Growth, Fragmentation, Big Buyers Make IT Channel Attractive For Private Equity

High levels of fragmentation, market-leading organic growth, and the presence of rich strategic acquirers like IBM and Accenture make the channel ripe for investment, private equity leaders say.

Executives at Charlotte, N.C.-based Pamlico Capital, and Toronto-based Clarivest Group said the variance in performance among solution providers, combined with a desire to bet on emerging technologies make the IT channel an unparalleled opportunity.

"We're big believers in using the channel and solution providers as a derivative behind investing in some of these big, disruptive technologies like public cloud and subscription software," Andrew Tindel, vice president of Pamlico, said during XChange Solution Provider 2017 hosted by CRN parent The Channel Company.

[RELATED: Microsoft Azure Superstar 10th Magnitude Receives Private Equity Investment]

The essential nature of technology also makes purchasing a stake in solution providers a relatively solid bet, said Mohit Kansal, vice president of Clarivest, Monday during a breakout session at the Gaylord National Resort & Convention Center in National Harbor, Md.

"Technology is here to stay, and it's going to grow," Kansal said. "It's as important as the power in the office building, so it's going to be here forever."

Solution providers become valuable to large, rich strategic acquirers such as IBM, Accenture or the larger multinational outsourcing firms once they reach a certain size and have highly-developed skills in areas such as Microsoft Azure, Amazon Web Services, big data or the Internet of Things, Tindel said.

That's because customers of companies like IBM and Accenture have increasingly been turning to firms like IBM and Accenture and asking about Azure or AWS, Tindel said. However, those companies haven't historically had great answers to questions around Infrastructure-as-a-Service, so Tindel said they've been very active in the market acquiring smart, thoughtful solution providers.

Pamlico has, therefore, worked to put the pieces in place to build IT services companies to a size where they can exit deep-pocketed solution provider giants, Tindel said. The private equity firm invested in Microsoft Azure superstar 10th Magnitude of Chicago in October.

"As an investor, finding a company that's small but high-growth and helping shepherd it for a number of years to get it to the scale where it's on the radar of an IBM or Accenture is a way to collectively make a lot of money," Tindel said.

For Kansal of Clarivest, the presence of thousands of service providers across North America creates more opportunities for strategic acquisitions and taking share from competitors. Similarly, the variance in operating performance among solution providers targeting the same markets with similar products is also very appealing to outside investors, Kansal said.

"That just screams opportunity," Kansal said. "If you're able to back the right team with the right approach, you could do very well."

Additionally, Kansal said the IT channel gives private equity firms an organic tailwind since the industry average organic growth rates of 10 percent to 15 percent.

"There's not many industries left in North America that are growing at the pace that I think the channel is," Kansal said.

Virtual Density is looking to acquire several small managed service providers with management teams that are looking to exit the business within a year or two, according to Christopher Furey, managing partner of the Danbury, Conn.-based MSP.

Once Virtual Density reaches sufficient scale, Furey said he would be interested in seeking outside investment to help the company grow from a local MSP to a regional or even national one. Furey would like any potential investor in Virtual Density to be a true partner, working closely with the company to come up with strategies for winning in the marketplace.

"If you're going to take money," Furey said, "you want smart money, which means people that will be hands-on with your business."