MSPs Increasingly In-Demand For Private Equity Firms

Managed service provider acquisitions are on the upswing, as a smorgasbord of private equity firms hope to construct large-scale platforms with expert-level IT and streamlined technology. MSPs are often contracted at a base fee to oversee a business makeover, and the monthly recurring revenue model for engagement accounts for over 50% of MSP profits. Private equity firms practically salivate at the consistency of this pricing, as the through line carries over to the customer base.

An MSP company usually has $2 million of EBITDA operational value, so a merger or consolidation of several platforms is necessary to punch up into the PE space. The majority of MSPs are unable to reach the $5 million benchmark that might preclude buyouts, team-ups, or other self-preservation tactics. However, the diverse nature of the business lends itself to an ideal model: a prolific combination of MSPs forming a wide-reaching conglomerate with services for every imaginable need.

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A marked increase in ownership deals for MSPs points to persistent PE aggression, as the industry’s heaviest hitters vie for the cooperation of in-demand service providers. There are only so many MSPs worthy of taking on significantly scaled-up projects; 2021 promises an even tighter race as those that can handle volume are already being retained left and right. The buy and build attitude of PEs is igniting a wildfire of hefty MSP appraisals.

Over 60 MSPs have been acquired by PE firms in the last four years as of February 2021, reported by Focus Investment Banking, with the average amount of add-ons for each being three to four. Focus has played an advisory role for ICS Managed Services and half of the MSP platforms founded in the continent in 2020. Principal of Rosewood Private Investments Briton Burge said, “We believe that the tailwinds will continue to drive investor interest and activity in the space. Given the fragmentation of the market, we believe we will continue to see consolidation among regional and national players.”

Additional expertise or programs developed within an MSP maximize value on the market. MSPs unwilling to expand their portfolios risk falling by the wayside, as giants like IBM absorb smaller, specialized BUs to achieve domination in the subcategories of managed service. The older acquisitions (from 2014 to 2017) survive through these add-ons, and some have the potential to reach $15 million EBITDA because of strategic adaptation. The proliferation of nebulous cyberattacks among multiple sectors makes MSPs (in this case MSSPs) with security specialization all the more attractive. Recurring revenue can rise from 80% to 90% for providers staking their reputation on data and identity protection.