The number of UK IT MSPs large enough to be viewed as platform acquisition targets by private equity (PE) investors is “dwindling”, a corporate finance expert has asserted.
Only seven MSP platform acquisitions by PEs made it onto IT Channel Oxygen‘s radar in 2023, as rising interest rates dented deal activity.
But the PE feeding frenzy in the sector in recent years has also resulted in a shrinking pool of viable targets, Venture Corporate Finance Managing Director Gary Smith stressed.
“The amount of businesses of a platform size in the UK is dwindling,” he told IT Channel Oxygen.
“The ability for a private equity firm to find a decent platform is a lot less, and the general sentiment of the medium to larger-sized IT MSP businesses is probably more towards a trade sale.
“All the PE firms are asking us ‘do you have anything for a platform?’, and we say ‘no, we can’t find anything where the shareholders want to go on a five-year journey’.”
Private equity feeding frenzy
Attracted by the sector’s high growth potential and predilection for recurring revenues, private equity houses have flooded into the IT channel in recent years.
Having initially picked off larger, £100m-plus targets, PEs have more recently shifted their focus to the midmarket and SMB space.
Venture Corporate Finance itself acted as an advisor on one of the smaller platform MSP deals completed this year, namely that of Essex-based MSP Arc Systems by Beech Tree.
As a result of this feeding frenzy, at least 11 private equity houses now hold multiple platform investments in the UK IT managed services sector, by our calculations.
Five – LDC, Bowmark Capital, August Equity, Beech Tree and Livingbridge – back four or more MSPs apiece.
But only three fresh platform investments have been completed so far in 2023, our analysis suggests. The other four were secondary buyouts.
The backdrop of high interest rates – which could see the total number of global channel M&A deals completed in 2023 fall by 60% – has made it harder for PEs to put deals together, Smith (pictured above) added.
“There’s a scarcity [of targets] about, for one thing,” he said.
“But the ability for the PE firms to pay the multiples due to the rising interest rates has also curtailed it.”
ESG a factor in ‘2, 3 or 4 years’
Asked about proclamations that ESG will be the “next cab off the rank” when it comes to MSP valuations, Smith would only issue a cautious prediction.
“It will become more of a talking point, and more of a valuation point, in the next two, three or four years – but at this point it’s not making any impact at all,” he said.
MSPs with high recurring revenues still hold the whip hand when it comes to attracting investment, Smith stressed.
“There was a business that did want to go on a journey with PE. It was about £10m revenue and £2.5m EBITDA,” Smith said.
“But because they had low recurring revenue, they weren’t of interest to the PE firms because of what they’d have to buy in to make them a high recurring revenue business.”
Smith concluded: “There’s a lot of activity for PE-backed businesses buying bolt-on, sub-£5m or sub-£10m deals, so they’re continuing at pace.
“But certainly platform acquisitions are tough to come by.”