Shutterstock
Private Equity Creating Chaos in the Channel, Says Partner
Private equity looms large in the channel and promises to forever alter the industry.
No one from private equity (PE) stood on stage or sponsored an event at the Channel Partners Conference & Expo last week, but partners say they felt outside investment everywhere. The traditional agent channel in particular is experiencing attention that it has never experienced before.
Eclipse Telecom’s Dave Dyson
“PE guys are onto us. I’ve had so many people lurking around the event saying, ‘Hey, we’re here representing some PE guys who want to talk to leaders in the space,'” said Dave Dyson, CEO of Eclipse Telecom.
The adviser/broker space has witnessed an unprecedented level of investment and consolidation in 2021. Upstack landed a whopping $50 million investment private equity investment that it has used to buy more than a dozen consultancies (and it recently added $100 million in financing). Upstack’s head of global channels and alliances recently told Channel Futures that the company has engaged in talks with upward of 100 agencies. Add to that the flurry of investment occurring up the supply chain with Telarus and Avant, and the game of musical chairs gets louder and more confusing.
“It’s [sic] chaos right now,” Dyson said. “In every conversation I’ve had in the hallways here with my peers, everybody’s like, ‘Should we be merging? Should we be selling? Should we be buying?'”
However, some partners worry about how disparate and secretive these conversations are. Dyson said peers need to compare notes with one another to stave off misinformation.
“[PE is] lurking around. Not talking about it is dangerous at this point,” he said.
Most of the partners speaking to Channel Futures have engaged in some sort of preliminary conversation or have been approached by people from private equity. Some even attended pitch meetings last week. The partners’ responses have varied. One partner has rebuffed requests for meetings. One partner took a deal with a private equity firm and retained one-third ownership in the company. Another partner took an investment from a solutions brokerage and started another company. One partner said other partners have reached out to them about putting their books of business together in order to attract a higher multiple.
End of the Road?
Other partners see private equity as an opportunity to leave the business. They haven’t pivoted to next-generation technologies and the market is leaving them behind.
Top Speed’s Allan Jaffe
“There are some advisers who don’t want to move forward. And of course, the transport business is going up a down escalator. You’ve got to sell more bandwidth and you get less money. So if you don’t evolve, you’re going to retire,” said Allan Jaffe, vice president of technology at Top Speed Data Communications.
Other businesses’ owners want to stick around, but they might lack the size and expertise to survive bandwidth commodification. Kathleen Waters, founder and CEO of the Creekview Group, said many of the smaller firms lack the technical expertise to bring on the newer technologies.
Creekview Group’s Kathleen Waters
“Take a mom-and-pop organization that has 100 accounts, and they’ve been doing transactional broadband or UCaaS. Maybe now they’ve jumped to SD-WAN, but they can’t do anything beyond that,” Waters said.
Dyson said these firms need to either scale up by being acquired or …
The roll-up trains have left the station, and many are on an express route, and no longer stopping at every station. Trains (plural) because the routes are all different, the passengers are all different, and yet all the destinations are the same, the customers doorstep, or more appropriately, their desktop. As I have long predicted and previously written about; PE’s and VC’s are not interested in technology solutions brokerage (formally “Master Agent”) revenue or EBITDA however, it is a means to and end or what they really want.
Of course, they’ll always be short-sighted rollups (package and flip) in any industry, but ultimately most of these investors want to be much closer to the end-user. Just like emerging fiber locators and carrier quoting platforms endgame is not to marry Carriers to Channel Partners, although it is a required a first step to their primary goal; the end-user’s desktop. So, while the insurance industry as described in this well written article above is one example, for me, it’s more like a hybrid of insurance, travel, and retail commerce with a dash of Google thrown in.
Just like Allstate has Esurance, along with other examples across other industries, I predict the largest technology suppliers will build their own versions of “One-Stop” shops as well. Comcast and Spectrum are well down the path to building on-net off-net aggregation divisions to deliver no-line-left-behind solutions, like CLEC and ISP aggregators. AT&T is quieter about it, but I predict they too will jump in, as will other top of the food chain network and technology suppliers. I don’t believe they’ll be quite the same roll-up of these new web centric sourcing and procurement like there has been in travel. I.e. Expedia and Priceline own all the travel brands now, but conversely, early entrants, particularly those not owned and operated by the big suppliers, will see epic wins and epic fails along the way.
Some giants like AT&T, Verizon, or Comcast or CDW, (just a few examples) may decide to wait and see, like Microsoft often does. Sit back, let others trip, allow the end-user experience to mature, work out the bugs, wait for the regulatory climate to settle, and then jump in with a new ICON in 365, and shazam!
Right now, it’s like a friendly game of musical chairs, everyone having fun, making money, and supportive of one another because no one is truly ready to take any chairs away at this point. Everybody still needs Everybody, directs, Channel Partners, on-line portals, etc., but things will change. it will, at some point get serious or more Squib Games like to draw a comparison. Clearly more than a single winner, but certainly many fewer over the next several years and a fight to the death.
Furthermore, this is not just about technology, it’s about all things sourcing and procurement. I follow another interesting company, The Procurement Foundry, which has their sights (for now) on all things “Enterprise Customers Sourcing & Procurement from Technology and HR to Uniforms and Power and much-much more.
This is not doom and gloom. None of this has stopped me from recently starting my own Technology Advisor Agency, I believe I can adapt accordingly, however even as I do so, I still keep one foot firmly planted in another passion of mine, performing M&A due-diligence in the technology space. Finding hair on contracts, concerning revenue/customer analytics, supplier and process synergies, and cost reductions to name a few. It’s still about whale hunting, closing big deals, lowering costs, and improving profits. I just have a real passion for onions. Peeling them back that is.
Exciting times, so hang on for the ride and don’t be one left without a seat.