The Secret Ingredient to MSP Platform Success?

The 20 and rollups like it say integrated everything is the key to big money in a platform sale. Plus: D&H seeds AI confidence, Kaseya invests (more) in networking, and SaaS Alerts goes managed.

Abraham Garver of FOCUS Investment Banking is rarely wrong about anything concerning M&A in managed services, so I didn’t really need confirmation of his recent observation that we’re in the early stages of a “platform grab,” in which the multi-MSP rollups created (mostly) by private equity firms are buying each other up.

But I got it this week anyway in the form of a presentation by Barrett Kingsriter, senior managing director and founder of M&A advisory Pinecrest Capital Partners, during The 20’s annual Vision conference in Dallas. More than half of M&A deals in managed services over the next five years, he predicted, will be PE platform owners selling upstream to even bigger PE platform owners.

It’s not hard to figure out why, he added. “There are a hundred unique private equity firms that are invested in platform deals in this industry today, and some of them have been in these deals for a long time,” Kingsriter said. That’s a lot more players than private equity typically likes to see in an industry, especially when a lot of impatient limited partners are eager to cash out.

Plus:

• There’s a near-record amount of “dry powder” (committed but as yet uninvested capital) looking for places to go, some $965 billion of it in fact, according to PitchBook.

• That money is accumulating in larger and larger funds. Per PitchBook as well, so-called “megafunds” worth $5 billion or more at launch are responsible for 47.3% of total capital raised through the first half of the year.

• In jittery economic climates like ours right now, investors embark on a flight to safety. “They look for mission critical services, recurring revenue streams, things that businesses and people cannot do without,” Kingsriter said, making MSPs an even more attractive investment thesis than they already were.

All of that implies that giant deals like Ntiva’s acquisition of The Purple Guys in April are going to become increasingly common going forward as private equity’s stake in managed services consolidates. But it also implies something else about those forthcoming deals, according to Kingsriter and others I spoke to at Vision this week, with potentially significant implications for MSPs, MSP rollups, and private equity firms invested in them.

The most prominent of those “others” I just alluded to is Tim Conkle (pictured), CEO of The 20, who has figured in this blog multiple times in recent months (and who I recently interviewed about this exact topic in a recent episode of the podcast I co-host).

That giant Ntiva/Purple Guys deal? Not a platform grab, he says, so much as a “bolt-on.” To be a platform grab, The Purple Guys would need to have been a platform, and it wasn’t by Conkle’s definition of the term. And while bolt-ons, he contends, may sell for tens of millions of dollars, they won’t get the top-tier multiples that platforms do.

Platforms like, say, The 20.

As we’ve discussed numerous times here, there are several models at present for scaling in managed services. All of them involve acquiring and combining a bunch of local, independent MSPs, usually with support from private equity (though The 20 relies on cash flow and bank loans to fund its purchasing instead). Some such acquirers allow portfolio companies to retain their brand, their culture, and at least some of their policies and processes. Those rollups though, according to Conkle, aren’t platforms, no matter how many cities they operate in, how many clients they have, or how much MRR they collect.

“It’s no longer revenue that makes you a platform,” he says. “You’ve got to at least be completely integrated across your stack.”

And he really does mean “at least.” A platform, Conkle and other like-minded MSP rollup builders argue, must have one toolset, one brand, one set of processes, one set of contracts, one HR team, and one everything else, or it’ll sell for the lower sums that bolt-ons receive.

If he’s right, the repercussions are kinda huge, for rollups and MSPs who join one in hopes of collecting a “second bite of the apple” when their new ownership sells to someone even larger later on. For years, we’ve been told that the keys to a big payout when selling an MSP are recurring revenue and EBITDA. Kingsriter, during his keynote, pointed to two other variables that PE firms eye carefully as well.

“If you see a company that is growing at a greater than 10% annual rate over a longer period of time, at least three years, and also has a high degree of [client] retention so that our growth doesn’t have to simply overcome attrition in our customer base, these are the companies that are going to get the highest valuations,” he said.

True before, true today, and still likely to be true tomorrow. But if Conkle’s definition of platform is the correct one, MRR, EBITDA, growth, and retention all become necessary contributors to rollup success, but not sufficient. The real platform grab winners will be rollups with standardized everything.

