Private Equity, Venture Capital Warning Signs for 2019
The New Year starts with fresh warnings about the private equity and venture capital markets, particularly as they pertain to technology and managed service provider (MSP) investments in 2019, ChannelE2E believes.
Among the potential warning signals worth noting:
1. Venture Capital Concerns – Part One: VC confidence is falling due to rising costs of doing business, high valuations and longer exit times for startups, as well as macroeconomic issues including rising interest rates and uncertain trade policies, according to a USF survey from Professor Mark Cannice.
2. Venture Capital’s Concerns – Part Two: Amid plummeting stocks and political uncertainty, VCs are urging their portfolio companies to keep spending (i.e., burn rates) under control and to prepare for winter, Tech Crunch notes…
3. Private Equity – Record Investments: The private equity sector over in India saw robust growth in 2018 as overall investments grew by 36 percent in 2018 vs. 2017, according to Venture Intelligence. Roughly 32 percent of that money flowed into IT services and technology companies — with those firms attracting $10.6 billion across 383 deals, the researcher says. With those metrics in mind, we suspect there’s no way 2019 can build beyond the 2018 figures.
Private Equity: MSP Acquisition Turbulence Ahead?
Indeed, we’re wondering private equity is heading for turbulence in 2019, especially since some PE firms have been lowering their standards in their quest to find and buy MSPs (managed services providers).
According to ChannelE2E’s reporting, many PE firms have been hunting for MSPs that generate at least $20 million in annual recurring revenues (ARR) and at least 20 percent EBITDA profit margins. But the hunts often come up empty since MSPs that fit those criteria are so hard to find.
As a result, some PE firms are lowering their standards, talking to MSPs with at least $10 million in ARR and at least 10 percent EBITDA profit margins, ChannelE2E has repeatedly heard from PE and MSP sources.
Moreover, many MSP buyouts involve valuations that are above historical norms of 5X to 7X EBITDA multiples.
The big wildcards: How many PE money still needs to flow into the MSP market… and what exactly does that mean as the next round of MSPs consider potential exits…