Changing MSP Buyer Pool Creates Uncertainty in the Market

Consolidation of the managed service provider (MSP) space continues to fuel competitive M&A activity by financial sponsors and strategic buyers alike. While the value of MSPs has not wavered, the pool of buyers is changing and in certain parts of the market, buyer interest is even on the decline.

There are a number of factors driving this change in the market. Michael Birmingham, Managing Director in FOCUS’ Technology Services group says “Buyers are increasingly looking outside the U.S. into Canada, Europe and Australia, which is in turn is creating muted processes for US based businesses looking to sell. This trend has had an outsized impact on processes involving smaller businesses with less than $4 million in revenue and $1 million in EBITDA.”

MSP growth in foreign markets is driven by greater asset availability and lower asset prices. In other words, buyers are starting to look outside the United States to expand into new markets at lower cost. Barry Madden, based in Dublin, IR and Managing Director at Focus Capital Partners, says “Ireland and the UK have seen some level of consolidation in the MSP sector, but there is still a strong pipeline of opportunities, particularly for sub-€1.5 million EBITDA, high-quality, multidisciplinary assets”.

Over the last five years, US based MSPs sold at record numbers and now there is a shortage of investable MSP assets in the $2 – $5M range. This is not the case in relatively untapped foreign markets. US based assets that are available are likely already PE-backed and come at a significant cost or are still in the processes of digesting add-on acquisitions and have not fully operationalized contemplated synergies.

The pool of buyers of MSPs is also changing. Though PE-backed strategics and private equity firms remain aggressive to pursue IT services businesses to launch new platforms, the number of private equity groups leaving the IT services space now outpaces new buyers.

Furthermore, new entrants in the space have watched and learned from previous consolidators. These lessons learned have better positioned and equipped new buyers to more thoroughly evaluate investment opportunities and gauge what an MSP is truly worth. This, in combination with more buyers now looking for acquisition opportunities outside North America, has created a renewed urgency for US based MSPS that are considering a sale. As the window for competitive valuations continues to slowly close, there is risk to waiting and potentially missing out.

The good news is that valuations and interest remain strong for quality run MSPs in the United States. US MSPs with best-in-class metrics including recurring revenue mix, sustained year-over-year revenue growth, logo diversity, and defendable margins can still expect to see multiple competitive bids.

Partnering with the right investment banker and advisor can make all the difference as the MSP market continues to change and new macroeconomic factors begin to reshape the market. The MSP team at FOCUS Investment Banking works closely with businesses owners and potential buyers to leverage our collective experience across 27 successful MSP transactions to drive successful outcomes on behalf of our clients.