PEs Anxious over Exits from IT Services Bets Amid AI Fears, IPO Slowdown

Six months ago, the business plans we were evaluating were very different,” says Jyoti Prakash Gadia, managing director of investment advisory firm Resurgent India. “Today, those same plans are being rewritten due to AI [artificial intelligence].”

In recent weeks, Gadia has found himself in a series of boardroom discussions where founders and investors are being forced to revisit assumptions that, until recently, underpinned India’s technology investment story. Pricing structures have shifted, cost structures have come down, and in some cases, entire business models are being reworked to account for the impact of AI.

Deep Impact

When Fractal Analytics, an AI and data-analytics company, made its public-market debut earlier this year, the listing was expected to reaffirm the strength of India’s technology story.

The initial public offering (IPO), however, drew a more cautious response than anticipated. The company had already reduced the size of its offering before listing, and the issue crossed the full subscription mark only towards the end of the bidding window after a slow start. When trading began, the stock slipped below the issue price, reflecting a more measured mood around technology and software companies in public markets.

The caution has also been visible in the secondary market, where listed information technology (IT)-services stocks have corrected in recent weeks amid concerns around AI-led disruption and slowing growth visibility. That has left private-equity investors in Indian IT services in a holding pattern, with AI-led automation now reshaping the assumptions behind the sector’s growth story.

As pricing comes under pressure, delivery models are being reworked and cost structures shifting, investors are finding it harder to rely on the old playbook of steady, labour-intensive expansion. For funds that backed the sector on that promise, the uncertainty around how AI will alter revenues, margins and scale is making exit planning much harder to time and much harder to value.

Those Were the Days

That shift is particularly striking given the kind of returns the sector had delivered to investors in the past. Private-equity (PE) firms had made outsized gains from bets on Indian IT-services companies, reinforcing the sector’s reputation as a reliable value creator.

For instance, PE firm ChrysCapital’s exit from Cyient delivered roughly a threefold return on its investment, while several other mid-tier IT-services deals, including transactions in companies such as Hexaware Technologies and Mphasis, generated strong value creation through strategic sales and public-market exits. These outcomes were underpinned by a predictable business model, steady global demand for outsourcing and margin visibility.

That confidence is now being tested. In recent months, deals and listings in the technology sector have begun to encounter delays, repricing and, in some cases, complete pauses. The proposed stake sale in a Pune-based digital-engineering-services firm, for instance, was put on hold due to valuation disagreements even as the transaction was close to closure.

“Many assets now approaching exits were funded during an industry upcycle driven by strong demand for cloud and digital-native services,” says Shivani Nagpaul, partner for technology investment banking at EY India, a consultancy. “What we are seeing now is a reset period shaped by macro headwinds and the evolving AI narrative.”

Between 2020 and 2025, PE investors executed 187 deals in Indian IT-services companies, according to data from Venture Intelligence, a data platform. Annual activity remained robust throughout the period, with deals rising from 21 transactions in 2020 to 38 deals in 2025.

The capital deployed during this period was substantial. Investments in the sector peaked at $5.6bn in 2021, when pandemic-driven digital transformation spending accelerated globally. Even after the global technology cycle cooled, investors continued to deploy capital, with deal values reaching $3.3bn in 2025.

The attraction was clear. Indian technology companies offered stable margins, strong export revenues and a deep pipeline of global clients, making them a preferred destination for PE capital.

The AI Pivot

Yet the numbers reveal a striking imbalance between investments and exits. While PE investors completed 187 deals in the sector between 2020 and 2025, the number of exits during the same period was far smaller. Venture Intelligence data shows only 27 exits from IT-services investments over those six years.

That gap suggests a growing pool of companies where PE capital remains tied up while investors wait for favourable market conditions. In many cases, these investments were made during the technology valuation boom of 2021 and 2022, when digital transformation spending surged and valuations expanded rapidly. Investors at the time expected public markets to continue rewarding technology listings.

The environment has since shifted.

“Revenue was essentially the number of engineers multiplied by billing rate and utilisation. With AI, that equation is being challenged because many of those tasks can now be automated,” says Manisha Girotra, India chief executive of investment bank Moelis & Company.

For dealmakers advising technology companies, the disruption is not existential, but it is forcing a reassessment of growth models and valuation frameworks.

“The industry is moving from a volume-driven model to a value-driven one,” Girotra says. “The question investors are asking now is which companies will be able to make that transition successfully.”

The result is a widening gap between the valuations PE investors once expected and what buyers are currently willing to pay.

Financial sponsors have become more cautious, while strategic buyers are focusing on assets that offer stronger client relationships, specialised capabilities and long-term relevance.

AI sits at the centre of this recalibration.

Change in Focus

The change is not theoretical. In several cases, companies are already seeing the impact play out in their financials. “Businesses that were loss-making have been able to reduce their burn and turn profitable without even increasing revenues,” Gadia says, pointing to the speed at which AI-led efficiencies are altering cost structures. At the same time, the shift is exposing fault lines. “Manpower-led or body-shopping models will face pressure,” he adds. “Companies will have to move towards integrated, end-to-end solutions rather than offering piecemeal services.”

For investors, this has meant going back to the drawing board, not just for new deals but also for existing portfolios. The shift does not eliminate demand for IT services, but it changes its nature. Instead of selling labour hours, firms are increasingly expected to deliver integrated solutions that combine automation, domain expertise and consulting.

That, in turn, makes growth harder to forecast. “Investors today are evaluating IT companies through several AI-related dimensions,” Nagpaul says, including productivity gains, AI readiness and the ability to build industry-specific solutions.

For PE investors, the immediate challenge is how to exit in this environment. Traditionally, IPOs have offered the most lucrative route, but the bar is now higher. “Even if the broader IPO market is active, investors want clear answers about future growth,” says Devendra Agrawal, founder, Dexter Capital Advisors. “If the narrative around the sector is uncertain, it becomes much harder to sell an IPO successfully.”

As a result, alternative routes are gaining prominence. Strategic consolidation, such as Coforge’s acquisition of Encora, offers one pathway, while secondary transactions and sales to technology or AI-focused players are also seen as viable options.

In the meantime, the focus has shifted inward. “Funds are re-evaluating every investee company in their portfolio,” Gadia says. “Right now, the focus is less on exits and more on recalibrating these businesses to align with the AI impact.” Companies with AI capabilities, strong client relationships and improving profitability are likely to be better positioned.

“Public markets and buyers will reward companies that can demonstrate resilience in growth and margins through AI adoption,” says Gopal Jain, co-founder of Gaja Capital, a PE firm. The implication is not that exits will disappear, but that they will become more selective.

A Long Wait

For PE investors, the challenge is that this transition is still unfolding. Rather than accelerating exits, many firms are focusing on bolstering their investments. Portfolio companies are being pushed to build capabilities in AI implementation, data engineering and higher-value services. Strategic acquisitions and partnerships are being explored to expand offerings.

“The sense we get is that investors still believe in the underlying strength of these businesses,” Girotra says. “The issue is that the industry is going through a transition and companies need time to reposition themselves.”

That has translated into a more patient stance. Instead of pushing aggressively toward listings, some investors are exploring secondary sales or strategic transactions, while others are willing to wait for greater clarity on how the industry evolves.