The MSP software industry has been dominated by private equity. ConnectWise, Datto, Kaseya, N-Able, Pax8 and so many more software companies that serve the MSP space have been acquired by private equity in the last 5 or 6 years. This is also the case in cyber-security. “Thoma Bravo has one of the largest cybersecurity portfolios in private equity, representing approximately $47 billion in total enterprise value.”
Regarding ConnectWise, it has been 5 years since Arnie sold his company, which is a long time for a PE firm to hold an investment in a portfolio company. This from Channele2e:
“ConnectWise is also at a different crossroads. Five years has passed since Thoma Bravo acquired the company (for $1.5 billion, according to ChannelE2E’s estimates at the time. Here’s where we got that number.), putting it in the time horizon for the PE firm to be looking to sell the company now and looking for a price of at least $4.5 billion. But the market right now hasn’t been favorable to PE firms looking to exit. It’s unlikely Thoma Bravo could get the multiple it wants on its purchase price by selling ConnectWise right now. The PE firm could combine ConnectWise with another company to increase the value, or it could invest and wait for the market to improve, or it could take ConnectWise public in an initial public offering. Right now the trajectory is unknown.”
Another MSP software platform, N-Able, is owned by 2 PE firms – Silver Lake and Thoma Bravo – and a third of it is public?! The PE firms are trying to sell it to Barracuda Networks, which Thoma Bravo owned but sold to KKR. I guess they are trying to get the rest of their investment/profit out of N-Able now.
Private Equity in the Agent Channel….
Recently on a channel round table there was mention of a PE-owned “super-agency” that was up for sale. This company announced its PE investment in 2021, so the 3-year cycle is about up. Most PE investments are 3 years, but some can go 5. Other investor types are in for a longer time frame, but PE is about quick turns in technology.
Let’s look at Red Lobster, Golden Gate Capital acquired the restaurant chain in 2014 for $2.1B. Golden gate sold the real estate that the restaurants were on for $1.5B and the restaurants were saddled with high rent payments as well as the debt from the buyout. Add in that the changing habits of the restaurant customer and you can see why Red Lobster collapsed.
Per NBC, “Asset-stripping occurs when an owner or investor in a company sells off some of its assets, taking the benefits for itself and hobbling the company. This practice is favored among some private-equity firms that buy companies, load them with debt to finance the purchases and hope to sell them at a profit in a few years to someone else.”
In the late 1980s, KKR bought RJR Nabisco in the largest deal ever at the time. It was an LBO – a leveraged buyout. A whole book was written about this deal and it became a MBA case study across business schools in America.
I know that I harp on PE in our industry often, but it has more to do with a warning than a dislike. Look, a telecom agency whether it is a TSB/brokerage or a “super-agency” mainly selling directly to customers have just 3 possible revenue streams: commissions from sales; marketing funds from vendors; and events, which is an extension of the marketing funds.
A TSB can make a healthy profit at an event. Conferences are a healthy business. Informa, TMC, The Channel Co., ASCII, Robin, ConnectWise and many more businesses in our space, make bank putting on events/conferences. But even if the TSB only ekes out a tiny profit, at least they don’t lose money on their event program.
The MDF game is big because when you have 200-500 vendors vying for attention and access to the selling partners, you can make some bank. In fact, at least 2 in our space pay a 1% override to marketing on MDF funds collected. MDF is the only income stream that can go up exponentially without more bodies. A TSB can add an unlimited number of vendors to their portfolio. If a TSB started with 150 vendors and added 50 more at just $500 per year, that is $25K. Take in at least $500 in MDF in from 400 vendors and $100K in from 4. BINGO!
The commission piece is hard. Chasing commissions is a grind. And when the splits have gone from 70/30 to 90/10 as the average sales size has also declined, it becomes a grind for pennies. The telcos will tell you that wireline revenues have been declining for years. Verizon Business just wrote off $5.8 Billion. “The write-down is primarily linked to Verizon’s legacy wireline operations, which provide fixed-line communications services to businesses.” Lumen, AT&T and every other ILEC have seen MPLS, T1, POTS, DSL and other legacy circuits disappear. In the process, customers usually buy from a different vendor for broadband, SD-WAN, cell phone service and fiber.
Dedicated Internet rates are also in decline. Renewals are almost always at a higher speed for the same rate or at a lower rate.
UCaaS has recently come under the same price compression. Zoom and now NICE are helping that price free fall with sub-$10 UCaaS seats. BTW, even Contact Center seat pricing is shrinking!
So if UCaaS, CCaaS and wireline are declining, partners need to sell more and more every year in order to maintain or grow its revenues. That is a lot of transactions!
<This is all FYI.> The only public TSB reporting 3rd Quarter earnings: “Net billings for Intelisys increased to approximately $2.68 billion annualized, and Intelisys net sales for the third quarter increased 4.0%.” Do growing at the GDP speed. The investor prezo says that recurring revenue is at $108M for fiscal year 2023. I think that is the part of the commissions that they keep. Means the commissions are about $500M+.
Four percent growth isn’t what investors were looking for. But then stock holders of 8×8, RNG, Lumen and the like aren’t exactly happy either.
If the average investment is a $36M loan (a number I am spit-balling) at 12% APR (as per SEC filings from AB), the interest alone is $4.3 Million per year. I’d take a 12% credit card right now, but not a 12% home equity loan!
Upstack has 188 “employees” per LinkedIn. Telarus as 493. Avant has 260. That is a lot of payroll!
Sales Engineers, Partner Managers, Channel Managers, tech & dev people for the portal, vendor relations, marketing, events, Commissions, ordering, Cable and M&A – that is a lot of folks that need to get paid.
Upstack acquired about 30 agencies since 2021. Bluewave has done fewer deals. Bridgepointe has done about as many. These deals put selling partners under the umbrella of the super-agency. They share some back office support to save a few dollars. They get a lottery ticket on the eventual exit event, much like TNCI in 2011. TNCI had an equity play but was mismanaged and the business plan smelled bad to me from the start. Did any partner remember when TNCI tried to recoup commissions from partners as part of its bankruptcy?
No one is really certain how all this plays out. I am certain based on 24 years of being a telecom agent, consultant and startup mentor that the partners will end up wondering WTF happened?
If one PE-backed firm is struggling to re-package that business for resale, then other similar businesses in that same niche will also struggle to exit.
On the round table, Adam from Telarus did mention that there would be more TSB consolidation. I assume that means Columbia Capital, who invested in both Bluewave and Telarus, is in talks to scoop up any troubled assets in our world.
Hedge your bets folks.
BTW, I use TSB for Technology Services Brokerage because like insurance the former master agencies broker services, they do not distribute anything but commission checks to the selling partners, so TSD is a misnomer.
FYI..
Intelisys is owned by a publicly traded company, Scansource. Sandler Partners is privately held and Alan Sandler tells me he has no reason to sell — and I believe him! AppSmart is now AppDirect owned by a handful of investors who plunked down over $450 Million in investment. Avant and Amplix have PE money. Clarus/TDM is private.