Quess Corp
BSE SENSEX
33,360
S&P CNX
10,299
20 November 2017
Update
| Sector:
Others
CMP: INR866
TP: INR1,170 (+35%)
Buy
Acquires Tata Business Support Services…
…Strengthening the technology portfolio
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
QUESS IN
138
1068 / 557
0/0/18
119.8
1.8
68
18.5
Financials Snapshot (INR b)
FY17 FY18E FY19E
Y/E Mar
Net Sales
41.6
56.2
77.1
EBITDA
2.2
3.3
5.0
PAT
1.1
3.1
3.6
EPS (INR)
10.0
27.8
31.4
Gr. (%)
354.4
68.6 287.6
BV/Sh (INR)
73.8 179.6 211.0
RoE (%)
19.0
21.9
16.1
RoCE (%)
12.6
16.7
13.6
P/E (x)
86.5
31.2
27.6
P/BV (x)
11.7
4.8
4.1
Shareholding pattern (%)
As On
Sep-17 Jun-17 Sep-16
Promoter
81.5
89.0
89.5
DII
2.4
2.3
2.2
FII
5.3
3.5
3.4
Others
10.8
5.3
4.9
FII Includes depository receipts
Quess Corp acquired 51% stake in Tata Business Support Services, a provider of
Customer Lifecycle Management and Business Process Management. The company
would fit into Quess’ technology solutions portfolio (30% of revenue), strengthening
offerings and providing cross-sell opportunities.
Quess would pay INR1.53b in an all-cash deal, valuing TBSS at INR3b, implying a
trailing sales multiple of 0.5x and EBITDA multiple of 5.4x. Valuations for the deal
seem attractive given Quess’ current multiples of 2.5x sales and 46x EBITDA.
Our FY19/20 estimates for revenue/EBITDA/PAT increase by 8/12/8%, thereby
increasing our price target by 12% to INR1,170, implying an upside of 35%.
Stock Performance (1-year)
Quess corp
Sensex - Rebased
1,025
850
675
500
About TBSS:
TBSS, a subsidiary of Tata Sons is a company with wide a wide
services portfolio ranging across Customer Lifecycle Management (CLM) and
Business Process Management (BPM), serving Tata and non-Tata companies in
the verticals of telecom, media, retail, manufacturing and BFSI. TBSS as of FY17
had revenue of INR6.6b and has seen growth of 12% in FY17. The company had
an EBITDA of INR559m in FY17, implying margins of 8.5%. Although margins
have seen a decline for the last two years, current levels are expected to be
sustainable.
A sizeable acquisition:
Assuming continued revenue growth of 12% and stable
margins, the acquisition would add 8/12% to our FY19E revenue/EBITDA
estimates. Our PAT expectations are inching up by 8% given erosion of other
income led by the cash outflow. The acquisition fits into the Global Technology
Solutions segment of Quess Corp, which contributes to ~30% of total revenue.
The segment is currently made up of Magna Infotech (IT staffing in India),
Brainhunter (IT staffing in North America), MFX (IT services for the P&C
industry in North America) and Comtel (IT staffing in Singapore).
Acquired for inexpensive valuations:
Quess would acquire 51% of the
company for a cash consideration of INR1.53b, valuing the entity at INR3b. It is
an all-cash deal and would not result in stake dilution for Quess. This implies a
trailing sales multiple of 0.5x and EBITDA multiple of 5.4x. Quess is currently
trading at a trailing EV/Sales multiple of 2.5x and EV/EBITDA multiple of 46x,
making comparative valuations inexpensive.
