MSP platforms present resilience as valuations rise

MSP platforms are attracting capital, making complementary acquisitions and having fun with wholesome valuations, even in a difficult financial setting.

Platforms are personal equity-backed buildings that function the inspiration for regional or nationwide MSPs. Platforms usually increase via a sequence of add-on acquisitions, bringing in smaller service suppliers. Investor curiosity in MSP platforms took off in 2018, together with the enterprise want for digital transformation, and has grown steadily ever since. People who launched just a few years in the past at the moment are being recapitalized for the subsequent wave of development. And new platforms are coming into the market.

The truth is, 2022 may see a report variety of platform launches, in response to Abe Garver, managing director and MSP group chief at Focus Funding Banking, a Vienna, Virginia-based M&A advisory agency. Anticipates 25 platform launches by the top of the yr; the earlier report was 21 in 2018.

Platforms develop in worth

In the meantime, MSP’s valuations are additionally up, in distinction to different IT sectors. Garver cited publicly traded SaaS corporations, a few of which have struggled with profitability, for example of a sector that lately noticed fairly a steep drop in valuations.

“For MSPs, we have really seen valuations go up this yr, with nearly each transaction we have completed,” Garver mentioned.

Trent Hickman, managing director of VSS Capital Companions, a New York-based personal funding agency, mentioned MSPs on the excessive finish of the standard vary proceed to attain superior valuations. He outlined MSP high quality not solely as monetary efficiency, but additionally as the standard of shoppers, the standard of companies supplied, and the power of contracts.

That being mentioned, immediately’s economic system will not be one the place a rising tide lifts all boats. “Corporations that are not as sturdy could also be much less prone to obtain the identical form of excessive valuations that we noticed a yr or two in the past,” Hickman mentioned.

Marty Flaherty, chief government of GP Bullhound, a expertise advisory and funding agency, additionally emphasised the significance of high quality in sturdy MSP valuations.

“Buyers are keen to pay good multiples for offers which are high-quality and that resolve a mission-critical want,” he mentioned, citing safety and information safety as examples. “Their focus from him continues to be profitability, recurring income, and buyer retention and growth.”

Personal fairness fuels platform development

The rise of platforms is among the many key MSP traits in recent times and a serious supply of trade development. The growth path begins with the primary personal fairness funding establishing the MSP platform. The platform then makes complementary acquisitions of smaller service suppliers to enhance natural development.

The platform technique helps entrepreneurs create a regional operation, constructing a longtime hub. That is the case with Cantey Tech Consulting, an MSP primarily based in Charleston, South Carolina. Earlier this month, the corporate acquired Palindrome Consulting, its first acquisition since receiving an funding in 2021 from LNC Capital Companions, a personal fairness agency that focuses on middle-market enterprise companies corporations.

Cantey Tech’s foremost growth emphasis is within the Southeast, though the corporate has thought-about offers from Texas to Virginia. Palindrome is headquartered in Hollywood, Florida.

“We’re actually centered on a geographic technique,” mentioned Willis Cantey, president of Cantey Tech. “We predict there’s plenty of room to develop there,” he mentioned of the Southeast, noting the area’s rising inhabitants.

The evolutionary path of MSPs has made them extra enticing to buyers.

MSP platforms are recapitalized

Such extra offers naturally result in bigger MSPs and, more and more, bigger buyers. Garver, whose firm suggested Cantey Tech on the LNC Capital and Palindrome transactions, mentioned an MSP platform will make an extra 4 to 5 acquisitions earlier than reaching a measurement that may entice the subsequent largest investor. That PE group recapitalizes the MSP, shopping for the unique monetary accomplice.

Entech, a cybersecurity service supplier and MSP in Fort Myers, Fla., is following this trajectory. The corporate mentioned final week that it has recapitalized with Prospect Companions, a personal fairness agency that focuses on pre-midmarket corporations. Entech goals to speed up its acquisition technique within the Florida market.

Synoptek, an Irvine, California-based MSP, recapitalized in September. In that transaction, Sverica Capital Administration, the corporate’s former personal fairness accomplice, bought a majority stake to Quad-C Administration.

Drake Star, a New York Metropolis funding financial institution that suggested the MSP on that deal, cited Synoptek amongst greater than 365 digital companies M&A transactions it tracked within the third quarter of 2022. The companies sector Digital consists of managed companies and different areas comparable to enterprise course of outsourcing and digital transformation companies. Drake Star recognized extra accomplice ecosystem offers within the second quarter — greater than 375. However the firm’s third-quarter deal quantity replace cited continued momentum “regardless of the present macroeconomic local weather.”

Service suppliers present resilience

The financial setting, which has seen layoffs amongst main expertise corporations, seems favorable for MSPs. Service suppliers supply clients the power to dump costly IT features to keep up in-house when occasions get robust. “The extra corporations begin to battle, the extra they downsize staff and outsource to MSPs,” Garver mentioned.

Outsourcing “must be a tailwind for the broader MSP market,” Flaherty mentioned.

Cantey cited cybersecurity as one other issue driving demand for MSPs. “Subsequent yr, safety compliance will proceed to drive development, together with cybersecurity insurance coverage necessities, which have gotten extra stringent,” Cantey mentioned.

MSPs, in fact, can’t fully override financial circumstances. Hickman mentioned that MSPs are usually not essentially countercyclical, as they develop quicker throughout a downturn than they’d in any other case. Relatively, it’s extra the case that stronger MSPs can extra simply navigate financial headwinds. A big recession would make some MSP shoppers undergo, creating damaging strain on service suppliers, he mentioned. Alternatively, one other group of shoppers would possibly see outsourcing as extra enticing due to the potential for price financial savings, she mentioned.

For MSPs, the damaging and optimistic parts may “steadiness out to a big diploma,” Hickman mentioned.

Teams in search of MSP offers shall be maintaining a tally of resiliency and paying shut consideration to the gross sales pipeline.

“Buyers, throughout the board and within the MSP and SMB house as properly, are inspecting gross sales cycles, in search of indicators of elongation and making an attempt to determine how that may move via future earnings and new offers,” Flaherty mentioned.

Buyers are additionally “exploring particular end-market dynamics, particularly given the truth that we could enter a recession,” he added. As for particular verticals, Flaherty mentioned that retail, for instance, may obtain the next stage of scrutiny than different markets, comparable to training.

The most important funds are chasing a restricted provide

Rising demand for companies, and the ensuing enhance in month-to-month recurring income, helps preserve valuations for the MSP platform wholesome, a sample additionally seen two years in the past amid the COVID-19 economic system. The arrival of buyers with deeper pockets additionally performs a job. Garver mentioned he has seen the dimensions of personal fairness funds within the MSP platform market increase, from $500 million just a few years in the past to $1.5 billion immediately. Nevertheless, these bigger personal fairness companies are demanding bigger and bigger MSP property, that are in restricted provide, Garver mentioned. This imbalance helps preserve valuations up.

“There are extra personal fairness {dollars} making an attempt to get into fewer potential funding targets,” Garver added.

Personal fairness teams can discover methods round MSP measurement limitations. For instance, an investor would possibly pursue a merger of equals deal, shopping for and mixing two MSP platforms to craft the dimensions of property he seeks to finance, Garver mentioned.

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