It’s all about efficiency

So is Conkle right? According to Kingsriter at least, yes.

“Valuation, I would say, is probably 20% on average higher in businesses that have full integration of their technology solutions,” he told Vision attendees this week. “It might be higher than that, but assume about a 20% premium.”

Fred Voccola (pictured right), CEO of Kaseya and also a speaker at Vision, is seeing the same thing.

“The MSPs that are being successful in doing rollups, or platforms, are people like Tim who mandates that everything is done the same way,” he says, adding that rollups without that kind of “operational rigor” often fall short of their exit goals.

To be clear, the issue here isn’t that PE firms buying rollups have a mania for uniformity. It’s that’s highly uniform rollups tend to be more efficient.

“Let’s say you’ve come together with five different acquisitions and you haven’t integrated how you price for your offerings,” Voccola explains. “Well, now you need a finance department and an accounting department and a billing department that are much larger because you’re accounting for five different business models.”

Kingsriter cited uniform data as a similar case. “Private equity is really keen on this topic because they have a limited amount of time to underwrite deals,” he said. “Timely access to cohesive data is really critical.” If it’s not available already at close, making it available will be among the first things the firm does after completing a purchase, and it will deduct the cost of that work in advance from the sale price.

That’s a prospect worth at least considering if you’re a rollup pondering an eventual sale to someone even larger—or an MSP pondering a sale to a rollup.

If you’re happy running a nice little company, Conkle observes, none of this matters. “If you want to be a nice big company, you’ve got to stop doing things the way you’re doing it.” And that, Conkle believes, means embracing someone else’s blueprint for running a managed services business.

D&H seeds AI confidence

The maximum speed a typical adult skydiver in belly-to-earth position attains while in freefall is approximately 120 mph. Vince Poscente, who keynoted at Vision this week 32 years after competing as a speed skier in the 1992 Winter Olympics, reached just under 135 mph during his one and only run. He finished 15^th, and would almost certainly have done better if not for an unexpected bump on the slope.

The man has some experience with conquering fear in other words, and had this to say about it: “When fear is high, confidence will be diminished.” And confidence is an essential part of success in any venture.

Which speaks volumes about where MSPs are in their journey to AI at present, it seems. Interest is high, but so is fear. “It’s scary,” Conkle says. “You might fail.” And that possibility is producing an endemic lack of confidence among MSPs and solution providers in their ability to deliver AI-related services.

D&H is well aware of the issue, and sympathetic to its origins. MSPs in particular ask customers to entrust them with everything IT, observes Peter DiMarco (pictured), the distributor’s senior vice president of commercial sales. That’s something they’re unlikely to do without confidence in you, and that you’re unlikely to offer without confidence in yourself.

“You live and die by confidence. It’s got to be 100%,” DiMarco says.

As a result, he continues, D&H partners are being “methodical” about their approach to AI until their familiarity with the technology and its applications is high enough to ensure they can keep the AI promises they make to their clients.

“Most of them are in research and building mode,” DiMarco says. “There’s a big need for knowledge to really engage end customers in meaningful conversations right now, and so that’s what really drove the content that we’re providing in Anaheim.”

Or rather “provided” by the time you’re reading this. D&H held the latest in this year’s series of THREAD partner events in Anaheim earlier this week, and it included plenty of AI-focused sessions, including content on AI PCs.

“We expect the majority of our endpoint client shipments to be AI-enabled over the next few years,” DiMarco says, largely due to end user interest in Microsoft Copilot. “It’s kind of a front and center practical application that everybody can potentially use right inside of their endpoint or their client device, and so a lot of partners want to put together use cases [and] build a practice around it.”

Many are thinking about building practices in AI security too. “As we know with large language models and AI tools, they can do bad things with data if they get in the wrong hands,” DiMarco says. “Protection all along the way from the endpoint through the network to the data center to the data that actually sits in a cloud workload is critical.”

More mature partners are looking beyond Copilot and security toward customizing and constructing AI solutions for clients, often using Copilot or other Microsoft solutions like Teams as a foundation. “There are larger system integrator partners and VARs that are building entire AI practices rooted in application development,” says DiMarco, who hints that D&H will soon start helping less sophisticated partners do the same.

