Introduction to Private Equity Discussion
James Anderson: Who’s excited to talk about private equity? We love talking about private equity in the channel. Come on up, guys. We’re gonna have a wonderful conversation.
My co op moderator, Lucas Salvage, and we’re gonna have folks from Columbia Capital, Moloss and Company, and Bluewave Technology Group. We’re gonna get right into this. We’re gonna talk about what the people in those rooms are talking about, what they’re planning on, what they’re excited about, and what it means for you. So, how are we all doing today?
Evan DeCorte:
Great.
Will Goodman:
Excellent. Thank you.
Seth Penland:
Thanks for having us. Appreciate it.
James Anderson:
It’s good to be with you.
Current Events in Private Equity
James Anderson:
Will, can we start with you, with sort of current events? You were advising on Bridgepoint’s latest strategic growth round, getting Charles Bank to stick around, bringing in the Carlyle Group, and Alpenvest.
Can you weigh in on that? Maybe weigh in on what this means for the space and just where we’re at?
Will Goodman:
Yeah. I mean, I think, I’m happy to. I appreciate the question. I think overall, it’s great for space when you think about both the Bridgepoint transaction at the end of last year and the Avant transaction as well.
You now have two to follow on, transactions that were done at, you know, very nice valuations that also, I think, shows the broader community and in particular, the Asian community that there is continued value after the initial sale that occurs as well. You know, the rolled equity value that they have as part of the deal is worth a lot of money, given where those two companies transacted as well. So, I think it’s good, and that should inspire confidence there. I also think, in general, it shows that one, there’s a lot more investor interest in the space than maybe people outside may have realized.
Both were competitive processes, which is good as well. And sort of the last thing I would add is that, you know, I think it also helped that both the existing investors, Pamela Co., Adivant, and Charles Bank at Bridgepoint, are continuing to be significant investors in both companies. That sort of shows the people who know the most have continued confidence in the underlying business, in the underlying space as well, and, you know, just to be blunt, like, putting their money where their mouth is and are continuing to invest and wanna continue to ride that upside.
Market Collaboration and Growth Opportunities
James Anderson:
And we’re kinda we’re we’ve got we’ve got investor, Evan, you’re with Columbia Capital. We’ve got a TA platform leader in Seth Penland. And so, and and, Will, I don’t know if you’d say that you’d sit in the middle with Moelis, but right.
Evan: Yes. You actually are the middle.
James Anderson:
I mean, I would be curious, like, maybe how when you all get together, like, how you are talking about this differently, and what the maybe what the relationships, like, look like between the three of you, I guess.
Evan DeCorte: I mean, I think that these are, on the whole, pretty open conversations. This is a really, really big space with opportunities for people to build big businesses that don’t have to look exactly the same, and it’s not a winner-take-all market. So I think the thing that, like, I’m constantly impressed by is, like, you can be open about your strategy, what you’re seeing in the market, what you’re seeing with buyers, what’s happening with deals, what’s happening with customers, and it’s collaborative in a way that it really just isn’t in other sectors.
And I think it creates a really healthy dialogue.
Will Goodman: Yeah. Look. I think it’s especially right and obviously looks sesh seshawain as well, especially as, like, you take a step back, there’s a lot of different companies out there, some that have slightly different business models. And to exactly Evan’s point, everyone’s doing well and everyone’s successful in their own way, and so it’s not like, oh, this is the model that only works. It’s like, no, some people have a model that works for certain agents at a certain status, you know, of their business life cycle of their way, or if they have slightly different goals with each other, like there’s an alternative for you, and so it’s not just everyone butting heads in competition. Like, I do think there is an extra level of openness that often you don’t see in some other spaces as well.
Seth Penland:
Yeah. I think I agree. And I think it’s not a zero-sum game. Right?
So, I think the way I look at this market is the better each of us does in terms of those building TAs in different strategies. Right? As was mentioned, some are taking, you know, various approaches, but ultimately, it’s with the goal of growth, and with that growth comes increased opportunity for all. I think we’re all looking at how do we grow the actual channel in size and not about how I grab my bigger percentage of the existing pie, like the pie should be bigger.
