North CEO Williams on private equity influx into channel

Glen Williams gives his verdict on what the influx of PE into the channel means for the industry

Newly re-branded North is one of at least 69 UK resellers and MSPs backed by private equity, according to the CRN Private Equity Report.

It was formed last year from the merger of five solution providers acquired by Aliter Capital over the past few years, namely Boston Networks PEL Services, 2020 Vision Systems, Pinacl Solutions and Pinacl GDA.

CEO Glen Williams gives his views on what is behind the PE influx into the channel and whether it is good or bad for the industry.

Private equity houses made at least eight platform investments of UK resellers and MSPs in the first quarter of 2021, and more than 30 bolt-on acquisitions. What is driving that?

The UK [channel] is still quite a fragmented marketplace. If you look at your Top 350, with the exception of the top 20 or so there are a lot of small to mid-sized organisations, so there are massive opportunities to consolidate the market full stop.

And the second piece is why is it accelerating now - why so many in March?

Someone I spoke to was congratulating themselves for doing a deal just before the [3 March] Budget happened, as they were expecting changes to capital gains tax - which are still being mooted.

A lot of MSPs are privately owned, run by entrepreneurs who have invested time and effort over years and suddenly you find out you'll probably have to work another 10 years to make the same returns.. That was a big driver towards March, but I think it will continue because there is a sense that there will be changes to CGT in the future..

I also think it's down to the age of the companies. A lot of tech companies are 20 or 30 years old. If you think about a privately owned company that's been going for that long, the owner is reaching a period in life where they want to take things a bit easier. They're coming to their late 50s or early 60s and want to go and do something different.

And then on the other side you've got the demand bit. There's billions of dry powder [committed but unspent capital] out in the marketplace that needs to be invested.

And the final piece is why are people investing in tech? Because tech is seen as resilient. People are looking at whether your business is Covid resilient - and typically tech has been quite Covid resilient. So I think this trend will continue.

Is private equity good or bad for the industry?

I think it's good. The only reason the influx is happening is because there is a requirement for it.

A lot of channel 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.

You can either go to a bank, private equity house, or you can IPO - but most companies are too small to IPO. [With a bank loan] you're just putting debt in the business. And there's only so much debt any lender will put into a business. Normally it's four to five times' EBITDA, so if you wanted to borrow £30m your EBITDA has to be at least £6m before they would even consider lending to you.

With a PE investor, if your enterprise value is £100m, they'll probably put £60m of equity into that and £40m of debt. To fund it yourself out of debt you'd have had to find £100m of debt. PE taking a slice de-risks it for the business owner, brings skills to the organisation that might not have been there and enables the owner to take some money off the table after all their hard work.

What do you say to critics of the PE model?

I can only talk about my personal experience of private equity. I have worked with two: Aliter Capital and Oakley Capital and have had a very positive experience with both. Critics might have a view that PE investors just look to take cost out of an organisation. With a "buy and build strategy", when you put things together, there are obviously synergies. But I've not had the experience of being put under pressure to drive cost out.. At Damovo [Williams' previous venture, which was until 2018 backed by Oakley Capital], we had 280 employees when we started and 500 when we finished.

Did we make some cost savings [at Damovo] as we went along? Yes, where it made sense to do so, and that would happen in any organisation.. But I can say for a fact that at Damovo and now at North, we are investing in more people, systems and tools. To get the highest multiples, organic growth is key, not cost take out.

What factors should resellers and MSP owners be considering when choosing a private equity partner?

My advice would be to get someone who's got some sector knowledge. The generalists invest in anything from tech to teacups. They might pay a bit more for your business but their understanding of your business sector could be less.

With Aliter it's their first fund and they have been very supportive. They have great expertise in the sector and are the perfect sized PE backer and fund for North. For anyone looking at PE investment, you want to make sure you're in their sweet spot for the size of your company. If you're too small you're going to be a bit irrelevant to them and if you're too big they won't have the firepower to help you with bolt-on acquisitions, so you have to be careful who you pick. I'd also advise to work with PE funds that look to drive value creation for all stakeholders, namely employees, customers and shareholders.

Finally, if you're considering going through a sale process you will typically get down to three or four potential PE backers, and as much as they want to interview you, you also need to interview them.