“It’s not something I can talk about right now, but we’re looking at more advanced cloud solutions and being able to deliver applications to market that are AI-enabled on behalf of our infrastructure partners like Azure as an example,” he says.

Not that D&H needs such offerings, apparently, to keep its commercial business humming. SMB revenue is up 43% so far in the fiscal year that began May 1^st.

“We’re seeing tremendous growth,’ DiMarco says.

Kaseya’s still interested in networking

May you live in interesting times.

Odds are good you’re familiar with a (supposed) curse to that effect. Marcus Ward certainly is. As we’ve written before, he was running Datto’s networking unit during the busy month of June 2022, which began with Datto announcing plans to discontinue much of its network hardware line and ended with Kaseya completing its epic $6.2 billion acquisition of his employer.

“It was an interesting time,” Ward (pictured) says drily.

But the good kind of interesting. Shortly after the Datto transaction closed, Ward’s new boss, the previously quoted Fred Voccola, offered him $40 million of incremental budget in a bid not just to sustain the networking business but to grow it into a strategic asset.

“Literally it was like two days after the acquisition, Fred said, ‘what do you need?’’’ Ward recalls. “It took me a little while to believe him, but he put the money where his mouth was, and we’ve rebuilt the team, we’ve rebuilt the supply chain.”

Behind that investment is a fact of life for SMBs that makes networking a giant opportunity for Kaseya and its partners alike: “Every single business on earth requires connectivity in one way, shape, or form,” Ward says.

Especially in the age of AI, we might add, which is why global outlays on networking gear will rise 8.9% this year (a little ahead of overall IT spending growth) to $109 billion, according to Gartner.

Rebuilding Datto Networking took about a year and a half, according to Ward. “Then in the last year, we’ve really pressed the gas on integrations and new feature and product releases,” he says.

The product releases include the re-introduction during Kaseya’s Connect Global event this spring of the managed power units Datto introduced in 2017 and subsequently cancelled. “We brought those back and we’re taking pre-orders now,” Ward says.

That, however, is far from the most important networking move Datto has made since joining Kaseya. “At the end of the day, the hardware itself is highly commoditized,” Ward observes. “The value that we try to add is in the integrations and the automations with the tools that MSPs use daily.”

More specifically, and in keeping with a long-term strategy at Kaseya, Ward and his team have spent a lot of time in the past year linking Datto Networking products with Kaseya’s RMM and PSA solutions, so technicians can do things like reset an access point or power cycle an outlet on one of those managed power devices remotely.

“We allow people to resolve tickets at a faster rate because you can do it straight from your RMM,” Ward says.

There are security advantages to weaving network management into an MSP’s tool stack as well, he continues. Think about IoT, for example (no, really, think about it, as we encouraged you to recently).

“There are a lot of devices out there that you can’t put an agent on,” Ward notes, ranging from physical security systems to video surveillance cameras and beyond. Integrating Datto Networking products with Kaseya’s RMM solutions enables MSPs to manage them anyway through the same interface they use to manage PCs, servers, and other endpoints.

We’re still talking technology for the most part, though. Voccola prefers to focus on the customer value, and hence loyalty, implications of Kaseya’s networking play. Businesses, he notes, care far less about technologies than technology-enabled outcomes.

“If I’m an SMB, and I have these business or industrial applications that run my business, they have to be always available and always secure,” Voccola says. “That’s what the market is asking MSPs to deliver.” Smart MSPs know it too, and know that it takes tightly integrated networking, security, and availability solutions to meet that demand.

“They’re not selling a networking project. They’re delivering an outcome, and networking is a part of it,” Voccola says.

That value proposition is beginning to produce results. “We’re seeing significant new customer adoption,” says Ward, who declined to define “significant” more specifically. He did, however, concede that multiple issues, beginning with the hard reality of limited capital budgets and extended purchasing cycles, make hockey stick growth difficult for networking vendors generally.

“It’s expensive to swap out networking gear,” Ward says. “It takes years for people to lift and shift their entire fleet.”

