What traits attract me to tech solution provider investments

Apiary's Nicki Boyd lays out the top health barometers that convince her to invest in MSP and solution provider businesses

This viewpoint originally featured in CRN Rising Stars 2020, which can be viewed here (brief registration period required).

Private equity has long been attracted to investing in tech businesses, and never more so than now, given the expansion and evolution of the role of technology in our lives. Each PE firm will have specific requirements around size, location and ownership; Apiary invests in UK and Ireland-headquartered businesses with enterprise values of £10m to £75m, and with our partnership approach we seek to take a significant minority or majority stake. There are a number of characteristics that make a tech business attractive to investors and will increase value in a successful sale to private equity.

We look for a high-quality management team who really know their business. It is common for there to b augmentation to the team and perhaps even a full transition over a period of time, but unlike trade buyers, financial investors need to back one or more experienced and talented executives to run and drive a business forward. The quality of earnings is a critical metric. We look for a high proportion of recurring and repeating revenue, longterm relationships with customers (indicating high quality or a critical service), and a strong bias towards software and services, rather than hardware.

Similarly, the financial characteristics and the quality of information is important. Investing in a good CFO may seem like a luxury to owner managers, but it is not. Strong margins and cash generation are key metrics. Demonstrable sustained growth is significantly value enhancing. For a platform asset, we seek at least mid-singledigit revenue growth rates.

The opportunity for acquisitive growth is also attractive and even if not executed, it is beneficial to have reviewed the market and identified potential targets as part of the next sale story. Given the dynamic nature of the market, we look for knowledge of and alignment with technology trends. It is important for businesses to be agile and predict customer needs, so as not to become obsolete. The best teams will have a view that has informed their strategy, but with sufficient connection with their customers and the flexibility to adjust if the market changes. We recognise that no business is perfectly formed and each will be stronger in some areas than others. Indeed, it is often the right PE partner that can unlock the drivers for the next phase of growth and optimisation.

Nicki Boyd is a partner at Apiary Capital LLP