The Value Proposition of the Channel
Seth Penland:
I mean, think that’s how I think about this industry evolving, is that when I came into it a number of years ago, I was surprised that the value prop of this industry wasn’t widely known within the IT executive community. So, the better we the larger we get, the bigger voice that we have, I think the more readily available that value prop becomes or comes to the individuals within IT organizations, they’re gonna wanna do more through the channel. I mean, we just recruited a great candidate as our new CRO from Trace Three and, you know, he looked at that and saw the VAR value prop compared to the advisory value prop, and he’s like, this is so much better.
Why aren’t all IT executives going through this model? So, I think that’s the opportunity for us as a community is to build this even bigger.
Evan DeCorte:
It’s funny. I feel like so many of these conversations get together, and it’s like, it just ends up being, like, a bit of, like, an evangelization session. It was like, this is so great. Why don’t other people believe in it like we do?
And it’s because, like, the channels existed for a really long time, but at least as it relates to the private equity community investing behind and building businesses in the space, like, it’s still a little bit of a new idea. And so, I feel like a lot of our conversations, how do we make sure we tell the best version of our story? Because it’s a great story, and great stories have the benefit of being true. Like, we want to tell people, like, what great businesses exist here, and we’re sort of annoyed that, like, not everyone else is excited about it as we are, and they should be.
Will Goodman: And I think Seth hit on a key point there. Like, I think what as more people are coming into the space and evaluating it, I think the thing that strikes all of them is, like, the massive TAM expansion. The sort of thing we were talking about before, about it’s not like I need to take share from competitor x y z in order for us to grow. It’s no.
I mean, you have both the sort of the three legs of overall IT services continuing to grow massively. You then have share shift within the OEMs to channel, and then you have new product categories being added to the channel that didn’t necessarily, like, really exist or if so, exist in a major way a few years ago or even longer as well. And so as, like, new investors are sort of looking into Exact Access Point, like, the feedback’s always, everyone’s very complementary of each other. Why is that?
Part of it is that you just have this massive TAM expansion that’s occurring, and you don’t really need it; it’s just that you don’t need one side to win for the other to lose in order for there to be a winner or a loser here.
Everyone’s able to keep winning for at least, I mean, I don’t know how long, but it feels like it’s at least ten plus years.
James Anderson:
Okay.
Will Goodman:
Before we even have to start thinking about, you know, what does market share look like or anything like that.
Lucas Salvage:
And that’s amazing to hear that. Right? So, we, you know, we as a community, I think, are excited to see the growth and the investment and the excitement that comes with guys like you on the stage. What are their specific characteristics for the folks in the audience? Are there specific characteristics that you guys look for when you’re acquiring?
Characteristics of Acquisitions
Seth Penland:
Yeah. Maybe I’ll start. You know, when I look at it, I kind of segment the market into kind of three categories in terms of acquisitions.
I think you have kind of smaller companies with maybe one to five employees that really, they’re a great sales organization that’s built up a nice client base. And when I think of kind of that, it’s can that business continue with or without that owner? And if it needs that owner, which likely would if it’s that size, then you’ve got to have a structure that keeps that person engaged and excited for quite a long time post a transaction.
That’s in kind of one valuation tier. The next is kind of five to fifteen. You’ve got kind of a go-to-market motion that’s working. You’ve got more than just one seller.
Right? You probably have two or three sellers, a few account managers, some project management, etcetera. That’s kind of that next tier of value that’s going to demand a turn or two higher. And then you have kind of over fifteen.
I think of, like, fifteen to fifty employees. That’s you’re starting to have kind of a successful business that is durable, that can kind of continue to grow on its own with or without the founding partners. And again, that’s kind of a different tier. So, I kind of segment the market or the agency market in those three areas in terms of how I think about, you know, how much we should pay and what valuation each of those demand.
Alignment of Interests in Acquisitions
Lucas Salvage:
That’s great.