MSPs won’t have to wait that long for a fresh set of integrations, he adds. More are due in a couple of months at Kaseya’s DattoCon conference in Miami. Voccola, without disclosing details, says they will “really pivot networking on its head.” Ward is only a touch more forthcoming.

“You’ll see ways that people can control network access based on triggers or information from other modules, which is pretty powerful,” he says. “It allows MSPs to have more granularity over the network, again, with the tools they’re using every day right now.”

Managed SaaS Alerts now. Managed everything later?

IT spending is strong. According to Gartner, in fact, it’ll grow 7.5% this year to $5.26 trillion worldwide. Security spending is even stronger. Gartner has that pegged to grow 13.4% this year to a little under $184 billion.

If you want to know what strong growth really looks like, though, take a gander at MDR, where global spending will leap 50% this year, according to Canalys, to reach $9 billion.

That’s obviously a small share of the security market and a sliver of overall tech revenue, but the more I ponder the matter the more I suspect the soaring popularity of MDR is a sign of things to come. Why would any business—or any MSP for that matter—without the resources to build a SOC and staff it with pricey analysts want to take responsibility for something as important and complex as security all by itself?

It’s a question brought to mind for me most recently by the news this week that SaaS Alerts has launched a fully managed version of its cloud security service. To be 100% clear, the new offering is not an MDR service, nor SOC as a service either.

It is, however, a new reflection of an old truth, according to SaaS Alerts CEO Jim Lippie (pictured). “There’s a lot of MSPs out there that are resource constrained and they’d rather essentially pay as they go than have fixed resources that they’re paying to do specific functions.”

Those are mostly smaller MSPs, of course, and smaller MSPs account for most of the approximately 100 partners using the managed SaaS Alerts service already as a result. But larger providers are signing up too, at least partly because they appreciate the logic at a time of persistently low tech unemployment (just 3.2%, according to CompTIA) of having someone else configure the platform, setup automated threat response rules, and take care of day-to-day monitoring for a relatively modest 75 cents per user per month over and above underlying software costs.

“They’re telling us, ‘look, for the price point that you’re charging, which is relatively inexpensive, we probably can’t do this on our own with our own labor,’” Lippie says. Plus, he adds, who’s better qualified to wring every ounce of value possible out of a SaaS Alerts deployment than SaaS Alerts itself?

“We do multiple releases in a given month, which enhances the platform,” Lippie says. “Many times, we find that our partners don’t know about those releases, therefore they’re not leveraging them.”

All of that has him predicting that a year from now roughly a third of SaaS Alerts partners will be managed users. I wouldn’t be surprised if it’s even more, or if we see more vendors experiencing similar adoption of similar solutions for similar reasons in the years ahead.

(Note: SaaS Alerts is a client of Channel Mastered, the consultancy I work with. Their agreement with us does not, explicitly or implicitly, include coverage of any kind in Channelholic).

Also worth noting

• Why wait? Addigy is building controls for Apple’s still forthcoming Apple Intelligence into its MDM solution now.

• Nerdio is an early adopter of the Center for Internet Security’s CIS Hardened Images standard for virtual machines.

• Integrations with Jira Service Management, ConnectWise Manage, Freshdesk, and HaloPSA are among the latest enhancements to GoTo’s RMM solution.

• Check Point has acquired Cyberint, a threat intel/attack surface management vendor I’ve had my eyes on for a while.

• SentinelOne’s Purple AI technology is now available in the Sherweb marketplace.

• Sumo Logic has inked a strategic collaboration agreement with AWS to deliver cloud-native log analytics to DevSecOps pros.

• Omdia, in research sponsored by data security posture management vendor Normalyze, says 89% of organizations expect a significant or moderate increase in data security budgets in the next year. Told you so.

• Told you this kind of thing was coming too.

• Cole Knuth (formerly of Pax8) is the new CEO and Gene Stevens is the new CTO at cyber insurance wholesaler and consultant FifthWall Solutions.

• Jay Iparraguirre is now global VP of sales and Nir Veledniger is head of customer success at BCDR vendor N2WS.

• Phil Ben-Joseph is the new CIO at Procure IT.