Four MSPs and private equity firm Oval Partners have united their efforts to form New Charter Technologies, ChannelE2E has confirmed.
New Charter's four founding MSPs are:
Each of those MSPs is highly profitable -- typically generating 20 percent EBITDA margins or so, New Charter Technologies CEO Mitch Morgan tells ChannelE2E.
Financial terms of the investments and New Charter's overall valuation were not disclosed.
Not Your Typical MSP Rollup
To be clear: This is not your typical MSP rollup funded by a private equity firm. Instead, New Charter "provides business owners the opportunity to take some money off of the table and re-invest in a platform that brings greater value than their company could achieve on its own," the organization told ChannelE2E.
In a prepared statement about the effort, Morgan said:
“The industry is changing and evolving. We believe this next turn will provide even greater opportunity for companies that have the capability, capacity, and scale to take advantage. By partnering with New Charter, the right companies will have this opportunity. The founding MSPs enjoy the benefits of an enterprise-scale, PE-backed Managed Service Provider platform (financial depth, economies of scale, shared knowledge and resources, accelerated growth, North American footprint, access to capital, etc.) while maintaining autonomy, culture, leadership, personal investment/financial upside, and other benefits of running your own business."
The journey toward forming and funding New Charter was a long one. Morgan met with roughly 14 private equity firms about potentially building a national MSP strategy. The magic meeting arrived in August 2018, when Morgan first met Oval Partners.
Indeed, everyone at the table had deep IT services industry knowledge. For instance:
- Morgan is the former VP of professional services at IKON Office Solutions, and has also provided M&A guidance to MSPs the past decade or so.
- Oval Partners was founded by John Knoll and Jake Mizrahi. The firm's key investments include Flex Technology Group, a managed print services provider and office equipment solutions specialist. (Note: Flex Technology Group and New Charter are not associated with one other beyond having the same private equity backer.)
During a ChannelE2E interview today, Morgan, Knoll and Mizrahi described why they are taking this journey together. The reasons include:
- The MSP industry represents a multi-billion-dollar market opportunity that's highly fragmented.
- There are numerous service opportunities that you can scale through acquisitions.
- MSPs that Oval targets for New Charter investment have loyal customer bases and strong recurring revenue streams.
- The products and services offered by MSPs have matured, so the services are more productized and consistent, and revenues are more stable.
- If you create scale and invest for innovation, you can largely avoid commoditization, the trio asserted.
New Charter: Next Moves and MSP Benefits
New Charter is seeking additional MSPs to join the march toward building a national MSP platform. Dan Ruhl, a partner at Oval Partners, is leading the search for additional MSP investments (email him here: [email protected]).
The benefits for MSPs, according to prepared bullets from the company, include:
- Structured as a true partnership, with MSP owners taking some cash off the table and then reinvesting into New Charter in a single class of shares alongside Oval Partners.
- New Charter’s operating model provides strategic leadership and development support, enabling entrepreneurs to improve their businesses through best practice and resource sharing between operating companies.
- In addition to continuing to run their business, owners also become part of New Charter’s leadership team to help guide the larger business as it becomes a leading national MSP.
New Charter: Founding MSPs Share Perspectives
Each of the four founding MSPs offered prepared statements about the New Charter launch. Here's a look at each statement...
- Scott Young, Owner, PennComp Outsourced IT: “New Charter is collaborative and open. We are running our business and they are here to offer support, leadership, guidance and capital… It’s all about how can we help!”
- Sam Goh, Owner, ActiveCo Technology Management: "What’s even better is I can still stay in – not just as an employee – but as a true partner… while I’m growing the firm I’m also growing the valuation of the entire group of companies.”
- Scott Putnam, Owner, Apex Technology Management: “In building a trust relationship with (Mitch and Oval Partners) you realize they are both sound business operators and people of character and integrity.”
- Brent Whitefield, Owner, DCG Technical Solutions: “Our shares are identical to those of the PE firm… (giving us) a pathway to double-digit multiples on invested capital – NOBODY is doing that!”
New Charter: Challenges and Opportunities
When ChannelE2E first heard rumblings about New Charter in late August, we had a few concerns. Chief among them: New Charter allows each MSP to remain largely unchanged. With that approach, I worried that New Charter and its member MSPs would potentially fail to gain economies of scale at the regional and national level.
I expressed my potential concerns to New Charter using a burger chain as an example. If you acquire four different burger joints in four different regions, and then allow each burger restaurant to retain their own brands, menus and operations, you really don't gain much in terms of business synergy and scale.
New Charter offered some thoughtful responses that counter those scalability concerns. During a phone conversation today, Morgan, Knoll and Mizrahi told me that New Charter will gain economies of scale in several ways. For instance:
- Economies of scale through purchasing.
- The initial four MSPs largely operate on ConnectWise. Although the software instances differ, the single platform helps New Charter to more easily gather, analyze and act on data.
- As the organization continues to grow, New Charter may look to deploy an enterprise-class ERP system such as Microsoft Dynamics.
- New Charter is developing an inbound marketing strategy, based on Hubspot, for all of the member MSPs.
- New Charter will also have a vCIO strategy that MSP members can tap into.
- Kyle Robertson, a principal at Oval Partners, will be tracking financials and key metrics across the MSPs to help measure the scaling efforts.
Admittedly, many of those shared services -- such as the Hubspot-based inbound marketing system -- are optional opt-in services for each MSP.
So what will inspire each MSP to leverage best practices across New Charter's portfolio of member companies? The short answer involves business alignment. For instance, if one MSP owner helps another MSP owner to raise gross margins, the net result is a rising group profit tide for all of the MSPs aligned with New Charter's business.
"The real trick is maintaining the entrepreneurial focus and entrepreneurial flame of each MSP business owner," Morgan asserts. "And then making sure that flame grows."
New Charter says it has a solid pipeline of additional MSP deals brewing. Morgan concludes: "Great MSPs tend to travel in packs. They know each other. The first four companies we found have lots of friends."
Private Equity and MSPs: Active Market
Private equity firms have been very active in the MSP market for several years now. Deal activity slowed a bit when the coronavirus initially hit the United States. But things have picked up again in recent weeks.
According to ChannelE2E's M&A tracker for 2020, at least 35 different private equity firms that have invested in MSPs or acquired IT service providers so far this year. The list of deal participants includes:
- Abry Partners
- August Equity
- Averdon Capital Partners
- BC Partners
- Birch Equity Partners
- BV Investment Partners
- Catalyst Investors
- EQT Partners
- Kian Capital Partners
- Evergreen Services Group
- Gryphon Investors
- H.I.G Capital
- Horizon Capital
- Long Point Capital
- Lumerity Capital
- Macquarie Infrastructure Partners
- Madison Dearborn Partners
- Marlin Equity Partners
- McLane Group
- M/C Partners
- OceanSound Partners
- One Equity Partners
- Park South Ventures
- Pine Hill Capital
- Salt Creek Capital
- Siris Capital Group
- Southfield Capital
- Spire Capital
- Sverica Capital Management
- The Acacia Group
- Thompson Street Capital Partners
- Trinity Hunt Partners
- TriSpan Opportunities Fund
That's a lengthy list (whom did we miss?).
I'm not aware of another PE firm that's aligning its MSP investments in a way that resembles the New Charter Technologies approach. If I'm wrong please let me know via email ([email protected]) or the comments section.