Evan DeCorte:
I mean, I think the big thing for me is there alignment of interest between what works for either Columbia as an independent financial sponsor or for any of our platform companies that we’ve invested behind. I mean, you want people who are excited about what you’re gonna build together and have a shared vision for what could be.
So, and I think maybe this gets like another thing that we just see broadly in the market is that they’re like feeling like there are tracks developing
For people to exit their businesses.
And what you wanna make sure is that as you are having a conversation with a potential acquirer or a potential financial sponsor, that, like, you’re on the same track. Because if you’re not, it really doesn’t matter how great the business is, how fast you’re growing, how much EBITDA there is, like, you’re gonna have a problem going forward. Right? You gotta you gotta make sure you have a long-term and shared vision.
Challenges in Business Structure and Growth
James Anderson:
It seemed like in the last couple years, you’ve had some TA leaders who realized they had to I don’t if the word is like retrofit their business, but they had to go back, rethink their business, whether that’s getting off spreadsheets, like, we need actual CRM, we need to have like a place to house our data, we need to like get organized so that they’re not just when you buy them, it’s not just that they’re you’re buying that leader, that sales leader, but they’re you’re they’re buying a a team, a a company. And it’s like that’s a talk track, and a lot of TAs are really working on, like, having an actual structure, an actual business.
Do you see that changing in the books you’re evaluating? And does that make a difference to you, you know?
Evan DeCorte:
I see a lot of people talking about it. Okay.
But I don’t see a ton of people actually doing it, and it’s because it’s really hard. Yeah. I mean, I think fundamentally, like, investment thesis behind businesses like Bluewave is that you do need scale to support the investment required to build a platform business. And what we see time and time again is that businesses get to a million dollars of EBITDA, and then to take that next step, they’ve gotta go back to zero.
Then they get to five, and they go back to three. Then they get to ten, they go back to five. And it’s just that it takes a lot to continuously invest in the business and build a platform that can really scale. And I think we can help support that journey, but it’s tough when you’re doing it on your own.
So, I think people like the idea they talk about that they hear from us and from others that it’s important. But when push comes to shove, like, man, it can be re a really, really tough road to hoe.
Will Goodman: I also think people are starting to confuse just if I get the five million, let’s just say, of EBITDA, yeah. On now a platform. And while, yes, there is some scale threshold that helps with that definition, to Evan’s point, I think it’s really more of a sophistication sort of threshold that people like him are looking for as they look to invest in these new companies in that regard. And so, like, yes, you can get five million, but are you still really only run on Excel spreadsheets? Like if someone asks you basic questions of what comprises the book, do you really not know the answer, and it’s, look, we have great customers, we’re doing great things for them, and that’s all we really care about, which looks great, like you built a nice business, that way there’s nothing wrong with it.
Evan DeCorte:
Do you have a team?
Will Goodman:
Correct. Like, what is the depth of the engineering team behind it? What’s the depth of the account management team? Or effectively, are you still living large, you know, off the core founders’ relationships or anything like that, because I mean, what Evan cares about is like, yes, you got the five, did not speak for you, but like you want to know, alright, how do we get from five to twenty-five in the next three years?
And if we were to then buy a couple of other smaller agencies, do you have any sense of how to integrate? Are there even any systems that, now that we get the twenty plus of EBITDA, that we can then start really running this as a true company and not really just what you had before, which is a really nice sales organization? And so, I think what we’re starting to see as part of our dialogue as more people sort of look at the success of some of the larger platforms like Seth, of like, I want to do that. How do I now do that?
And I think, like I said, they’re sometimes confusing. Like, I’m at this size. It feels like I should be considered a platform, but I may not really be set up as a platform. And I think that’s an important nuance that I think is getting a little bit lost.
Evan DeCorte:
When we think about scale, we think about whatever that five or ten million dollars EBITDA typically represents the operational platform behind it. And so that financial scale is a result of the operational scale. And I think sometimes because these are just such great business models, it’s it’s it becomes easier to say, like, I have a really profitable business, so I’m scaled. And so well, no. But you actually got there a little bit backwards. You just built a really profitable company, but because you maybe skimped on the systems. And what we wanna see is people build the platform and a durable organic growth engine that can persist into the future.
