The cloud infrastructure is having a profound effect on technology, from storage to bandwidth to scale to price.
In recent years, massive technological platforms (servers) have been made available to large and small customers alike. It is, in fact, one of the most impactful advancements in technology in recent years. Due to the massive scale of these cloud computing platforms offered by Amazon (AWS), Microsoft (Azure) and others, near infinite computational power is offered at a fraction of the price compared to just a decade earlier. Consequently, many applications that could not have previously existed (due to limited processing speed or scalable bandwidth requirements) may now exist economically.
10+ years ago, most companies owned their own servers. For small companies, this usually meant a server sitting in a supply closet that doubled as the IT closet. Because most small business owners have no idea how to maintain a server (software updates, security patches, installations, backups, etc.) and do not have the budget to hire full-time staff for this function, they would (and still do) hire outsourced IT departments to perform the required server maintenance – Managed IT services.
With the advent of cloud offerings in recent years, many companies are ditching their in-house servers and moving to the cloud. As much as we have heard about this trend over the past 5-8 years, initially, cloud migration was predominantly made by tech-savvy, early adopters. Now, it is en masse. Even small companies are opting for cloud technology rather than replacing an aging in-house server.
This trend forced a significant industry shift within the Managed IT sector as many of the firms offering traditional Managed IT services transitioned their business model to offer Cloud Migration services – helping companies make the transition from the server-closet to the cloud. There’s still a need for managed IT services, but more and more, the business opportunity for these firms is helping companies migrate to the cloud (in the most recent years, specialty firms have cropped up to provide software solutions that automate much of the cloud migration process)… and less about maintenance of in-house, on-site servers at these companies. In essence, Managed IT service providers are getting paid to reduce the traditional Managed IT needs of their customer base, which would initially seem problematic (and it is for those firms that have not adapted).
Smarter IT firms have transitioned with the changing times. Those who haven’t have been left to service a slowly decaying market.
Post-transition to the cloud, these vanguard Managed IT service providers now offer Cloud Migration and Cloud Services. This is because, even after a migration to the cloud, operating companies have discovered they still know very little about maintaining their server resources. It’s more of the same problem, just a different location. Perhaps it is easier to manage a cloud environment (because it is designed to be managed remotely), but it is not the typical skill set of an operating company to know their specific trade skills AND know how to keep their Amazon server resources running, secure and backed-up. It’s both beyond their expertise and beyond the scope of their desire to learn. The thinking is that the technology bit is often best left to the experts. This is fortunate for the Managed IT firms that have transitioned to Cloud Services firms. There’s still work to be done.
Given this background, I was interested in how these trends might show up in private equity investments in Managed IT and Cloud Services firms.
Private Equity Trends in Managed IT & Cloud Services
As a proxy for the private equity voice in these industries, I queried our Private Equity Database for those portfolio companies with either “managed IT” or “cloud services” in their business profiles. Here’s what the data shows:
Caveat 1 – these queries do not capture all PE transactions in this space, only those portfolio companies that contain these specific phrases.
Caveat 2 – for this study, I am only interested in those firms that provide outsourced tech support. I therefore specifically omit SaaS, IoT, software and similar companies from the data.
Caveat 3 – the data only includes platform investments and therefore excludes add-on investments.
Note – in this chart, negative counts imply exits.
Observation 1 – while Managed IT has been around for a long time, the private equity universe really began to invest in this space more heavily in 2016.
Observation 2 – although Cloud Services came later, it has been a more interesting sector for PE firms. Perhaps this is because it is more scalable. With traditional Managed IT services, oftentimes, the provider would need to visit the customer’s office in person. This makes Managed IT a more geo-fenced business and less scalable, compared to Cloud Services. The point being, private equity firms generally prefer businesses that scale easily.
Observation 3 – 2019 data only represents half the year and is therefore on track for the same approximate trends as 2018 (for both investments and exits).
IT-Total Sweden AB is a B2B-provider of secure and sustainable IT infrastructure services. The Company’s offering includes managed IT, data center and workplace hardware, software licenses and related IT consultancy services.
Carbon60 is a managed cloud services provider for SMB and enterprise customers. The company offers private, public and hybrid cloud services and a full suite of managed services including monitoring, performance optimization and testing, security, disaster recovery, back-up and CDN access. Carbon60 is also a provider of application hosting for content management systems in Canada.