The barometres of a healthy MSP investment

August Equity's Mickey Patel on the traits that attract him to invest in tech businesses

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

Some of these strategic options can be achieved by inorganic growth through acquiring companies which August can help them originate.

We typically look for new platforms in adjacent markets to our portfolio companies, as we use the transferable market knowledge, network and learning points to add value to the new plan. We look for markets where there are clear macroeconomic shifts, such as the move to multi/hybrid public cloud; or customers beginning to embrace newer concepts such as AI. We must be able to create a leading business within the sub-sector with three to five years and we must find some edge over other PE-backed investments in the sector.

The targets we back must fare well against the competitive environment - typically they are punching above their weight. In order for us to complete a buy and build, there must be readily available targets across the UK and we typically would have qualified this while we were mapping the sector before approaching targets. The business models we typically invest in would have high quality of earnings and that means one to five-year contracts, low customer concentration, less than five per cent negative customer churn and customers buying more products and services over time.

The financial metrics are the by-product of all the above. Generally, we would expect an exceptional managed services target to be delivering revenue growth above the average market growth and at least 30 per cent and normalised EBITDA margins of 20 per cent. If the quality of earnings are high then we would expect high EBITDA to cash generation, with recurring revenue growing each year. This informs us that the strategy devised and executed by the management team is working in the market and therefore we have a platform on which to build.

Mickey Patel is a partner at August Equity