VARs set to benefit from private equity influx

The IT sector will attract greater interest from private equity in 2010

Ambitious resellers will have more recourse to private equity funding in 2010 as IT comes back into vogue, new research suggests.

The survey, carried out by financial advisor Grant Thornton UK LLP, revealed that 84 per cent of private equity investors backing UK IT firms are planning on making an acquisition within the sector this year.

Cloud computing will be a hotspot, according to the survey of 40 private equity firms.

Additionally, 72 per cent of respondents said they expected the number of investments and private equity houses getting involved in the sector to rise this year.

Wendy Hart, corporate finance advisory partner at Grant Thornton, said the interest shown in the sector by private industry backers would generate high levels of competition for “quality IT assets”.

“Businesses that have been robust enough to have done reasonably well through the downturn, and can prove they have an embedded customer base, will be the ones that attract the most attention,” she said.

Hart added that while the number of investments in the sector is expected to rise, the average amount being invested has fallen.

“Ninety-five per cent of respondents expect future deals to be worth less than £100m,” she said.

Paul Spencer, non-executive director at private equity-backed VAR Axial Systems, said the results should not come as too much of a surprise given the economic landscape.

“Company prices are the lowest they have been for a while, and finance from the banking sector is more readily available now than it was a year ago,” said Spencer.

“So, an increase in the activity of private equity firms is not unexpected.”

In the survey, Software as a Service (SaaS) and cloud computing were identified as “attractive areas of investment” by 89 per cent of respondents, while just 39 per cent cited green IT.

Nick Grossman, business development director at 2e2, which is backed by Duke Street Capital, said the return on investment potential is the main driving force behind cloud computing’s popularity with private equity backers.

“I suspect private equity houses will be looking hard to work out which sectors and organisations might grow at the high end of market expectations and where they might get better-than-average returns,” he said.

“Cloud computing is an area with the potential to achieve this and one we have good expectations for, having been providing these services for quite a few years.”

Bob Tarzey, service director at market watcher Quocirca, said the channel should “take heart” from the survey’s findings.

He warned that, with the attention of private equity backers on cloud computing, resellers will need to change the way they work to attract investors and retain their margins.

He added: “More than ever, resellers will need to focus on services, advising the best way to deploy and integrate distributed on-demand service with legacy and new on-premise deployments.”