Private equity bosses tell MSPs why it is a seller's market right now

Panel of experts explain how smaller MSPs attract interest from PE by winning against legacy competitors

When it comes to M&A, it is "definitely a seller's market" in the channel due to the number of investors looking to take a stake in MSPs, according to a panel of private equity investors.

Speaking to delegates at CRN's Channel Conference MSP, investors said that interest in the sector has never been higher, due to the high margins, sticky customers and recurring revenue.

Mo Aneese, investor at Livingbridge, explained that the return on investment from MSPs means that there are a higher number of investors circling than there were a few years ago.

"I think it is a seller's market because you've got more investors operating in it and they want to get in and it's better than some of the other sectors they're invested in," he told the audience.

"Whether that's the right thing for the entrepreneurs is up for debate, because you guys want someone who's going to add value to your business, and who has some experience.

"But we've definitely seen an increase in activity in this sector in the past five years."

Aneese added that smaller MSPs are more likely to attract private equity interest because they are more agile than their legacy competitors, and therefore prove their ability to adapt to change and reap those rewards.

"You've got huge disruption going on with every business around how they manage their IT infrastructure and how they operate their business model," he stated.

"Some of the bigger guys have legacy infrastructure and legacy sales teams, which means they can't pivot to service their customers to what they need now, and the smaller MSPs are winning as a result.

"We're seeing exceptional growth in some of those smaller companies - there's a question of how you can sustain that - but it is creating a really good, competitive environment for the smaller ones; the big guys are still swallowing some M&A challenges, they've got a lot of legacy salespeople who've sold product rather than solutions and the debt or the capital structure of the business is hindering them."

His fellow panellist Mehul (Micky) Patel, a partner at August Equity, added that the sub-250-seat market is somewhat "unloved" by MSPs and that it is a niche to be taken advantage of by MSPs.

"SMBs have had really poor service. We were one at August and we've tolerated it because we haven't had a provider that has been brought up to deliver a good service," he elaborated.

"I think there's a big opportunity in rolling out this 250-sub market and we want to do it. There's an opportunity there for a lot of operators because there is no real 250-sub, high-quality MSP in the market at the moment."

However, Nicki Boyd, partner at Apiary Capital, cautioned that although it is a seller's market at the moment, MSPs seeking to sell still need to do their due diligence about whether it is the right decision for them.

"It's binary; we see lots of processes which fail, where the business isn't ready or isn't big enough or doesn't have all the information ready," she explained.

"So I think we have to be careful when we look at stories like Micky's [selling SecureData to Orange for £120m] that promise 20-time multiples and realise that there are a number of characteristics which underpin that - and that's after some value-add along the way from August.

"I think it's important to be realistic before we conclude it entirely, one way or the other."

(Video L-R: Marian McHugh, moderator; Mo Aneese, Livingbridge; Nicki Boyd, Apiary Capital; Mehul Patel, August Equity and Greg Gyves, Fortinet)