And financial scale will ultimately come as of that.
Future Landscape of the Industry
Lucas Salvage:
So that’s a great segue. So, I guess one of the things that I’m curious, I mean, you guys kind of see this industry moving towards a few very large national platforms? Or do you think there’s still going to be room for that boutique, smaller organization in the future?
Evan DeCorte:
Probably best for you, Seth.
Seth Penland:
Yeah. I mean, the way I think about the landscape shifting over the next five, ten years is I kinda think about it almost through the lens of, like, how consumers can purchase products. Right? It’s marketplaces and influencers.
And when I think of where our industry is going, is really, we are the influencers. Right? This channel is the advisory arm that helps clients, especially in the mid-market enterprise, make complex decisions around just around purchasing technology. And we wanna give them the clarity, confidence, and deliver the outcomes they’re looking for for that.
For the SMB, smaller business, I think that’s all gonna go through marketplaces fairly soon. I think that’s gonna get commoditized and I don’t think I think there’s gonna be a lot less of that going through the traditional channel with an adviser. It’s gonna go through a marketplace. I think for the mid market enterprise opportunities, I you know, maybe I’m biased, but I believe that the way the landscape will migrate is a handful of us national players, a number of like regional boutiques will capture eighty, ninety percent of the wallet share out there from our from clients because I think clients are going be looking for, again, this has been market to enterprise, they’re looking for a roam more robust team, process, expertise, you know, delivery model for them.
And I think that’s going to be really hard to deliver for a five-to-ten-person agency. I think it’s going to get more competitive. They’re gonna, you know, clients are gonna demand more. Suppliers are gonna expect more.
And if we don’t rise to that occasion, I think it would be a tough, tough spot to be.
James Anderson:
Eighty-nine percent of the TA market or eighty-nine percent of something else?
Seth Penland:
Eighty to ninety percent of the TA market would be, in my view, going through larger agencies.
James Anderson:
What do you think it is right now?
Seth Penland:
Probably less than twenty percent, maybe even ten. Yeah. Okay.
Evan DeCorte:
Yeah. I think it’s even smaller than that.
Lucas Salvage:
Wow.
Evan DeCorte:
I probably have a slightly different view. I think that there is there is gonna be space for a very, very, very long tail of highly focused, specialised TAs that either maybe have, a very narrow geographic reach or a very narrow vertical focus or a handful of incredible relationships.
I think that will persist, so maybe that’s maybe where we disagree. Where I think we are almost certainly a hundred percent aligned is, like, what I think about as the messy middle, which is people sort of start and scale their business, but they don’t know how to hand off relationships. They maybe have some financial scale, but don’t have, like, a differentiated product set, and they do need to invest. And I think those people are going to see market share eroded by the national players. So that, I think, is for sure.
Will Goodman:
Yeah. In general, I think we’re a firm believer of, like, scale will get scale here. And especially as IT continues to get more complicated, you know, I’m sure you’re seeing it with some of your larger customers, just they’re asking for more. And so, can you then invest and have those engineering resources behind you?
You know, yes, your relationship may have started on the network level, but now they’re asking you security questions and other things like that. And if you’re not able to answer them, which look, we get it. If you only have two, three million bucks of EBITDA, the higher a good security specialist might be what? Four or five hundred thousand all in a year?
Like, I get it. That’s, you know, twenty, thirty percent of your EBITDA. You’re potentially taking a step back. You might not want to do that versus, obviously, if you’re a forty, fifty, sixty-million-dollar platform, if you will.
It’s just easier to keep making those bets and keep that investment going because material a hit. And so, like I said, that differentiation, I think, will just continue to play out in this space.
Evan DeCorte:
I mean, I think a Bluewave of the conversation is, okay. We’re gonna hire twenty-plus specialised engineers next year.
Where do we wanna place our bets? It’s not like, can we make, can we hire one?
