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Building the Constellation Software for India: A $20 Billion Roll-Up Opportunity


AltG's Principals, Poornima Vardhan and Taponeel Mukherjee, discussing rollup investment opportunities in India

As the world looks towards India with its world-beating GDP growth rate and young demographics, one corner of India's market is at the cusp of growth that few sectors globally can match. That corner is the software industry that caters to a rapidly growing and formalising economy and holds the key to generating benchmark-beating returns for global investors and private equity players that are largely uncorrelated with their broader portfolio in the next decade.


What is the opportunity?

The opportunity is to Roll-Up vertical market software firms in India that do revenues between 500k USD to 5 million USD a year to create a large software platform that can accrete capital at internal rates of return (IRRs) north of 30%. We explore why multi-billion dollar Roll-Up platforms in Indian software are inevitable, how they will create value, and what investors need to know to benefit from this opportunity.


Why Multi-Billion Dollar Roll-Up Platforms in Indian Software Are Inevitable?

Digitisation in India is just starting to take off massively. The software business is sticky, crucial, and a derivative of consumption growth. The next phase of growth in India is where software usage is essential. In addition to digitisation, the economy is rapidly formalising with the GST tax regime fully implemented. Much of the formalisation and scaling of traditional free cash flow generating businesses involves using the software as an essential glue that holds the company together. This is why software businesses that serve the Indian consumer market and ancillary industry are the ones to focus on.


India is at an inflexion point seen, but once in 1000 years of a nation's history as per capita income crosses 2000 USD per year. As consumption, which will constitute over 60 percent of the economy, takes off, the growth and investment returns from software businesses will be market-beating. This presents an asset-light opportunity where these software businesses are the essential picks and shovels of high-growth consumer businesses.


How will the Indian Software Roll-Up Platforms create value?

Plenty of vertical market software businesses have good businesses with attractive margins and high free-cash flows but lack the scale and skill needed to generate the next growth phase. The Roll-Up platform will solve this. The Roll-Up platform will generate value through four arbitrages:

  1. Growth Arbitrage through Growth Engineering: By centralising sales efforts while pushing into newer segments to service larger geographies and allocating capital to high-growth opportunities.

  2. Capital Structure Arbitrage through Capital Structure Engineering: Employing a more efficient capital structure to finance the platform that holds the various software businesses together to drive exceptional IRRs for the equity holder of the Roll-Up platform.

  3. Multiple Arbitrage via Multiple re-rating: Improving the "quality of earnings" by reducing customer concentration, improving customer acquisition costs, increasing retention, and cross-selling.

  4. Cost Arbitrage via Cost Rationalisation: The Roll-Up will allow for economies of scale through integrating back-end functions and cost-cutting.

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As the next phase of growth in India comes, from being a 3 Trillion to a 10 Trillion USD economy, software will be able to consistently capture a percentage of the growth and thereby generate significant revenue at attractive margins. Investors should look to Constellation Software as an example of how the platform will adopt a similar strategy.


Investors must remember that generating market-beating returns in India will require creative deal-making. A Roll-Up of software businesses is just that! The opportunity to build the Constellation Software for India is significant, with platforms worth USD 20 billion to be created. Investors should focus on companies that have demonstrated their ability to serve the Indian consumer market, have a strong track record, and are well-positioned for the next phase of growth.


In conclusion, global investors looking to bring FDI into India must look beyond the larger private market deals and the SENSEX-driven public markets. The immense investment opportunities that India's private markets hold are unmatched globally. Software Roll-Up platforms in India are one such significant opportunity. As digitisation and formalisation continue to drive growth in India, software will be essential for businesses to scale and compete effectively. Investors focusing on vertical market software firms in India can create a large software platform that accretes capital at IRRs north of 30% to ride India's growth story on the global stage.


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