Not a Big PE Fan? Consider Small PE Instead

The Federal Reserve left short-term interest rates, which it’s raised 11 times in roughly as many months, unchanged this week. Unfortunately for anyone with a business model dependent on borrowed funds—like, say, private equity firms—“unchanged” in this case means the highest levels seen in over 20 years.

The predictable consequence has been a massive slowdown in M&A activity. And in case that wasn’t discouraging enough for the PE sector, the same FTC trying (and largely failing so far) to tame Big Tech may have Big Equity and the rollup strategy it so eagerly applies to MSPs and others in its regulatory sites.

Perhaps the time is right, at least when it comes to managed services, for some Small Equity. Or at least smaller.

I’ve written several times this year about alternatives to Big Equity and its go-to “buy, standardize, integrate, and flip” model, including Evergreen Services Group and Meriplex. Two additional and equally interesting examples of that phenomenon have more recently come on my radar.

The first is Worklyn Partners, a fledgling private equity firm co-founded by Johnny Lieberman and Zack Miller (“Worklyn” is a mashup of Worcester, Mass., and Brooklyn, where their parents hail from). Miller (pictured) dreamed up the company’s strategy while helping elite security management consultancy The Chertoff Group negotiate acquisitions of promising young cybersecurity vendors. “I fell in love with the whole process,” he says.

He also spotted an untapped opportunity. “We were seeing a lot of companies that are too small for us even and not growing fast enough for venture capital, but they were good founder-run businesses with sticky customer relationships providing real value to their customers,” Miler explains. “We can be super value-add for that kind of company.”

And that company’s clients. Worklyn’s vision, funded by “family offices and a number of high-net-worth individuals,” according to Miller, is to acquire businesses with perhaps a few million dollars of revenue that collaboratively deliver comprehensive, security-heavy services to mostly midsize end users.

“Once you get below 1,000 seats, there are a lot of companies out there that aren’t getting the right kind of cybersecurity support,” Miller observes.

Worklyn has purchased three companies so far, two MSPs and an MDR provider named Quadrant Information Security. Ultimately, it plans to build three mutually reinforcing platforms in cybersecurity, IT services, and IT staffing. Founders who become part of them will keep their brand and continue using whatever tools they like. All they’ll give up in return for the money they pocket is responsibility for functions most of them don’t enjoy anyway, like marketing, hiring (hence the IT staffing platform), and accounting.

That’s a formula many MSPs find more appealing than becoming part of a big master-branded rollup with standard operating procedures and tech stacks, according to Alysia Vetter, vice president of marketing at IT community The ASCII Group, which has forged an exclusive partnership with Worklyn aimed at connecting the firm with member MSPs considering a sale.

“They’re not looking to change operationally what makes the MSP great in their market,” she notes. “That’s what we like about them.”

That and the chance they offer IT providers without giant EBITDA numbers to enjoy the same opportunities as larger peers. “They want to buy good small MSPs,” says Alan Weinberger, ASCII’s founder and CEO. “That’s generally not available to the industry.”

Worklyn has a huge selection of acquisition candidates more or less entirely to itself for precisely that reason. “It’s not worth it for the big private equities to put in anything less than $25 or $50 million,” Weinberger observes. Miller, who has friends at conventional PE firms, is well aware of how much that holds them back.

“Every fund wants to buy the next $100 million revenue MSP, and they’re always asking me where they are,” he says. “I’m like, ‘guys, there’s really not very many of those.’”

Worklyn expects some of the owners it buys from to be seeking an exit. It hopes more of them, however, will be looking instead for a well-capitalized business partner more interested in building something than in turning a quick buck.

“A typical private equity fund’s got to get in and out in three to five years,” Mlller says. “We have a longer-term investment horizon.”

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How about a No Equity alternative to Small Equity

At the other end of the acquisitions spectrum, Fulcrum IT Partners is offering significantly larger MSPs a similar value proposition.

“We’re looking for the owner that wants to stay engaged in the business,” says Kelly Carter (pictured), the company’s chief strategy officer. “They have built great brand equity in the market, have built their leadership teams, have put the sweat equity in to get to where they are today, and they want to take it further, but they need help to accelerate that growth.”

The companies Fulcrum buys tend to have experienced a lot of growth already judging by their top line. “Somewhere between $50 million and $200 million is our sweet spot,” Carter says, “but then we have things in the pipeline that are up to $750 million.”

Rather than PE funds or the kind of deep-pocketed investors Worklyn partners with, Fulcrum raises the money it needs to fund big purchases from many of the same sources Carter got to know in her previous job as CFO and vice president of Ingram Micro Canada. “I’m continuing to work with some of the traditional finance partners in the channel that I’ve worked with in the past,” she says, including Ingram itself.

The company’s goal is to assemble a family of IT providers with complementary skills in high-growth disciplines. Stoneworks Technologies, for example, is strong in cloud computing and AI. iON United specializes in cybersecurity. Fulcrum cross-sells the expertise contributed by those holdings and others to build and then maintain customized solutions for retailers, healthcare organizations, manufacturers, and other mostly mid-market businesses.

“They’re all looking at how do we do more without hiring bigger staffs of people to manage it all internally,” Carter says. “We think it’s a huge opportunity.”

