Biography of a Carve-Out
With revenues of around half a billion dollars, WNS Global Services is a major player in the outsourcing space. But not much more than a decade ago it didn’t even exist; rather, it was part of BA’s back office structure, until private equity giant Warburg Pincus saw an opportunity to get into the burgeoning BPO game. Now, with Warburg Pincus having finally exited, we go behind the scenes to get the inside story of a remarkable investment, from WNS’ founding Chairman and CEO David Tibble and Warburg Pincus MD Joseph Schull…
Outsource: Joseph, can you start by giving a bit of background on Warburg Pincus?
Joseph Schull: Warburg Pincus is a global private equity investor. We manage over $35bn of capital which makes us one of the larger private equity firms. We have a unique approach to investing in that we are entirely focussed on finding growth investment opportunities globally. We are not a leveraged buy-out firm. We organise ourselves into five key industry groups – of which technology, media and telecoms is one – on a global basis and seek to identify broad secular growth opportunities in our major geographies and then pursue interesting targets – companies that we think are well positioned to benefit from those secular growth opportunities.
Equally, we are not macro-driven investors in that we do not just invest behind a broad industry trend. We back entrepreneurial management teams and give them the full support of all our institutional resources whilst providing them with the flexibility and risk capital to build up a business over a long-time horizon.
O: What’s normally a long-time horizon?
JS: We have made over 750 investments during a 40-plus-year history; the average holding period across all those investments is five-and-a-half years. When we make an investment, we generally look at five to seven years. However, in many cases, we have held investments for ten, 12, 14 or more years. In the case of WNS, we held it for ten years and we are very comfortable doing that. Our long-term investment horizon compares very favourably with most of the private equity industry.
O: What brought about the investment in WNS, then?
JS: In the early 2000s, we decided that the BPO industry was poised for a long period of very high growth and that we would like to build a global BPO business. In London, Warburg Pincus engaged David Tibble as an “Executive-in-Residence” around a year before we made the WNS investment. We worked with David together with our investment professionals in London, New York and Mumbai to pursue a target around which we could pursue our thesis. That eventually led to identifying WNS within British Airways as a carve-out opportunity. WNS had a special appeal to us because we have significant experience of successful carve-out investments. Carve-outs are quite complex and difficult to successfully execute. When we see an opportunity to play a long-term secular growth trend within an industry and also to do that by backing a carve-out, we are particularly interested. WNS met both these criteria.
David Tibble: At this point, WNS was called World Network Services, and it was not a business as such, more a department of Speedwing which was 100-per-cent.owned by BA. At the time of the acquisition by Warburg Pincus in 2002, there were about 1,200 people in the business of which 1,150 were doing BA work and 50 people were doing some accounting work for Royal Sun Alliance. That was the business.
JS: One of the features of the carve-out – and it’s a feature of a number of our carve-outs – is that BA was not a seller of all the business to us; it retained a 30 per cent ownership interest in WNS beyond the initial transaction. Indeed, BA held on to the shares through to the IPO. BA had a Board seat and also had an opportunity to make some money on the shares that it retained in the company; it was not transferring all of the upside to Warburg Pincus in the transaction.
DT: BA’s primary focus was on maintaining the quality of service they received as well as building a large company. One of the attractions they saw in Warburg Pincus was their long-term approach. BA was also particularly impressed by the international perspective of Warburg Pincus. They fielded partners from London, Mumbai and New York and that international team was really what BA bought into. On the back of BA’s belief in Warburg Pincus, it agreed a five-year contract with us. It is worth noting that the transaction was relatively close to 9/11 and the airline industry was in a state of turmoil – British Airways was losing millions a day and a number of airlines were popping in and out of Chapter 11 – so although the India play was very strong, the actual segment we were picking had some risk in it.
Since we saw potential issues within the travel sector, at the same time as the WNS investment, Warburg Pincus invested almost simultaneously in buying Town & Country, a UK onshore insurance claims handling business, and put the two businesses together. This provided a base to approach other insurers offering similar services.
