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MSPs, Private Credit Lending and COVID-19 Impact: Survey Findings

Abe Garver, managing director, FOCUS Investment Banking

How has the coronavirus pandemic impacted MSPs (managed IT services providers) and their access to private credit? To find answers, FOCUS Investment Banking, a middle-market investment bank, surveyed the private credit market for MSPs that have between $1.75 million to $10 million annual EBITDA (earnings before interest, taxes, depreciation and amortization).

In an email exchange with ChannelE2E, FOCUS Investment Banking Managing Director Abe Garver pointed to these survey findings:

1. Non-PE-Backed MSPs borrow much more expensively (e.g. 11%-13%) than PE-backed MSPs (e.g.6%-8%)

Source: FOCUS Investment Banking, April 2020

2. Four (4) out of Five (5) private credit lenders have not increased borrowing rates since COVID-19.
3. One lender has increased rates from L6 (Libor + 6%) to L10 (Libor + 10%) as a result of COVID-19.
4. Access to private credit lenders requires a minimum of $1.75MM of adjusted EBITDA.
5. Two (2) out of Five (5) PE-Backed MSPs will lend between 5.0x-7.0x EBITDA.

Source: FOCUS Investment Banking, April 2020

6. Private credit lender ideal term is five (5) years with 1% amortization.
7. Private credit lenders target Loan to Value (LTVs) between 41% to 70%.
8. ‘Grid pricing’ (Lowest leverage (e.g. 2.5x v. 5.0x EBITDA) and highest absolute EBITDA (e.g. $5MM v. $2MM) result in lowest rate.

To reiterate, the source of the data above is a FOCUS Investment Banking Survey of private credit lenders focused on the MSP sector as of April 18, 2020.

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