Will Goodman:
Can we do it.
Seth Penland:
Sure. Yep.
Evan DeCorte:
And that’s like that that is the benefit financial scale brings. It’s just real.
Lucas Salvage:
Sure.
Building Durable Go-to-Market Engines
James Anderson:
And I mean, this is an oversimplification, but, like, I feel like the battle right now is for these platforms to build go-to-market engines that last beyond the employment of the founder of the people that you acquired, and the relationships they have? What do you think about that? Do you agree? And then if so or if no, how is that going in this space, building engines that last beyond the founders?
Seth Penland:
Yeah. I mean, I think that’s where real value and premium values occur. I think there’s a wide variety of ones that have been able to do that successfully versus not. And I think the ones that can’t, I think that’s where you look at folks like us and our competitors. Like, is it better to lock arms with them and help continue to grow and be competitive?
It is kinda like the two paths that I see.
Will Goodman:
Yeah. I agree with that. I also think there’s an issue, a question going on. It’s like, I think more time also needs to go by.
I think people are doing the right things. You’re seeing early success, but the reality is that for a lot of these platforms, like either the original person is still there that they acquired or, like, they just left. And so, like, you don’t necessarily have a five-year history where you can say, like, this is what happened over that five-year period. And just from an outside private equity perspective, like, I still think, like, a lot of people draw parallels to this space to whether it’s, like, the insurance space or the wealth RIA, wealth advisory space and others like that.
And I think a lot of those parallels are true. The benefit those spaces have is that they’ve just been around significantly longer, and so you’ve seen like the benefit of I sold my book to them five years ago, did the book continue to grow, is it flat, is it down?
This space just given time, like I said, I think you’ve seen early success, which is giving more and more people, as you’ve seen in the deals we referenced earlier, the confidence to keep investing in it, but like we just don’t have that five to ten year history like we do in insurance and wealth advisory.
Evan DeCorte:
And like, I mean, we maybe have three or four years in this space. Yeah. Really? Yeah. I think some of those large insurance platforms, like those that got going almost twenty-five years ago. I mean, it’s a there’s a lot of longitudinal data longitudinal data there that you just don’t have in the space yet.
Seth Penland:
And I think to the point you made earlier, it’s not like only one model is gonna work. Right. Similarly, in the insurance space, you have some that are like w two employees. You have more independent agents. You have a variety of models.
They’re all working in different ways. Right? And they all have different economic and value creation chances, you know, paths to go down. So, I think similarly in our space, it’s not like and obviously, I’m biased, believing the way the path that we’ve gone down is superior, but like, it’s there’s, I think, multiple paths that are gonna do very, very well.
Evan DeCorte:
Yeah. But I do think that is one of the, maybe, intangible benefits of partnering with a consolidator is that you effectively get to attach yourself to their track record. Sure. So, if someone’s gonna say, okay.
Like, I’m gonna start professionalizing the business today. I’m gonna figure out the durable growth mechanics, and that got proven another five years, like Will was talking about. That’s one path. The alternative is, like, Seth’s been doing it for five years, so his track record starts way back when.
Seth Penland:
Yeah. I mean, I think that’s what’s great about hearing about Bridgepoint getting their transaction done, right, there was liquidity provided to some of those early agencies that sold to them. And I think it demonstrates that, like, pick your horse to the point made earlier, pick the horse that matches your strategy, your personality, what you want to accomplish. But the ability to get to tack on to a large platform when they recap and participate in that valuation, like that’s an exceptional opportunity, and we’ve seen that play out in other industries where you know, that first seller, you know, becomes part of the platform. The platform recaps again three to five years. They could participate in two, three, four transactions along the way and do extremely well financially, but more importantly, build an industry-defining business that’s really changing this industry. And I think that’s a really exciting, you know, story to be a part of.