O: So there was an immediate diversification, effectively.
DT: Yes. It is also worth noting that the acquisition of Town & Country provided us with some excellent people who helped form the management team.
O: So how did that amalgamation process go – were there teething problems?
DT: We had two big challenges. First of all, we just bought a back-office department of an airline; we had not bought a third-party BPO outsourcer. So a lot of the disciplines required in Mumbai were just not there. We brought in a very experienced operations director and he quickly made that operation look very, very slick. We also moved the business to a new site with impressive offices and professional staff. For the first 12 months, we did not really do anything other than do the housework. Secondly, we had to recruit sales and transition teams for the US and UK as well as put in place an IT network as we could no longer piggyback on the British Airways network.
O: It sounds like there were a lot of challenges on the plate at that point, building up the team and getting ready to go to market, so talk us through that.
DT: It was really about getting the right people in place. We had a good base with the BA business and a good backer – remember Warburg Pincus invested 100 per cent equity so we had no debt – we therefore benefited from having a captive vehicle where we could hire high-quality people to build the right team.
JS: The key in the first year of a carve-out is to make sure that the business can stand on its own as an independent entity. For WNS, the challenge was to build a management team to transform the company from a cost centre, and a back-office function within a corporate, into a self-standing business. It was also critical to show that we could bolt an additional business on to that and turn it into a platform, which was done through the acquisition of Town & Country. This moved WNS beyond the airline vertical into the insurance and financial services verticals as well.
It was important through the carve-out period to maintain a stable relationship with BA as the largest customer of WNS. There was a lot of block and tackling that needed to be done during the first year in order to position the business for rapid, long-term growth.
DT: This is a market where we saw we were going to have to handle 30, 40, 50 per cent compound growth – and even though in that first year we had opportunities for winning new contracts, we de-selected ourselves. The key for us was to get everything in place, so that when we went to market, we could run fast. The issue for all outsourcers is if you get a contract where there are problems, it sucks up so much management time that you lose nine or 12 months in the marketplace.
JS: The build-up of new customer acquisition really began from around 2004.
DT: We started marketing and pitching for business heavily in mid-2003; by the time it came on stream, it was 2004. The business then started growing very rapidly: 40 or 50 per cent compound. By the time we floated in July 2006, effectively four years post the carve-out, we had gone from $15m to about $250m in turnover, and from 1,200 people to about 15,000 people.
O: Obviously that’s a very different phase: what were the challenges there?
DT: The big obstacles were in two areas. Firstly, they were front-end, making sure when we won new customers in the US and the UK, that we really understood their business and their process.
The other part was the recruitment and training of people; each month we were initially recruiting over 100 people – which then became 200 and then 300 people. You have got to be very slick in recruitment and in training. As well as ensuring the skills and experience of people involved in the business, we had to have the right management at all levels.
In all the time I was involved in the business, we never lost a patient on the operating table! All the business we won, we transferred offshore and we did it well – sometimes a bit quicker, sometimes a bit slower. We did not have a major foul-up. I think that is a testament to the quality of the operational and transitional people we had. With a private equity backer, everyone wants you to grow the business and go forward; the good thing about Warburg Pincus was they were happy that we took time to get the basics right. We were not pressured to sign new deals.
Ultimately, what we were trying to get at the end of every year was a much better business than we had at the beginning of each year. It was not just about top- and bottom-line growth. In the early days, it was about putting in real, solid foundations to the business.
JS: One other aspect during the period when the business really began to accelerate between 2003 and the IPO in 2006, was that as the business acquired a significant number of new customers in different geographies and different industries, there was increasing pressure to open new operating centres outside of the Indian continent where the back-office servicing platform of WNS had been first established. For a period of time, the company focussed on opening new centres within India as well as Sri Lanka, in order to ensure that the platform it was building remained manageable during that period of hyper-growth.
Eventually post the IPO, WNS began to expand its operating platform beyond the Indian continent. But during that initial phase, the company tried to maintain an integrated, efficient, manageable operating platform in order to avoid any mistakes while it was taking on larger customers.
