For pvt equity, HR consulting’s the next stop

India Equity Partners sets the trend by investing $8 million in Ikya

MUMBAI: Ask Gaurav Mathur, managing director of India Equity Partners, of what he thinks is the next big sector for private equity in India, and pat comes the reply: “I wish I knew.”

That said, Mathur may inadvertently have just sparked off the next big sector wave for private equity, when his $350 million fund invested $8 million in Bangalore-based Ikya Human Capital Solutions earlier this month.

Ikya operates in the human resources (HR) services business and offers executive search, contingency recruitment, staffing and training solutions.

Such companies, many agree, could be the next genie from the bottle that private equity would latch on to.

“The deal (Ikya) could very well be the beginning of a trend, what with one of the main bottlenecks for growth across various sectors being the difficulty in finding the right people,” says Arun Natarajan, founder and chief executive officer of Venture Intelligence, a provider of information and networking services to the private equity ecosystem in India.

Mathur’s investment in Ikya was also spurred by similar thinking. “Every company that we meet talks of the shortage of managerial level people,” he says.

“And an analysis that we did showed that managerial level salaries have been increasing at 15-20% per annum, again symptomatic of the skills shortage,” he said.

Babar Khan, vice-president, SAIF Partners, which has not yet taken a call on whether to enter this space, does not rule out the opportunity it affords. “Whenever there is inefficiency in the market, taking care of that creates value. Therefore, human resources consulting could become an investment option for private equity players,” he said.
 
Despite its potential, HR consulting has been missing from private equity investors’ radars in the past couple of years. On the other hand, investments into education, at the other end of the human resources value chain, have been many. For instance, SAIF Partners has invested in VETA, an academy that teaches spoken English, and ICA Infotech, which provides job-oriented vocational training to arts and commerce graduates.

“While education is a very hot theme among PE investors, the highly regulated nature of the sector limits investment opportunities. Human resources consulting could therefore be an alternative way to play the skills shortage theme,” says Natarajan of Venture Intelligence.

From the exit standpoint, too, the HR looks favourably poised. Canbank Ventures, Usha Martin Ventures, Metdist of the UK and a clutch of other investors who had bought into Chennai-based MaFoi, had very good exits in early 2004. Then there was JP Morgan’s 20% stake in Bangalore-based PeopleOne  that was bought over by global HR consulting firm Adecco in late 2004. In 2007, HSBC’s private equity arm made a 100% return when it exited MeritTrac, a company that does preliminary screening of resumes and shortlisting of candidates . Manipal Education paid around $7.4 million for HSBC’s 47% stake in MeritTrac, which it bought 18 months ago for $3.5 million.

So, will Mathur put more money into HR firms? “HR consulting is a fragmented business now. Rather than us making 10 investments of Rs 5-10 crore each, we’d prefer it if Ikya were to go out and make some acquisitions,” he says.