What Private Equity Wants From A VAR

Solution providers need something unique, says Marty Wolf, president and managing director of Martin Wolf Securities, a San Ramon, Calif.-based investment banker focusing on IT solution and IT-enabled business process outsourcing companies. "It could be geographical location, technology, management or size," he says. "Today, Cisco experience is valuable, and businesses with a high degree of recurring revenue are important."

Thoma Cressey Bravo has been investing in industry consolidation for 27 years, and last year invested in Sirius Computer Solutions, a San Antonio-based solution provider as a platform for further acquisitions.

When Thoma Cressey looks at an industry, it looks at the characteristics favorable for consolidation, says Holden Spaht, a principal at the Chicago-based private equity investment company.

In the case of the IT channel, Thoma Cressey first learned of the opportunities via several of the companies in its software portfolio, Spaht says. "We invested in software companies, and through our software companies we saw the channel—a huge landscape of fragmented businesses," he says.

John Clarey, managing director of Clarey Technology Group, an Irvine, Calif.-based private equity investment company that last year acquired Phoenix Computer Associates, a Phoenix-based mainframe and peripherals solution provider, says his company likes the channel for its obvious capabilities across the spectrum of IT offerings. "We are looking at companies that provide products and that provide services," Clarey says.

Clarey, whose company has signed letters of intent to acquire two other solution providers within the next couple months, says what attracts private equity investment to certain solution providers is first and foremost a management team that will remain in place after the acquisition. "The thing with smaller companies is, the owner has a tremendous influence. If the owner leaves, the business could evaporate," he says.

Second, Clarey says, is a great customer base with potential for growth. "Does the revenue depend on the owner?" he says. "That's a big red flag."

Thoma Cressey invested in Sirius because it saw a profitable, growing company with a good management team and one that had experience with acquisitions in the past, Spaht says.

For now, though, Sirius is Thoma Cressey's platform for further investments in the channel, with all future investments or acquisitions going through the solution provider.

The potential for investment in the channel will only continue to grow, says Clarey. His company looks at four to five serious opportunities per month, with contacts for potential acquisitions coming from companies familiar with the investor and from investment bankers. "We're long-term players in this space," he says. "But we want a strategy to exit our investments in three to five years."

That is an important consideration when an industry like the channel is undergoing a flurry of M&A activity, Wolf says. "Private equity's biggest concern is not how to get in, but how to get out," he says. "They are not charitable groups. They're in it to make money. Today, there is more competition, but a finite amount of assets. So more money is chasing deals, and private equity investors are not going to make as big a return. But they won't invest in anything unless they can get out."