WATCH: Private equity bosses give MSPs masterclass in how to boost valuations

Four private equity investors tell MSPs that high valuations are here to stay, but only if bosses avoid a number of pitfalls

Low-margin reselling, tax discrepancies and bolshie CEOs are just three of the things to avoid if you are looking to take on private equity investment any time soon.

A panel of investors spoke to MSP bosses at CRN's MSP North conference earlier this week, offering tips on what to do and what not to do if you are hoping to attract private equity attention.

Mehul (Mickey) Patel, partner at August Equity, said that a solid management team and long-term plan are essential. (You can find details of all four panellists below).

"If you haven't got that management team or that clear plan and you can't feel it, then we don't invest in the business, because otherwise you're not backing a team and it'll take much longer to create a plan," he said.

"I don't like legal tax issues that could have been resolved. That just elongates stuff - if you have got issues in your business and you need financing, just flush it out before you come to us."

Mo Aneese, investor at Livingbridge, said that private equity investors will speak to the customers of MSPs before investing to check they deliver what they claim to.

"Fundamentally for us it's the customer experience," he said. "If you deliver a great customer experience and customer service, that is how you'll get recurring revenue.

"You might have a contract that says you have got the customer for three years, but we're looking at five to 10 years and the only way you renew is through great customer experience by delivering what you say you'll deliver.

"What I hate is low-margin, hardware businesses that are window dressing as MSPs. ANS has done a transition, but that is bloody difficult."

A host of MSPs have taken on private equity investment over recent months, but why is the space so attractive for investors?

The panel cited high recurring revenue, a huge target customer base and consolidation opportunities as three of the main draws.

Aneese said that these points are why valuations of MSPs are set to remain high for the foreseeable future.

"Our house's view, and my view, is that multiples are here to stay," he said.

"My colleagues are envious of me investing in MSPs because I'm investing in businesses with high recurring revenue and I'm paying a high multiple for that, which is fair enough. They're investing in consumer businesses which don't have recurring revenue and they're paying similar multiples."

But while MSPs are sought after by investors, MSPs should not look to take on investment purely for the cash.

"If you want a partner it can't be just for the capital," Aneese said.

"You're better off going to a bank. They're much cheaper and they leave you alone. Most investors will be on your board and involved in strategy, so if you want the value-added support, reference [the private equity house] and meet them."