So do the firms Fulcrum acquires, which would otherwise have to cultivate multiple capabilities themselves to deliver solutions. “This gives them a way to do that as part of a larger organization, versus having to make all that investment and do that heavy lift completely on their own,” Carter says.

Partner companies continue operating under their own brand and need never adopt new tools or embrace new operational processes unless they wish to. “I’ve been in the channel a long time and I’ve seen partners sell out to private equity,” Carter says. “You lose your business. Here you not only retain your business, but you’re gaining this network of people that are all working together towards the same goal.”

And sharing financial rewards along the way. In addition to the money they make selling their business for its present-day value, acquired companies get a piece of the action on Fulcrum’s longer-term growth.

“That gives them an opportunity to have success beyond what they could ever do on their own and beyond what they’d have if they sold to private equity today,” Carter says.

Why managed service providers are providing more solutions and consulting

Fulcrum is betting big on solutions for lots of good reasons. Profitability, not unexpectedly, is high on the list.

“It’s definitely more valuable for us in terms of margin when we’re truly bringing solutions and managing solutions versus just selling commoditized products,” Carter says.

A lot of others in the channel have reached the same conclusion based on research published by TD SYNNEX this week, which shows that 80% of MSPs are adding solution capabilities in areas like analytics, AI, and augmented/virtual reality.

“They’re looking for elements that give you more differentiation,” explains Sergio Farache (pictured), the distributor’s chief strategy officer. The same logic explains why 65% of MSPs are investing in business consulting and business planning skills, he adds. “They need to find ways to be more profitable, and the only way that they can do that is with more services.”

Profits, moreover, aren’t the sole reason MSPs are honing strategic know-how. According to Farache, there’s increasingly no other way to meet client expectations at a time when IDC expects global outlays on digital transformation to reach $3.9 trillion by 2027. Businesses responsible for that spending couldn’t care less which products an MSP sells, he notes. “They care about the problem they need to solve. That’s challenging the partner to take a more consultative approach.”

TD SYNNEX can help, Farache continues. The company’s “Practice Builder” courses teach partners to launch service offerings in fast-growing fields like cloud computing, IoT, and security, as does the “Destination AI” program the company introduced in August.

“MSPs realize that they need to specialize, and to specialize they need to create practices,” Farache says. “Now more than ever you need somebody to help you transition to those areas.”

Someone you can outsource tasks like security assessments and cloud migrations to when needed can be useful as well. “We’ve been growing and expanding our services capability to offer backend support,” Farache says. If the data TD SYNNEX shared this week is correct, that was a wise decision.

Is this the mysterious bombshell Kaseya has coming next April?

Regular Channelholic readers will recall the hints Kaseya CEO Fred Voccola recently dangled my way about what will supposedly be, when it happens about six months from now, “the most impactful and largest announcement that the MSP channel has ever heard.”

Well, during a Q&A session this week at the Channel Futures Leadership Summit in Miami Voccola discussed a forthcoming corporate branding campaign called “Powered by Kaseya” that he said will debut at the Kaseya Connect Global 2024 conference in Las Vegas…about six months from now.

“That will disrupt the entire industry and that’s why end customers are going to start to look for MSPs powered by Kaseya, the same way that we bought a PC 15 years ago powered by Intel Inside,” he said per Channel Futures reporting by my erstwhile ChannelPro colleague Jeff O’Heir.

Is that the blockbuster news I was told to anticipate? I doubt it. For one thing, the company has been talking about “Powered by Kaseya” and likening it to Intel Inside for months already. For another, Voccola spoke this week about “Powered by Kaseya” helping MSPs double EBITDA and reduce cost of goods sold by 20-25%. That doesn’t sound like the kind of thing a branding campaign typically does on its own.

Voccola told me that what’s coming in April will “fundamentally alter [an MSP’s] economic model, their service delivery model, their customer experience model more than anything that’s ever been done.” The “Powered by Kaseya” campaign might be part of it, but I suspect there’s more we don’t know about yet.

I also suspect, for whatever it’s worth, that the something more Kaseya has coming is related somehow to the help desk services it officially introduced yesterday. What would it do for your economic, service delivery, and customer experience models, not to mention your EBITDA and cost of goods sold, if Kaseya gave you outsourced Level 1 help desk support for free, or something close to it, in exchange for a multiyear commitment to a big bunch of its products? Just asking.

Also worth noting

Good news for Syncro users who appreciate the logic of tightly integrated backup and security functionality. You now have access to the Acronis Cyber Protect Cloud platform.

MSP360 has partnered with service provider iT1 Source to bring its BDR platform to business buyers.

One PDU to rule them all! Eaton’s new G4 rack power distribution unit is designed to fit well in data centers and edge facilities alike.

HPE’s Partner Ready Vantage program for as-a-service partners has a new rapid migration tool, new support for Aruba networking products, and more.

Proofpoint has bought Tessian to beef up its AI-powered email security capabilities.

The gap between the number of cybersecurity pros the world needs and the number it has was massive before this year. Now it’s even massiver, according to ISC2.

Congratulations to Tracy Hali, Holly Hunt, and Kathryn Rose for winning LEAD Awards from the Alliance of Channel Women and to Madison Beedy, Sommer Figone, Vicki Patten, and Alexie Teferi for winning ACT Awards.