Private Equity Funding Driving VAR Consolidation

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The current wave of channel consolidation is increasingly being funded by private equity companies that may not have a lot of experience reselling computer hardware or services, but that do know a good solution provider when they see one.

And the primary beneficiaries of the funding are solution providers that are making aggressive moves to branch out into new skill sets or geographies by acquiring or merging with their peers.

Joe Mertens, executive vice president at Sirius Computer Solutions, one of IBM's largest solution providers with $578 million in annual sales last year and the recent recipient of an undisclosed amount of equity funding from San Francisco-based Thoma Cressey Equity Partners, said that the investment in his company and in many other solution providers comes as the solution provider space is rapidly consolidating.

That consolidation is what is drawing the attention of private equity firms to the channel.

Orlando Bravo, a managing partner at Thoma Cressey, said his company and other investors see solution provider consolidation as a huge growth opportunity for themselves and for the VARs in which they invest.

"We see this as a consolidating space, and feel it will continue to consolidate for the next five years," Bravo said. "It's way too fragmented. But a company like Sirius has a broad breadth of products and geographies."

John Clarey, managing director of Clarey Technology Group, an Irvine, Calif.-based private equity investment company that in July acquired Phoenix Computer Associates, a Phoenix-based mainframe and peripherals solution provider, said the channel has a lot of $4 million to $5 million players, but few $50 million to $100 million players.

"It looks like an area where we can get economy of scale," Clarey said. "This business is not going away. We're seeing new requirements for such regulations as SOX [Sarbanes-Oxley], HIPAA and so on. But not a lot of big companies in it."

The consolidation is really only in the beginning phase, Clarey said. "Many of these companies are undercapitalized," he said. "This is a people business, a relations business. And they need to grow."

And grow they are. Much of the equity investment in solution providers is going toward acquiring other VARs.


NEXT: A look at VAR mergers and acquisitions.

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