Valuation view:
We value QUESS using DCF to arrive at a TP of INR1,170 (35%
upside); our TP is up ~12% led by the acquisition. Valuations are rich, given its
strong growth history and continued aggressive thrust on acquisitions. Over
FY17-20E, we expect revenue/EBITDA/PAT CAGR of 31/42/62% (27/37/58%
earlier), led by our assumption of 20% growth in organic business and
incremental contribution by recent acquisitions. Long-term prospects stand
bright, given high-growth opportunities, aggression shown on expansion and
flawless execution.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Sagar Lele
– Research analyst
(Sagar.Lele@MotilalOswal.com); +91 22 6129 1531
Ashish Chopra
– Research analyst
(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530

Quess Corp
Exhibit 1: Historical financials for TBSS (INRm)
Revenue
EBITDA
EBITDA margin (%)
FY15
4,966
503
10.1
FY16
5,907
556
9.4
FY17
6,610
559
8.5
Source: Company, MOSL
Change in estimates
Revenue for FY19 (assuming 12% revenue growth in TBSS) would add 8% to our
estimate of Quess’ topline.
EBITDA, assuming steady margin for TBSS at 8.5% would increase by 12%. Given
Quess’ FY19E EBITDA margin of 6.3%, the acquisition would be accretive to the
tune of 20bp.
PAT, assuming outflow of cash, and hence lower other income, would increase
by 8%.
We thereby increase our FY18-20 CAGR expectations for revenue/EBITDA/PAT
to 31/42/62% from 27/37/58% earlier.
Exhibit 2: Change in estimates
FY18E
Revenue (m)
Rev. growth (%)
EBIT Margin (%)
EPS (INR)
EPS Growth (%)
56,191
35.2
5.2
23.2
177.7
Revised
FY19E
77,123
37.3
5.7
26.2
12.9
FY20E
92,548
20.0
6.1
35.7
36.2
FY18E
56,191
35.2
5.2
23.2
177.2
Earlier
FY19E
71,161
26.6
5.7
24.3
4.8
FY20E
85,393
20.0
6.1
33.1
36.1
FY18E
0.0%
0bp
1bp
0.2%
48bp
Change
FY19E
8.4%
1061bp
4bp
7.9%
806bp
FY20E
8.4%
0bp
5bp
7.9%
4bp
Source: MOSL
Valuation view
Quess operates through four key business segments: [1] Global Technology
Solutions (GTS), [2] People & Services (P&S), [3] Integrated Facility Management
(IFM) and [4] Industrials. All of these areas have been witnessing high growth,
which is expected to continue going forward as well.
In terms of penetration, it has barely scratched the surface in its core staffing
business as well as other areas. In general staffing, India’s low penetration of
0.5% of working population (versus global average of 1.6%) itself should drive
high velocity growth. In business services, Quess intends to be part of anything
that is non-core to a business and that can be outsourced to a third party. While
it has touched upon the areas of facilities management, catering, security and
industrial asset management, the directions for further growth are ample.
Inorganic growth has been a key component for Quess’ growth, improvement in
profitability and diversification. It has demonstrated successful integration with
margin accretion and retention of management personnel. Validation also
comes from the following examples;
[1] Over the last eight years, revenue at Avon (a facilities management
acquisition) has grown at a CAGR of 52% and EBITDA margin has expanded to
5.1% from 1.7% at the time of acquisition.
20 November 2017
2

Quess Corp
[2] Magna (an acquired IT staffing company) has grown at 15% CAGR since
acquisition and its margins have improved to 13% from 5.5% at the time of
acquisition.
With the strategy in place, and execution being impeccable, we expect 31%
revenue CAGR over FY17-20. This would be fueled by the current portfolio and
any inorganic activity would only add to these expectations. Over the same
period, we also expect cumulative EBITDA margin expansion of 150bp to 6.9%.
The visibility for this comes from [1] continued improvement in profitability in
Brainhunter and MFX, which were loss-making entities, [2] addition of Tata
Business Support Services, Manipal Integrated Services, Terrier Security, Comtel
Solutions and Vedang Cellular Services, all of which have better margins than
company average, and [3] margin expansion in the People & Services business,
led by operational leverage and continued growth in Training & Development.
We value Quess using a DCF to reach a price target of INR1,170, implying 35%
upside. Valuations are rich given its strong growth history, and continued
aggressive thrust on acquisitions. Over FY17/20E, we expect
revenue/EBITDA/PAT CAGR of 31/42/62%, led by our assumption of 20% growth
in the organic business and incremental contribution by recent acquisitions. The
long-term prospects of the company stand bright given the high-growth
opportunities, aggression shown on expansion and flawless execution.