O: So, at this stage, how had the role of Warburg Pincus evolved? Were you still giving direction, and intervening, constantly?
JS: We consider ourselves to be engaged partners to management. We are not operators; we played a role of sparring partners and strategic partners to help management in identifying strategic and operating priorities and then to set about addressing them. We are very involved in developing company strategy, in translating that into a long-range business plan and then working that into shorter-term financial and operating objectives, making sure that the company tracks its financial and operating performance and keeps in sight the long-term as well as the short-term goals.
We try to ensure that the company has the management and board resources available to implement its plan – and we are always involved in trying to identify and hire in senior management talent and board-level resources. We also act as an in-house corporate finance adviser to our management teams. In the case of WNS, we provided significant M&A support.
Finally, we always leverage our global relationships and assist our portfolio companies to make senior introductions to potential customers. In some cases, we identified acquisition targets for WNS.
DT: I would endorse that. Early on we had this credibility issue around the size of the balance sheet and who we were and Warburg Pincus really helped us address this. For example, when we were going head-to-head with the IBMs of this world, often one of my colleagues would take in a Warburg Pincus partner to meet potential clients.
The input that Warburg Pincus provided at the Board level and on strategy was invaluable to the management team. We combined quarterly management and board meetings together which worked very well.
In the M&A area, which we started from 2003, the support of Warburg Pincus was critical as well. The acquisitions enabled us to enter into different vertical markets such as healthcare and mortgage processing as well as new geographies such as the US. During the IPO, we benefited from the Warburg Pincus dedicated Capital Markets team in New York which ran the process. If we had been doing that on our own, we would have made some errors and it would have taken up a lot of our time.
O: And then the IPO: what happened after that in terms of Warburg Pincus’ involvement?
JS: The first thing to note about that is that when we take companies public – and we have taken 133 public at last count – we are rarely outright sellers in that transaction. That is quite important and different to what most other private equity firms do. Most private equity firms think that at the point a company IPOs, their job is done and the IPO is the moment at which they exit by selling their shares to public market investors. Typically when we IPO a business, we are not sellers in that transaction. Sometimes we sell shares, which we did in the case of WNS. However, that was with a view to creating a liquid market in which the shares could trade.
Beyond the IPO of WNS, we were still the majority shareholder: we owned over half of the company shares. That served as a strong vote of confidence in the company’s future prospects.
In terms of our day-to-day involvement, we continued to treat WNS as we had before the IPO; as a very important portfolio company. We had a full investment team dedicated to the investment and the level and frequency of interaction with management was the same beyond the IPO for the full period to our ultimate exit earlier this year.
O: How did that last stage play out?
JS: We went from a business that had less than $15m to a company with about $250m of revenue at the point of the IPO to just under $500m of revenue today. At a certain point the company begins to stand on its own feet and requires less day-to-day support from its private equity backer. At that point, we were happy to step back and take a reduced role while still trying to provide strategic advice to the company at various points along the way.
WNS went public in 2006; the business then continued to grow and went through a series of acquisitions. There was a change of CEO together with some changes to the Board following a period of market challenges post-2008 when the company went through a period of reduced growth. Throughout this time, we supported the company and believed it would eventually resume solid growth, which it did. Once we saw that the challenges were substantially behind the company and that began to be reflected in an improving stock price, we took that as our signal to declare victory and move on. We made our first major share sale in 2012 which was designed to support additional liquidity in the stock. Then we made a final offering in February of this year which completed our exit from the company.
O: And the firm’s feeling is that this was a successful engagement that delivered significant returns to your investors?
JS: Absolutely. The firm also feels that the investment is a good illustration of our general investment approach of backing entrepreneurial management teams, to build a durable business and providing patient capital to allow that business to grow to its full potential. We are proud of the business that was built and the fact that it will continue to stand the test of time, maintain its pace of growth and continue to drive further value long beyond the end of our ownership and tenure.