From Channele2e: “Venture capital deal making had its fifth consecutive record year in 2018, with 14,889 transactions worth an aggregate $274 billion, easily surpassing the previous high of $192 billion set in 2017, according to data firm Preqin, Chief Investment Officer reports. All that VC money has put pressure on private equity firms to seek out alternative investments, ChannelE2E believes. And in some cases, that has led PE firms into the MSP market. That’s good news for MSPs, but we’re watching closely to see how all the M&A activity plays out…”
This is my guess how the new money in MSPs work out: it won’t.
Jay McBain made a prediction that the gig economy will affect tech services. This happened before (2006-2009) when everyone and their brother was in the IT space. The rates for RMM dropped out of the sky. Then it all fell apart.
Tech services require specific skills, especially in cyber-security. None of this scales well. Ask Fireeye.
You can scale monitoring, but not what happens when an alert hits. Not fixing things.
If things are going so well in the MSP space, why was there a shake up at Office Depot already?
I watched private money come into the ISP space. Nothing major changed. A bunch of ISPs cashed out. A few got bigger, but mostly nothing major changed. Not everything scales, creating efficiencies, which is where the arbitrage in roll-ups comes from. So without efficiencies, there is low return on investment.
You can scale mass market mediocre services, but only if you are an incumbent or a near monopoly does that allow you to ignore 30% of your customers. By having poor customer service and “creating efficiencies” in other departments, can you peel away some free cash flow (FCF).
The only thing that scaled well was dial-up. Ask EarthLink/Windstream.
If it scales up, it is commodity. Hence, the provider needs to keep making it efficient. How does that work with managed services? or IT?
Sure. We could Uber-ize the Geek Squad – and everyone can take a test to identify what skills they are qualified for (or utilize the CompTIA certifications), but it will only scale for low hanging fruit.
Already consumers balk at spending $75-$150 for a house call to fix a PC or a wi-fi problem or to set up home automation. You think Uber-Geek-Squad will Lyft that by accepting less?
“Private equity chief financial officers (CFOs) reported another year of unprecedented growth of their firms but are still struggling to overcome operational issues that are dramatically eroding their margins, according to the EY 2019 Global Private Equity Survey.” [source] Sustainable growth is hard. Scale is hard. Operational efficiencies are difficult. All three are needed for the private equity to get a return on MSPs.