Advice for Businesses Not Ready to Sell
Evan DeCorte:
I do think one place we have gotten clarity, though, is that I feel like there was this almost gold rush mentality in like twenty-one, twenty-two, where everyone was just trying to find the right next deal and everyone was trying to acquire agents. And, you know, like, we’re still early days, but I feel like you were definitely separating the weed from the chat from people who have consistently been able to execute, keep acquiring, keep investment, are still in business and are participants in the market, and other people who maybe ran really hard but have not continued to find success. And so, like, I think we’re seeing platforms really emerge with, like, a real credible track record, and I think they’re gonna those winners will continue to compound their advantage.
Lucas Salvage:
So, for those that are out in the room today that maybe are not quite ready to sell, maybe don’t have quite enough EBITDA, maybe are just thinking about what’s the next step for me. What advice can you give them about maximizing things to do in their business to create that value?
Evan DeCorte:
Invest in the business like you own it forever, or you will.
I think this idea, like, I’m gonna prep for a sale. I totally understand where it comes from, but I worry sometimes it’s a little bit misplaced because it implies that, like, there’s just, a button you can press to, like, maximize value in a sale.
But, I mean, don’t know, Seth, maybe talk a little bit about how you think about that about
Seth Penland:
I was gonna say, take great care of your clients and grow your business.
Growth is of paramount importance for all of us. So, grow your business, and there’ll be value there for it.
James Anderson:
Interesting. That’s really interesting.
Go a little longer. I know, there’s people in this room, I think most people love this model, have grown up in this model, this residual commission model, And there but there still are probably detractors, maybe at the supplier level, at the you know, some of these potential companies that we may be selling to. How is that conversation going? And what’s your elevator pitch to get them through that?
Evan DeCorte:
Which of those suppliers will stop paying commissions?
I mean, people are coming into this market. They’re not leaving it. And so, like, look, nobody likes to pay their landlord. Nobody likes to pay the commission.
Nobody wants to pay for services provided. Like, I would like everything for free. But this, like, this model works, and it’s growing, and it’s providing an enormous benefit to customers. And so, like, sure, people would like it for free, but don’t you want a great outcome for your customer and a great route to market?
Like, that’s what this is.
What is there to be concerned about?
Will Goodman:
Yeah. I mean, like, I think that issue has, at least from the private equity standpoint, talking to other firms that are looking at space, like, the difference between two to three years ago versus today is night and day. Like, I think that was a big concern or do the commission splits change and stuff like that, where you have this downward march on margin? Like, no one’s really asking that question anymore because it’s exactly what Evan said.
Like, yes, you might not like it, but fundamentally, what else are you gonna do? Like, it’s proven. It’s more effective, generally speaking, than direct. That’s why you’re seeing share shift continue to move this way.
The Durability of the Commission Model
Will Goodman:
Yes. Every individual OEM, there’ll be some puts and takes over time, but in general, like the long-term trend here is greater and greater shift to channel because fundamentally, it’s cost-effective, and it works, and it’s delivering. And as these platforms get bigger and bigger, it’s only like I said, it’s only gonna keep compounding as well. So…
Seth Penland:
Yeah. I think we just need to continue to add value to the client experience. And if we’re adding value, the suppliers will feel more comfortable with the commissions they’re paying because they’re seeing the value. If we aren’t doing that, then they’ll get frustrated. Again, I don’t think they stop paying. I think that it’s pretty it’s really durable, and you look at kind of, you know, the CX landscape, which is a bit newer in the channel, like a lot of those started as their first go to market was really through the channel. And I think we’re seeing that in other industries as well, or other categories where, like, this is the preferred path to build scale.
Will Goodman:
And look, I think, like, the conference this year is a perfect example of it. Like, there feels like there’s more MSPs here this year than in previous years.
It feels like, and just in general talking to them, what used to be a basically a hundred percent direct model.
Of local sales or mid-market sales is now shifting meaningfully more to the channel versus, you know, five plus years. What percentage of MSP sales are for the channel? Feels really tiny, whereas now it’s a meaningful piece of more and more.
James Anderson:
Well, thanks, everybody. This has been awesome. Thanks for leaning in and taking some impromptu questions. This was awesome. Thanks for watching, everybody.
