Why are Private Equity firms so interested in MSP investments and acquisitions? The answer involves five key market dynamics, according to David Del Papa of Riverside Partners.
During an MSP M&A Symposium to kick off the Kaseya Connect 2018 conference in Las Vegas, Del Papa pointed to:
1. The increasing amount of capital that private equity firms have to invest.
2. The mission critical, recurring revenue nature of MSP services. In other words, the market isn't a passing fad.
3. The significant MSP industry tailwinds. Businesses of all sizes are spending more on IT during multiple inflection points (cloud, greater outsourcing of non-core functions, digital transformation, etc.). That bodes well for MSP investments, he says.
4. Evolving MSP business model enables greater scalability and margins. In other words, there's real scale and less dependence on hardware sales and labor.
5. The highly fragmented MSP market provides numerous acquisition opportunities and potential benefits from M&A.
Reality Check
I certainly agree with Del Papa's points. But I also worry about a few of them. First and foremost, I'm concerned about point one: Private Equity firms are loaded with cash that they want to invest. And in reality, they need to invest the money. They need to put it to work. That pressure to spend, in my opinion, could trigger some bad deals.
Or as I put it: Private Equity may be chasing MSPs on a short runway...
I also worry about point five -- the MSP market is highly fragmented. That's true. But the heavy fragmentation involves lots of less-than-stellar resellers and VARs that aren't true MSPs. And many of those true MSPs deliver less-than-stellar profit margins (9 percent or below).
My constructive criticism isn't specifically directed at Del Papa. He's a sharp guy. And certainly, each PE firm is conducting extensive, intensive due diligence before inking an MSP investment or buyout. In Del Papa's case, he's looking closely at margins, recurring revenue percentages, churn, and other factors that separate quality MSPs from the pretenders.