Key triggers
GST-related pick-up driving higher growth in the general staffing business
Significant margin turnaround in Brainhunter and MFX boosting overall margins
Broad-based and consistent growth driven across business segments
Key risks
Integration of current/future acquisitions going wrong
Inability to manage diverse portfolio of businesses, leading to inferior growth
Economic downturn, leading to a proportional and direct impact on business
20 November 2017
3

Quess Corp
Exhibit 3: Fair value of INR1,170/share based on DCF
Discount rate
Terminal growth rate
PV FCF
PV of terminal value
NPV
Cash and cash equivalents
Deployed in acquisitions
Sales acquired
EBITDA acquired
EBITDA in FY19
Value of acquired EBITDA
Cash not deployed
Less: Debt
Total equity value
Per share
PV FCF
PV of terminal value
NPV
Cash deployed in acquisitions
Cash not utilized
Less: Debt
Total equity value
NOSH m
CMP
Target price
Upside (%)
12.0%
5.0%
42,710
106,757
149,467
10,832
8,666
7,221
578
635
12,710
2,166
6,530
157,813
315
788
1,103
94
16
48
1,170
135
865
1,170
35%
Source: MOSL
Exhibit 4: We assume 12% WACC and 5% terminal growth rate
WACC/g
990
10%
11%
12%
13%
14%
3.0%
1,330
1,130
980
860
760
4.0%
1,500
1,250
1,060
920
810
Sensitivity analysis
5.0%
1,720
1,400
1,170
990
860
6.0%
2,070
1,610
1,310
1,090
930
7.0%
2,640
1,930
1,500
1,220
1,020
20 November 2017
4

Quess Corp
Story in charts
Exhibit 5: Revenue CAGR of 46% over the last five years
Revenue (INRm)
34,350
4.2%
20,536
6,370
10,012
15,194
3.0%
41,574
Exhibit 6: Margins have expanded by 110bp over the same
period
EBITDA margin (%)
4.3%
4.3%
5.1%
4.4%
5.4%
2,749
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
Source: Company, MOSL
Exhibit 7: Growth has been organic and driven by
acquisitions, enabling presence in multiple segments
Integrated
Facility
Management,
10%
Industrials,
6%
Global
Technology
Solutions,
31%
Exhibit 8: Addition of higher margin businesses expected to
further improve profitability
7.0%
EBIT margin (%), as of FY17
4.6%
4.9%
7.6%
People &
Services, 54%
Source: Company, MOSL
Source: Company, MOSL
Exhibit 9: Expect a cumulative 160bp EBITDA margin
expansion over the next three years
EBITDA margin change (YoY, bp)
123
74
7
4
96
49
Exhibit 10: Consequently leading to stellar PAT growth
PAT (INRm)
159%
Growth (YoY, %)
178%
3,553
72%
313
538
51%
812
40%
1,133
3,147
36%
4,839
64
39
94%
121
(68)
13%
Source: Company, MOSL
Source: Company, MOSL
20 November 2017
5

Quess Corp
Financials and Valuations
Consolidated - Income Statement
Y/E March
Total Income from Operations
Change (%)
Total Expenditure
% of Sales
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income
PBT bef. EO Exp.
PBT after EO Exp.
