The outlook for managed services providers (MSPs) remains positive, as increasing complexity and security concerns — driven by the work-from-anywhere environment and high-profile hacking incidents — have moved IT management from being a cost center to a core strategic priority for the C-suite.
A key driver of the growth of such providers is the fact that the requisite skills needed to manage and secure complex IT environments are in high demand, making it difficult for many businesses to develop and maintain internal IT teams that are up to the task.
As a result, an increasing number of companies will continue to outsource some, or all, of their IT management to highly skilled managed service providers. Some industry insiders estimate that only 30%-40% of the managed services market has been penetrated, so there is a huge gap that MSPs can fill.
Private equity investors have taken notice of these tailwinds and many are highly interested in investing in the sector, which will fuel the currently ongoing consolidation.
MSPs have all the ingredients that private equity loves — a strong demand trend, low risk of obsolescence, a “sticky” service that attracts long-term customers and high recurring revenues, strong cash flow margins and a relatively “asset-light” business. In addition, with approximately 40,000 MSPs in the U.S. [as of 2019], the industry remains very fragmented, leaving massive opportunities for private equity players to build large companies via acquisitions.
Many private equity firms are already invested in the sector. Cowen tracks approximately 50 private equity-owned MSPs, many of which have already acquired other MSPs. The table below shows a few such private equity-backed MSPs that are expected to be catalysts for continued consolidation in the sector. Most of these firms have already completed multiple acquisitions.