Quest Global stake buy: ER&D a great way to play multiple themes on innovation across industries, says Carlyle India’s Amit Jain

Amit, Carlyle first invested $6 million in growth capital in Quest Global in September 2003. Two decades later, Carlyle has decided to re-enter the firm. For starters, what are the key factors that contributed to this re-entry? And what exactly excites you about the engineering R&D services space?

Amit Jain: Let me first start with saying it's truly a privilege and a little bit of testament to the partnership being built in India in the region. We partnered with Ajit and Quest Global in 2003, as you rightly said. And I think our growth capital was put to great use. A business, which was sub 100 million dollars of revenue back then, is inching very fast and closer towards a billion dollars now, two decades later. I think it's truly, in our view, Ajit's visionary leadership and the phenomenal team and capabilities he has built over the years that the business has done what it has done. And if we take a step back, what is ER&D (Engineering Research and Development) and why at Carlyle do we feel excited about this space? One agenda, which CEOs, CXOs and board members across the globe, across verticals have today is innovation, right?

Innovation is the central theme in corporates across verticals – automobiles, mobile phones, med devices, aero, defense, energy; people want to gain competitive advantage by innovating. Now, when you think of innovation, you're fundamentally thinking design, you're thinking prototyping, you're thinking product innovation, and you're thinking manufacturing complexity at scale. All of that leads to engineering and R&D resources being used. Now, you can go the captive way, or you use an outsourcing partner like Quest Global for the same. So, I think for us thinking about ER&D, which is a very large and growing space, is the play on the global innovation agenda which cuts across multiple horizontal thematics. For example, disruptive technologies like AI. AI is fundamentally driven by having a chip because there's intelligence to be picked. When you think about a chip, you think about silicon and semiconductors. That's where Quest Global plays.

You think about movement from ICE engine to EV, when you think about movement of automobiles from all these ICE engines to EV, you're re-engineering the way automobiles work. When you think about re-engineering, again, innovation, again Quest Global where automobile is a large part. Same thing goes on from traditional energy sources to renewable where energy is a very large vertical for Quest Global. I think the simple point I want to make is ER&D, in our view, is a great way to play multiple horizontal thematics on innovation across industry verticals.

And why Quest Global? One, Ajit is a visionary and we have seen and experienced, very closely, his thinking and leadership over the last two decades. It’s a high-touch, high domain knowledge (space)and you are partnering at the heart of mission-critical agenda for your clients, which is innovation. The fact that across verticals over the years, they've built that domain expertise, proximity to the customer and sticky client relationships is the reason Quest Global has grown step-by-step closer to a billion-dollar business. And finally, we do think we can meaningfully add more value to this business in the partnership. So, I think a combination of these three things is the reason we are back again in the game.

Amit, can you give us a sense of how much stake you are picking up this time in Quest Global? And will you be giving a complete exit to the earlier investors – Bain and Advent? Also, what's the quantum of your investment?

Amit Jain: We aren't talking specific numbers. All I would say is, yes, Bain, Advent and GIC or the existing shareholders will have a complete exit. In the process, we will have a meaningful minority stake in the company. Ajit will be buying in his personal capacity some more, so he'll increase his shareholding. The company will do a bit of a buyback. So, Ajit is doubling down, we are coming in with a meaningful minority stake and there is a full exit to the existing three institutional shareholders.

Ajit, you hiked your stake in the company as part of this transaction. Tell us more about the rationale behind that. And eventually will your stake in the company, Quest Global, be more than what Carlyle ends up with?

Ajit Prabhu: Yeah, my family will have a significant stake in the company. This business, which I started along with Arvind 26 years ago, you know, when we started, I didn't know the extent to which the company would grow. Around 2005, I realised the opportunity is significant for the emergence of a company, which is into innovation, and which does engineering across multiple segments. There aren't many firms, which are in $5-10 billion science. But if you look at the amount of engineering that happens across the world, it's in trillions of dollars, right? So, a lot of money gets uploaded into innovation. Unlike IT services, there is no dominant engineering company out there. So that fueled my aspiration to systematically think about building an organisation which can go on to become a dominant driving force in this industry.

Ajit Prabhu, Co-Founder and CEO of Quest Global

And I believe in that dream. So, my desire to stay engaged, building the company, and buying more into it, it all stems from that, that the market space is huge and a lot of the effort we have put in place in the last 25 years is to build those scalable platforms necessary to become the dominant driving force. I feel very optimistic about our chances of becoming the number one ER&D company and that's what is driving me to take that step of buying back the equity further whenever the opportunity arises. And this time I felt pretty good, given that it's coming at a decent valuation level and plus, the business is a lot more diversified today compared to the past. Our business has beautifully diversified both in terms of the verticals as well as the client concentration. So, we're in a far superior position when it comes to the stability of the business and combined with the market opportunity, I felt it's the perfect time for us to buyback. So that's what led me to that decision, Ashwin.

What would the valuation of Quest Global be as part of this deal? Somewhere in the region of $1.5 to $2 billion? Would that be a fair estimate?

Ajit Prabhu: Around $2 billion.

Amit, as a buyout fund, was Carlyle not tempted to acquire a majority stake in the deal? What prompted you to opt for this partnership approach?

