When the frequency of deals rises, the quantum of supporting activities would also increase. However, scaling up in-house teams may not be a viable solution, as a reversal in the trend would result in PE firms with oversized staff, which would have to be reduced and could lead to multiple complications .
Outsourcing to India presents a plug-and-play model for private equity outsourcing, as they could ramp their outsourcing operations up and down as per demand. This optimises their operations and improves their margins.
An extended work day
Outsourcing to India means that work continues throughout the day due to time zone differences. When professionals in western countries end their day, their Indian counterparts would be starting work in the morning. The latter would be able to complete and submit their tasks in the evening and their colleagues in the western markets would be able to access important information and insights when they report for work. This significantly improves efficiency.
Discreet due diligence
Conducting due diligence of prospective investors is an extremely crucial activity. PE firms would not want their targets to know about these activities. Hence, it is suitable to outsource such activities to a firm based in India that could conduct extensive due diligence without the prospective investee getting a whiff of the impending deal.
The above-mentioned reasons are why most PE companies outsource to India.