Investors’ enthusiasm for managed service providers (MSPs) has never been greater. MSPs’ recurring revenue models and their enticing margins have attracted growing numbers of investors to the sector with fierce competition for the best assets.
The conference took place against a backdrop of disruption and deal-making amongst MSPs, which are consolidating and transforming to embrace opportunities such as cloud, cybersecurity and the as-a-service phenomenon. Livingbridge's investment earlier this year in one of the largest independent security services companies in the UK serving FTSE 250 organisations, Adarma, is just just one example of activity in the industry.
Private equity investors are especially interested in fast-growing, smaller MSPs that are more agile than larger players with legacy IT structures, the panel argued, as they discussed how MSPs can maximise their value. Mo also urged MSPs to think about what investors could add to their businesses in addition to capital investment at a high valuation. “You want someone who’s going to add value to your business and who has some experience,” he said.
Mo’s contributions to the discussion featured his own insights on maximising value at MSPs, including:
The importance of quality
It’s certainly the case that MSPs are attracting ever-increasing investor interest, but the term is a broad one and smart investors are looking for certain key attributes. In Livingbridge’s case, the best MSPs can demonstrate high-quality earnings, with recurring revenues and good margins secured through contracts with customers; that requires high standards of customer service – demonstrated through strong customer retention rates and high net promoter scores (NPS). Livingbridge looks for organic growth rates of above 10%.
The right customer proposition
MSPs have the potential to become trusted business partners to their customers, rather than commoditised service providers. But that requires businesses to understand their customers’ needs in more depth, with a proposition designed around the client’s strategy and business model. Get it right and an improved customer experience and increased productivity will drive revenues and profitability.
The need for focus
Expertise in a particular sector or capability will help MSPs to stand out in a crowded and disparate marketplace. They’ll win new clients at a faster rate, building a solid base from which to expand further and broaden the proposition.
The value of the right investor
With so many private equity investors circling, the best MSPs can expect to command higher valuations – in this sellers’ market, they naturally have more power. However, the right partner will help the business continue to grow rapidly over the medium to longer term; that requires sector expertise, a high-quality network and the ability to offer value-enhancing support and advice, in addition to deep pockets.
If you own an MSP business and would be keen to discuss the valuation of your business or how we’ve helped similar businesses in the past, please get in touch on email@example.com.