Few insiders and observers would deny that the days of medium-sized VARs relying on consistent, high-volume product sales to deliver healthy bottom-line profits are effectively over.
The acceleration of technological advancements, the corporate flight towards heightened efficiency and VARs’ squeezed margins during the recent, competitive low-growth years have seen them and their partners being asked to deliver more value than ever before, in terms of technology, integration and true consultancy services.
The way end users interact with devices and software is changing rapidly, and channel firms are under pressure to keep up.
How value is returned depends on the business and its addressable markets. However, top-line themes include VARs working more closely with product providers to develop exclusive propositions; innovative new systems integration strategies; investment in recruitment to up-skill support functions; investment in true consultancy practices; and acquisitions to bring in specialisms in new, in-demand technologies, such as enterprise cloud computing.
IT majors are faced with providing the technology and the marketing and collaborative platforms that allow VARs to make this shift. This requires greater focus on R&D, while many sub-sectors have seen sig-nificant consolidation, driven by the leading names.
The common enabler on both sides and in almost every example is growth funding. Experienced private equity investors are targeting VARs and technology providers that have the requisite profitability, alongside talented management teams.
Their interest is being driven by UK plc’s continued appetite for IT and communications rationalisation, realised through high-margin transformation projects. Private equity investment in the IT sector has held up well in comparison to the wider M&A market since the onset of the global recession, while company valuations have remained stable, despite wider economic turbulence.
Ambitious management teams at mid-sized businesses with the potential to become dominant in their sub-sectors of the global technology market are making their cases for private equity investment.
When negotiating this backing against the challenging trading backdrop and evolving customer requirements, companies are seeking investment partners that offer the existing infrastructure, knowledge and resources to directly support expansion, and not necessarily the highest valuation.
By focusing on delivering future value by working directly with management, often via transformation, private equity has for many years assisted growth in the IT sector. This may be through follow-on capital to support strategic acquisitions, investment in R&D, growing sales abroad or supporting the commercialisation of new technologies in adjacent markets. The private equity business model remains in tune with the shifting dynamics of the UK IT sector.
Buy-and-build is increasingly popular when working with IT businesses. VARs used to delivering double-digit growth through organic developments are now looking at acquisition.
In a fragmented market, private equity funding can finance complementary bolt-on acquisitions that allow firms to expand their technological capabilities, transfer and upgrade client contracts, extend geographical reach or drive market diversification.
Given the number of high-growth businesses in the UK IT services market, there is a vast array of acquisition prospects. However, businesses are being targeted by private equity-backed companies based on their strategic value, in terms of market position, future potential and skill set rather than historic performance and pure scale. This position is reflected in valuations and pricing.
In late 2011, we backed leading IaaS provider Adapt in a £30m deal. Demand for the company’s managed hosting and cloud services is expected to grow at about 15 per cent over the next five years. With strategic support and funding, its management can implement an expansion strategy focused on organic and acquisitive growth to stay ahead of the market.
The right investment partner will not only have access to capital but the vision, expertise and experience to implement a consolidation strategy that fully capitalises on the opportunity.
Private equity investors remain active in the UK channel and can unlock additional value while facilitating sustainable business growth.
Simon Hitchcock is a partner at Lyceum Capital
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