Investcorp is proving out an emerging Indian middle-market buyout thesis by taking 100% of a global IT, cybersecurity, and digital services provider for blue-chip financial institutions

The stakes are high when it comes to cybersecurity and stock exchanges. It’s not just a question of criminals profiteering through ransomware. If a major bourse is destabilised, an entire national economy or the global financial system could be thrown into chaos.

Few organisations in Asia understand this better than the National Stock Exchange of India (NSE), which although only the sixth largest exchange globally in market capitalisation, often ranks in the top three by number of trades. NSE runs fraud analytics on every trade it intermediates, which can top 600m transactions a month.

Investors appreciate the technical capabilities that come with this kind of workload. This was evidenced when the Securities & Exchange Board of India (SEBI) asked NSE to streamline its business in the interest of strengthening governance, and the important yet non-core cyber division, NSEIT, went up for sale.

More than 60 parties expressed an interest, resulting in 20 in-depth meetings, and five detailed due diligence processes. Two offers were submitted, and Bahrain-based private equity investor Investcorp prevailed, after committing INR 10bn (USD 125m) and receiving a vote of support from the NSEIT management board.

“We looked at a lot of late-stage IT services companies in the last five years, more than 30 situations, and this is the most differentiated asset that we’ve come across,” said Varun Laul, a partner with Investcorp’s India team. “Given the circumstances around it, the capabilities, the team, we were willing to put in significant effort.”

Mixed bag

The deal, still pending formal finalisation, took 10 months to hash out due to the taxation and structuring complexity around the seller being a highly regulated entity and the need to amalgamate various functional units into a unified business that could be carved out.

These sub-businesses cover cyber, data analytics, and cloud, among other intersections of technology and financial services. Another covering digital academic examinations and certifications was excluded from the deal.

Adding paperwork, these units had begun operating outside NSE and even outside India. About 60% of revenue is in India, while North America is 25%, and the Middle East is 15%.

“Despite the disparate nature of everything that constitutes the business, the management team is really integrated, and that made a big difference in this investment,” Laul said.

“You can look at a situation like this and say there are just too many entities, and it’s going to be a massive task to put them together, but the C-level leadership across the businesses was very aligned in approach and strategy. If we didn’t have that philosophical and strategic alignment, we wouldn’t have done this. It would have been too complex a carve-out.”

Investcorp raised INR 10bn for its debut India fund in 2019 and cut its first deal in 2021 with the acquisition of IDFC’s private equity and real estate businesses. Fund II is in the market with a target of around USD 400m, more than half of which was said to have been raised as of a first close late last year. There were 18 deals under Fund I and four to date with Fund II, including NSEIT.

The strategy is to support existing growth plans of mid-market businesses, where Investcorp’s global network and resources can add value. Most of the firm’s deals in the country have been hands-on minority transactions, sometimes less than 15%. Cheques can be as small as USD 25m.

NSEIT represents something of a breakthrough in terms of ambitions to build out a more buyouts-focused practice. It is Investcorp’s third control transaction in the country – including an INR 3.4bn co-control investment in cardboard box maker Canpac – and its first 100% acquisition.

Investcorp hopes buyouts will eventually represent 30% of its deal flow in India. This is expected to be driven by a mix of succession situations in tech companies founded in the 1990s and early 2000s, as well as industrial platform plays and carve-outs in the vein of NSEIT.

Growth agenda

The INR 10bn commitment was 55% provided by co-investors, including LPs. Investcorp’s second India fund made a sizeable contribution, and the balance came from the GP’s balance sheet. The deal will be Investcorp’s largest in India and arguably one of the country’s largest in a middle-market company. No leverage was used.

“This is a growth buyout, not a traditional buyout, where you’re going to put in a ton of leverage, transplant a team, and drive a different agenda,” Laul said. “We like the team a lot and we’re backing what they started in internationalising the revenue base.”

NSEIT generated INR 2.2bn of revenue in the 2023 calendar year, about half of which came from its cybersecurity business. The next largest division is digital transformation services, followed by a small but growing cloud services practice. Clients include major stock exchanges, as well as 22 Fortune 500 and five Fortune 50 companies.

The growth plan is targeted squarely on the US, where Investcorp intends to facilitate partnerships, technical hiring, and M&A. NSEIT claims to have grown 50% annually in the US for the past four years. Further expansion of the client roster is expected to be driven by a seemingly irreversible increase in spending on cybersecurity and IT amidst the broader digitalisation of financial services.

“That’s the direction of travel. In addition to the capital markets, you have new-age banks going branchless and asset managers with security needs managing their relationships,” Laul said. “You need to be technologically attuned and connected with your customers and have the back-end operations. The opportunity set is very large, and these guys are able to compete with the best.”