Amit Jain: I think for us, we've always been investors in partnership positions with founder's management teams, which we believe are best in their trade. In our view, as we look forward this time, there are three or four dimensions where we truly believe Carlyle can add meaningful and tangible value to this business. And that's the reason we are partnering with what we believe is the best-in-class management team Ajit has built. The dimension on which this partnership will add value - number one is M&A. This company has been highly acquisitive. In the last two decades, this company has done more than a dozen acquisitions, right? It's very atypical of many companies to do these many and such frequent M&As. And what is now required is to build a machine that these M&As are successfully integrated, both financially, culturally, system-wise, capability-wise, and people-wise. And as Carlyle, we have the DNA in our own organisation and that's the agenda we drive across our portfolio companies more often than not. And therefore, we want to bring that systematic way to scale up the M&A engine at Quest Global.

We take bigger and bold bets and integrate them successfully. The second thing is around domain and our global network. There are several industry verticals Quest is in, wherein Carlyle globally has multiple portfolio companies of its own, and in its own network we know of those companies where we can make introductions and bring new customers to the company. Finally, I think as we think about an exit, at some point this business will be more ready than ever to hit the capital markets. Now, we will figure out when it goes for an IPO, but preparing this company for an IPO, finding out the right destination for it - that capital market expertise does reside with Carlyle in a nice way globally.

We've taken six companies public in India, and we have taken multiple companies public globally. So, I think on these three agendas – M&A, find new customers and serve them better, and then at some point, take it to capital markets for the right value capture are the three agendas we will work closely with Ajit. Knowing Ajit and his working style and the management style at Quest, we didn't think that the amount of stake is the deciding factor in our ability to add value to this business. I think the receptivity is very high, irrespective of the stake and our value add is tangible, irrespective of the stake. And therefore, we were open to doing a less than 50 percent stake, but we do think we'll be able to make the same amount of influence and change in the business as you would have if we had any other stake.

Ajit, you operate in a very specialised space. What are some of the key trends that you're seeing in the engineering R&D services space? And from a sectoral viewpoint, where are you seeing greater demand - aerospace, defence, healthcare, energy? Which one stands out?

Ajit Prabhu: Great question. As a business, we are a company of innovators who are solving some of the world’s hardest engineering problems. So, the energy segment is one of the dominant verticals in which we're playing, and this is due to the heritage of the business. And if you think about the future, by 2050 we want to be carbon neutral, right? So, the world wants to get back to the level where all this carbon that was emitted is captured, and how that is going to happen is by having renewable energy as the primary driver for fueling the need of the human society. And that transition requires a lot of engineering, and that engineering is about capturing these renewable energies. And then the grids that are required to transition that energy back to the consumers, a lot of the control software have to be done differently, the grids have to change.

So, there is lots going on in terms of the changes that are happening, the innovation that needs to happen on that front. And then you look at aerospace and defence, which is again another dominant vertical for the company, where we have more than 2,800 engineers. During the COVID times, the aerospace industry kind of shut down in a way, and a lot of the aging fleet has to be renewed through new programmes. So, I think in the next five years, there will be many new programmes that will get launched related to aircraft and modernising of the fleet. And, of course, the defence segment itself is also investing heavily in coming up with new technologies, cyber security is becoming important.

And the third one is semiconductors. So, semiconductors – you know there is a lot of investment happening in AI and a lot of deep learning algorithms have to be written to make all these new ae products which are intelligent, and this is going to happen across all industry verticals. So, if you think about connected cars and things like that, the car is becoming more and more advanced internally. So, I think the amount of chips that are required across industry is going to dramatically increase. Our company is positioned beautifully to be able to solve the client's needs across multiple verticals. So, I think that these are the three primary verticals that will drive the growth. Today, we are close to 18,000 engineers, and we have more than 3,000 open positions and significant opportunities across all verticals.

Amit, earlier this year, you acquired a majority stake in VLCC. What other sectors can we expect Carlyle India to look at in terms of control deals going ahead? Some of your peers have been rather active in the pharma, healthcare and hospital space.

Amit Jain: Well, I think from a sector standpoint, there are five sectors of focus, Ashwin. We focus on consumer, healthcare, financial services, IT and IT services, and what I would call as select advanced manufacturing or industrial businesses like auto and packaging. I think we are open across sectors to be honest with you. For us, a lot of it boils down to micro, but we're not just thematic investors. I think for us what's really critical especially in the competitive world we operate in, is what's our unique angle into the business? What's our everyday value-add into the business? And if we're not able to answer that question convincingly and logically we don't invest into it. Adding to your point on healthcare, we have a very meaningful exposure already. We own two companies in terms of a controlling stake - Sequent Pharma and we have a large partnership with Piramal Pharma. So, we have a meaningful exposure already in the healthcare space where we've been active. We have invested in financial services. So, we are open across sectors, but it does boil down to also our ability to truly see what value we will add in a partnership and, therefore, take the company to better outcomes than it would on a standalone basis.

Amit, recently when I spoke to Temasek, they told me they are looking to pump in close to around $10 billion over three years in India. Now, if you look at the stats, as of September 2022, Carlyle had invested more than $5.5 billion of equity in India in more than 40 transactions. Could you tell us what's the investment outlook for the next three years in India? Is there a figure that you have in mind?

Amit Jain: Not really. I think, as I said, we are investors with a micro point of view. We hold a positive outlook on the Indian economy. I believe we've got the macro, which is solid. We believe we have a stable political environment which the country enjoys. Inflation has been pretty stable. And now India is the fifth largest economy and the fastest growing economy in the world. So, our view is that there is everything going for it. Having said that, we've seen the micro can sometimes be challenging, the valuations can be high. It's still expensive. Public markets are trading at reasonably expensive multiples vis-à-vis its global peer group. I think each investment has to hold in its merit. And that's how we go about doing our business.