What do MSPs and resellers really think about private equity?

Is private equity good or bad for the industry? Leading industry figures including Stuart Fenton, Marc Chang and Roger Whittle gave their views for our Private Equity Report

From Richard Gere's corporate raider in Pretty Woman to Taylor Swift calling out "the unregulated world of private equity" following a battle over her music in 2019, PE has come in for some flack down the years.

Critics claim it is too focused on short-term gains over long-term value and - in the case of leveraged buyouts - loads companies with debt they may not be able to pay back.

The merits and drawbacks of private equity are taking on a new resonance in the channel following an influx of PE investment into UK resellers and MSPs.

Led by the likes of LDC, August Equity and Horizon Capital, private equity houses have made at least 18 platform investments and 72 add-on acquisitions of UK resellers or MSPs since the start of 2020, with activity accelerating in 2021, according to the CRN Private Equity Report.

As a consequence, they now back at least 69 UK resellers and MSPs, with no fewer than 38 PE houses on our radar boasting at least one UK reseller or MSP investment (see the top five here).

'Playing a valuable societal role'

Available exclusively to CRN Essential subscribers, the CRN Private Equity Report ranks and profiles the top PE houses investing in UK resellers and MSP and examines what is driving the trend and whether it is good for the industry.

CRN Essential subscribers can read the full report here. An Executive Summary of the report can be viewed by all here.

Private equity is regarded by many as the best way for business owners to accelerate growth while allowing them to take some money off the table after years of hard work.

In the model scenario, the PE house will support them with organic and acquisitive expansion and leave them a bigger, more efficient and more profitable company upon exit with at least a 2.5x return on costs.

The UK's largest Apple B2B reseller, Jigsaw24, doubled EBITDA to over £4m under its first private equity backer NorthEdge, which achieved a 3.1x return on its 2013 investment in 2018. It is now backed by a second PE houses in the form of Alcuin Capital.

Roger Whittle Jigsaw24

In the report, Jigsaw24 CEO Roger Whittle (pictured right) explains how private equity had enabled the Nottingham-based firm to "achieve our objectives as a company more quickly than would otherwise have been possible".

"Many of the institutional investors in private equity are very normal investors," he told CRN.

"It might be the Somerset Fire Service pension scheme, or the Cheshire Teachers' pension scheme. They need to have a return. And this is why PE is very important, because it helps these organisations who would otherwise find it very difficult to get a return when interest rates are so low. In that sense, I think PE actually plays quite a valuable societal role."

Glen Williams, CEO at Aliter Capital-backed solution provider North, argues that PE is good for the industry "because there is a requirement for it".

"A lot of these businesses have been run as lifestyle businesses and do need investment, so in that sense a private equity house will act as a catalyst for change," he said.

Yet to be pursuaded

However, Stuart Fenton, CEO of QUANTIQ, remained unconvinced that PE is the best route to growth for the Microsoft Dynamics specialist.

Fenton (pitcured left) said he has no intention to exit the business and that QUANTIQ has access to cash to grow and already has a "great team that works well together".

"PE works brilliantly for some firms (like Jigsaw24), and less well for others," he said.

"I hear horror stories from some management teams where the PE firm buys the company and effectively ladens that acquired company with the debt used to buy it in the first place. Other horror stories is that the PE firm is very hard to deal with, often unreasonable and changes out the management without notice.

"I get PE firms knocking on the door all the time. However I have yet to be persuaded that this is a good course for QUANTIQ or me."

Block CEO Marc Chang (pictured right) echoed this, saying PE "just hasn't been necessary or appropriate" for the Cisco Gold partner.

"The alignment just hasn't been right so far - mainly because I have been quite comfortable with my current risk and return profile," he said.

"There does seem to be perfect conditions at the moment, with increasing number and size of funds, many late in deployment and a focus on technology. I would have thought it is a better market to use PE than ever.

"It looks like an interesting space and have heard of many people looking in the channel - which I can understand - especially with the likely tightening of taxation policies over time."