The managed services space is a honeypot for private equity lolly right now, with £110m-revenue outfit Ultima Business Solutions the latest MSP to secure investment.
Although Ultima didn't disclose the deal value, MSPs that can demonstrate healthy recurring revenue streams are currently commanding deal multiples up to the early teens, with one MSSP which sold up last year achieving a multiple of over 20.
Deals are happening left, right and centre, with new funds even being set up with the specific aim of buying and building MSPs.
With this flurry of activity, it's worth asking why MSPs are such hot property right now.
This is a particularly intriguing question considering that private equity houses will have read the same headlines as everyone else about the multiple threats and challenges facing MSPs, not least around commoditisation, skills shortages and disintermediation by cloud.
It's clear, however, that they are looking well beyond this, and see something in the MSP model that they are willing to pay top dollar for.
Risk-averse PE houses love the downside protection of recurring revenues, and any IT solution provider that generates more than 50 per cent of their top line from business that is guaranteed for three or five years is a natural target for them.
But as I discovered at our recent MSP North event, the appeal of MSPs goes beyond this.
When quizzed about the allure of the MSP market, the PE bosses on our private equity panel variously mentioned the stickiness of customers, market fragmentation and organic growth. It's also viable for them to build up an MSP business and then sell it onto a larger, US-based PE house that will pay even higher multiples.
All this makes it very attractive for PE houses to perform buy-and-builds in the MSP sector right now.
"There's a ready-made exit," explained James Morris of LDC, which only last month invested in OneCom.
"It's almost like pass the parcel, with smaller businesses being bought by mid-sized ones and mid-sized ones being gobbled up by US PE houses that are happy to pay top dollar."
Indeed, Apiary Capital, whose partner Nicki Boyd was one of the representatives on the panel, was formed with the specific purpose of buying multiple tech businesses, including MSPs. Following its inception last year, it has created a £55m-revenue managed comms player with its acquisitions of G3 and Connect Managed Services.
PE houses also have an eye on a much longer game, and see MSPs as a safe bet not just over three years but the next decade.
The heat around AI and automation is one reason Apse Capital invested in Ultima yesterday, but PE houses are convinced that MSPs are also uniquely positioned to exploit other technology mega-trends.
This was perhaps best summed up by panellist Mickey Patel of August Equity, which has invested in MSPs and MSSPs including Charterhouse and SecureData.
"We take a step back and ask what's going to happen in three to five years' time?," Patel said. "The move to 5G, BT ISDN is going to be completely closed by 2022/2025, public cloud migration, digital transformation. That's all happening now and businesses that are in the MSP space, where they are taking the problem away from the customer, are very valuable."
The panellists offered various tips on how to attract (or repel) potential investors, including being open about financials and having a broad-based management team, rather than concentrating power in one owner/manager.
Any MSP that can demonstrate it is one of a kind will put themselves in the box seat for investment, as happened in the case of MSSP SecureData. It commanded a multiple of over 20 when August Equity sold it to Orange in February, Patel said.
"There was nothing else in the UK that was £50m revenue, growing at 20 per cent, had a SOC, [and was an] independent MSSP," he explained.
High-quality MSPs can easily command multiples in the early teens, and the PE panelists were convinced valuations will hold in the coming years.
It is safe to say that the love affair between private equity and the channel shows no sign of abating.
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