Total Tax
Tax Rate (%)
Minority Interest
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
FY13
10,012
57.2
9,581
95.7
431
4.3
44
387
176
32
243
243
72
29.6
50
121
121
94.1
1.2
FY14
10,060
0.5
9,662
96.0
398
4.0
42
356
88
21
289
289
97
33.7
13
179
179
48.0
1.8
FY15
25,671
155.2
24,366
94.9
1,305
5.1
101
1,203
218
57
1,042
1,042
370
35.5
0
672
672
276.3
2.6
FY16
34,350
33.8
32,839
95.6
1,511
4.4
144
1,367
310
91
1,147
1,147
335
29.2
0
812
812
20.8
2.4
FY17
41,574
21.0
39,346
94.6
2,228
5.4
264
1,964
465
153
1,651
1,651
518
31.4
0
1,133
1,133
39.6
2.7
FY18E
56,191
35.2
52,905
94.2
3,286
5.8
337
2,949
392
440
2,997
2,997
-150
-5.0
0
3,147
3,147
177.7
5.6
(INR Million)
FY19E
77,123
37.3
72,120
93.5
5,004
6.5
578
4,425
347
308
4,387
4,387
833
19.0
0
3,553
3,553
12.9
4.6
FY20E
92,548
20.0
86,183
93.1
6,365
6.9
694
5,671
304
463
5,830
5,830
991
17.0
0
4,839
4,839
36.2
5.2
Consolidated - Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Minority Interest
Total Loans
Deferred Tax Liabilities
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Goodwill on Consolidation
Capital WIP
Total Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Other Current Liabilities
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
FY13
300
383
682
164
879
-66
1,660
244
159
85
250
0
0
2,909
4
1,580
234
1,091
1,583
57
1,491
36
1,325
1,660
FY14
962
884
1,846
0
641
-50
2,437
319
201
118
729
4
0
3,080
4
1,246
291
1,539
1,496
48
1,413
35
1,585
2,437
FY15
258
2,267
2,525
0
2,170
-35
4,660
604
415
189
1,104
0
0
5,869
4
2,755
818
2,292
2,502
414
1,941
147
3,367
4,660
FY16
1,133
2,433
3,566
0
3,783
-1,345
6,005
1,043
541
502
2,020
24
37
8,573
18
6,926
1,094
536
5,151
674
4,138
339
3,423
6,005
FY17
1,268
7,094
8,362
9
7,304
-1,658
14,017
1,363
779
583
3,788
77
2,976
13,721
57
8,337
3,013
2,314
7,128
631
6,044
453
6,593
14,017
FY18E
1,377
18,980
20,357
9
6,530
-1,658
25,238
1,913
1,116
796
3,788
97
2,976
25,421
57
11,428
10,832
3,104
7,840
853
6,375
612
17,581
25,238
(INR Million)
FY19E
1,377
22,533
23,910
9
5,783
-1,658
28,044
2,463
1,695
768
3,788
117
4,506
29,626
57
15,685
9,650
4,234
10,760
1,171
8,749
840
18,865
28,044
FY20E
1,377
27,372
28,749
9
5,061
-1,658
32,161
3,013
2,389
624
3,788
137
4,506
36,019
57
18,822
12,073
5,067
12,913
1,406
10,499
1,008
23,106
32,161
20 November 2017
6

Quess Corp
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
FCF per share
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Asset Turnover (x)
Debtor (Days)
Creditor (Days)
Leverage Ratio (x)
Net Debt/Equity
FY13
1.1
1.5
6.0
0.0
0.0
FY14
1.6
1.9
16.3
0.0
0.0
FY15
5.9
6.8
22.3
0.0
0.0
145.9
126.7
38.8
3.9
76.2
0.0
-1.1
30.8
22.6
25.9
5.5
39
6
0.5
FY16
7.2
8.4
31.5
0.0
0.0
120.8
102.6
27.5
2.9
66.7
0.0
-6.4
26.7
17.1
22.3
5.7
74
7
0.7
FY17
10.0
12.3
73.8
0.0
0.0
86.5
70.1
11.7
2.5
45.9
0.0
3.3
19.0
12.6
21.1
3.0
73
6
0.2
FY18E
27.8
30.7
179.6
0.0
0.0
31.2
28.1
4.8
1.7
28.5
0.0
5.1
21.9
16.7
32.1
2.2
74
6
-0.4
(INR Million)
FY19E
31.4
36.5
211.0
0.0
0.0
27.6
23.7
4.1
1.2
18.8
0.0
15.4
16.1
13.6
28.6
2.8
74
6
-0.4
FY20E
42.7
48.8
253.7
0.0
0.0
20.3
17.7
3.4
1.0
14.3
0.0
34.5
18.4
16.0
32.2
2.9
74
6
-0.4
0.0
-1.8
19.9
22.3
24.1
6.0
58
2
0.9
0.0
0.5
14.1
12.4
13.2
4.1
45
2
0.2
Consolidated - Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Others
CF from Operating incl EO
(Inc)/Dec in FA
Free Cash Flow
(Pur)/Sale of Investments
Others
CF from Investments
Issue of Shares
Inc/(Dec) in Debt
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Opening Balance
Closing Balance
FY13
234
44
176
-200
-454
-199
38
-161
-44
-205
0
0
-44
0
323
-174
0
0
148
-57
290
233
FY14
288
42
88
-249
-52
118
35
153
-92
61
-657
15
-734
965
-237
-90
0
0
638
58
233
291
FY15
1,049
101
218
-412
-942
15
9
24
-145
-120
-525
375
-295
0
1,015
-217
0
0
798
527
291
818
FY16
1,147
144
310
-482
-1,622
-503
8
-495
-226
-721
0
129
-97
34
1,137
-304
0
0
867
275
818
1,093
FY17
1,652
264
465
-802
-759
821
-66
756
-379
376
0
-5,457
-5,836
3,704
3,726
-430
0
0
7,000
1,920
1,093
3,013
FY18E
