Most of the USD 140m raised by India-based human resources management software (HMRS) provider Darwinbox in its latest funding round has been used to facilitate partial exits for existing investors. Cyrus Driver, a managing director for private equity at Partners Group [SWX:PGHN] – which co-led the round with KKR [NYSE:KKR] – expects to see more deals of this nature.

It is a function of corporate evolution above all else. Software companies that raised significant capital in 2021-2022 – Darwinbox achieved unicorn status on closing a USD 72m Series D in 2022 –are now focused on profitability. There is no need to secure additional funding to support cash burn, freeing up space and time for cap table reorganisation ahead of the next phase of growth.

“For the best businesses of scale, primary fundraises are currently limited. Instead, the transactions that are occurring with these companies are secondary transactions in which early investors that need DPI [distributions to paid-in] for their own fundraising are selling part of their holdings to take some chips off the table,” Driver explained.

“If it’s a high-quality business that we like, we are very comfortable buying secondary. We can be flexible around the transaction structure as long as the valuation is right.”

Partners Group declined to comment on specifics of the Darwinbox deal, but the firm is said to have contributed USD 75m. 3one4 Capital, which joined the seed round at a valuation of less than USD 2m, is now sitting on a 500x paper gain. Darwinbox’s other existing backers include Microsoft, Salesforce Ventures, TCV, Peak XV Partners, and Lightspeed Venture Partners.

Growth equity surge

For Partners Group, the company reflects the expansion of a growth equity strategy that targets technology and healthcare assets globally. The portfolio features growth buyouts of scaled businesses as well as minority equity commitments to less mature start-ups nearing profitability.

More than USD 2.5bn has been deployed under the growth equity strategy since 2013. There was a 60% jump in investment activity last year alone, according to Partners Group’s latest annual report.

There are no strict geographical allocations; investments are evaluated based on how they stack up against other opportunities globally. Australia’s Neara and Singapore-founded SirionLabs – software providers in infrastructure modelling and contract lifecycle management, respectively – were added to the portfolio during this period. Both are seen as addressing international markets.

One reason behind the expansion is a shift in the perceived risk-reward dynamic as valuations return to historical averages. Another is the power of innovation, with artificial intelligence (AI) now central to Partners Group’s growth equity strategy. Application-level investments are the current focus; infrastructure, such as databases and AI platforms, is expected to become backable within two years.

“It’s already very clear that AI is going to play a huge role in all software. While many software companies don’t have substantial AI revenues yet, everyone has integrated GenAI into their products to some extent, and it has become the largest part of their R&D roadmap. So, if we come across a company that is ignoring AI, we wouldn’t move past the first conversation,” Driver said.

Darwinbox enables enterprises to automate HR processes on a cloud-based platform. It incorporation of AI extends to the development of an in-house large language model (LLM). AI-enabled functionality includes predicting employee turnover across regions and job roles and using facial recognition and geotagging to improve time management and attendance.

Expansion plans

The company, which was founded by Jayant Paleti, Rohit Chennamaneni and Chaitanya Peddi, manages over 3m employees across more than 1,000 enterprises in 120 countries. It claims to have achieved compound annual revenue growth of 100% and 110% net revenue retention over the past seven years.

Having gained initial traction in India, Darwinbox expanded into Southeast Asia, followed by the Middle East and the US. International business now accounts for half of overall annual recurring revenue (ARR). The company is targeting ARR of USD 100m this year.

Partners Group identified the opportunity through thematic research in the HR software space. A two-year dialogue with management ensued, initially hindered by disagreements on valuation with early investors. However, this process allowed Partners Group to conduct a thorough assessment, covering leadership, talent attraction, large client acquisition, and AI implementation.

The portion of primary capital in the deal will be used to strengthen Darwinbox’s AI offering and drive growth in the US. Driver is also keen to see improvements in the financial matrix, noting that growth is still to some extent supported by high cash burn. “They have a very credible plan to achieve break-even relatively soon and keep growing,” he added.

US expansion is also strategically relevant in terms of developing ultimate liquidity options, although India’s capital markets are still considered an attractive destination despite recent volatility.

“While an IPO in India is that’s just one of multiple exit options, it’s a particularly viable one for category-leading software companies headquartered in India,” Driver said. “In Darwinbox’s case, any such listing plans are not a current priority, they are for some distance down the track.”