Private Equity Funding Driving VAR Consolidation

MTI has used private equity funding, as well as strategic funding from vendor partner EMC, to transition itself from a name-brand storage manufacturer to a provider of storage products and services, and in the process has doubled its revenue since 2003 to hit about $175 million, said Thomas Raimondi, president and CEO.

"The investment was not a short-term thing," Raimondi said. "In 2007, you should see some really great results from us."

One common thread in nearly all of the recent investments in the channel is the move by the investors to keep the solution providers' management team as intact as possible, even though it is common for the original founder or primary shareholder to take the investment or acquisition as an opportunity to retire. In addition, private equity investment companies often bring in another resource needed by many solution providers: new members for their board of directors.

Having Michael Pehl from Advent and Ronald Heinz from Canopy on MTI's board of directors also benefits the solution provider with new industry contacts, Raimondi said.

"When we acquired Collective, it was nice to have our largest shareholder buy into the strategy," he said. "And because he's on the board, sometimes we're privy to non-public information. And people like Pehl have been CEOs of their own companies. It's nice to pair up with peers. It's like having a coaching staff with a hall of famer."

Even though Thoma Cressey will not be involved in the day-to-day management of Sirius, it is taking a seat on the solution provider's board of directors.

For now, Thoma Cressey does not plan to take a similar stake in other solution providers, Bravo said. "Sirius is our platform for expansion in the industry," he said. "We're looking to back Sirius to expand in this area. Sirius will be our platform."

For solution providers looking to expand with the help of equity funding, it is important to look at future growth prospects, especially as larger solution providers are growing faster than smaller ones, Mertens said. "Local or regional VARs will find it difficult to grow," he said. "They need to look at becoming supra-regional or national in order to grow."

Determining one's value is no simple task, Incentra's Sweeney said. "The straightforward way is much overrated," he said. "Sure, you need to look at profit and cash flow. But you also need to look at skill sets, certifications and of course your customer base."

Not every solution provider is a prime investment possibility.

Clarey said his company does not look at investing in startups, but instead looks for established companies that are making money, or at least are breaking even. Even more important is the quality of a solution provider's management team and customer base, Clarey said.

"Often when a company is bought, the management leaves and the company evaporates," he said. "We want to know if we buy a company that the management will continue. Also, we look at the customer base, types of data centers, types of services offered. We don't want a strict reseller."

Because there are many different types of investors looking at investments for different reasons, there is no simple guide for a solution provider to find equity funding, Bravo said.

"We look for scale," he said. "And you have to have a track record of consistent financial performance. And management who endorses partnership. If you have those three, and have the right expectations, there are investment opportunities. If somebody is looking to expand and really grow, finding a partner with a like mind can be a real benefit."