2,997
337
392
150
-3,169
707
440
1,147
-570
577
0
0
-570
8,848
-774
-392
0
-440
7,242
7,819
3,013
10,832
(INR Million)
FY19E
4,387
578
347
-833
-2,467
2,012
308
2,320
-570
1,750
-1,530
0
-2,100
0
-747
-347
0
-308
-1,402
-1,182
10,832
9,650
FY20E
5,830
694
304
-991
-1,818
4,019
463
4,482
-570
3,912
0
0
-570
0
-722
-304
0
-463
-1,489
2,423
9,650
12,073
20 November 2017
7

Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
Motilal Oswal Securities Ltd. (MOSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOSL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock
broking services, Investment Advisory Services, Depository participant services & distribution of various financial products. MOSL is a subsidiary company of Motilal Oswal Financial Service Ltd. (MOFSL). MOFSL is a listed
public company, the details in respect of which are available on
www.motilaloswal.com.
MOSL is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock
Exchange of India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE), Metropolitan Stock Exchange Of India Ltd. (MSE) for its stock broking activities & is Depository participant with Central Depository Services Limited
(CDSL) & National Securities Depository Limited (NSDL) and is member of Association of Mutual Funds of India (AMFI) for distribution of financial products. Details of associate entities of Motilal Oswal Securities Limited are
available on the website at
http://onlinereports.motilaloswal.com/Dormant/documents/Associate%20Details.pdf
Pending Regulatory Enquiries against Motilal Oswal Securities Limited by SEBI:
SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold
inquiry and adjudge violation of SEBI Regulations; MOSL requested SEBI to provide all documents, records, investigation report relied upon by SEBI which were referred in Show Cause Notice and also sought personal
hearing. The matter is currently pending.
MOSL, it’s associates, Research Analyst or their relative may have any financial interest in the subject company. MOSL and/or its associates and/or Research Analyst may have beneficial ownership of 1% or more securities in
the subject company at the end of the month immediately preceding the date of publication of the Research Report.
MOSL and its associate company(ies), their directors and Research Analyst and their relatives may; (a)
from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and
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The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or
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Quess Corp
Disclosure of Interest Statement
Analyst ownership of the stock
Quess Corp
No
A graph of daily closing prices of securities is available at
www.nseindia.com, www.bseindia.com.
Research Analyst views on Subject Company may vary based on Fundamental research and Technical Research. Proprietary
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The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person
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appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
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as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to
determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative
products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of
the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time
without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities
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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring
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Registration details of group entities.: MOSL: SEBI Registration: INZ000158836; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100.
Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:
INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd.
offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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