2013_09-private equity in the it services space.pdf

www.redcapgroup.com 1

REDWOOD CAPITAL: SECTOR OVERVIEW Private Equity and the IT Services Sector

INTRODUCTION

This report focuses on investment and acquisition activity by

private equity firms in the IT and cloud services sectors.

While for years, financial investors have been intrigued by the

potential opportunities presented by the IT services area,

many have not been willing to put capital to work in the space

until recently. A number of changes are occurring however

including the shift to recurring services, the continued out-

sourcing of the IT function, and the need for solutions provid-

ers to offer broader capabilities, that have now made the area

of IT services an attractive space for private equity. In this

report, we look at the trends that have begun to attract capital,

the spaces in which financial investors are active, and some of

the specific deals actually completed over the past several

years across the venture, growth equity, and buyout land-

scapes.

OVERVIEW

For years, private equity firms have studied the IT services

market and wrestled with the right way to invest in the sector.

While the highly fragmented nature of the market has present-

ed a compelling opportunity, the one-time nature of the reve-

nue streams for IT consultants and VARs was problematic.

However, with the evolution of cloud and managed services

offerings, the increased shift towards outsourcing, and the ever

increasing need for the integration of technologies (which re-

quires solutions providers to broaden their skill sets), the IT

service sector has suddenly become a very attractive space for

financial investors.

The renewed interest in the space is demonstrated by a number

of recent acquisitions by many leading private equity firms.

On the acquisition side, Oak Hill (acquired managed hosting

provider Intermedia), Silver Lake (acquired API-SPL & Go-

Daddy), Court Square (acquired Avaya channel partner SPS)

are just of few of the firms active in buyouts. Within the

growth equity area, players like General Atlantic (QTS), Ca-

naan (iYogi), and Columbia Capital (Cloud Sherpas) have also

made sizeable investments.

INSIDE THIS ISSUE Page

1. Introduction 1

2. Key Drivers of Activity 3

3. Subsector Activity

Managed Hosting 6

Systems Integration 7

Managed Services 8

Data Center 9

4. Valuation Metrics 10

5. M&A by PE Groups 13

6. Growth and VC Investments 16

Other Redwood IT Services Reports

The following additional reports on the IT

Services space may be found on Red-

woods website at www.redcapgroup.com

M&A in the Cloud & IT Services

Sectors July 2012

Cloud Enablement Services No-

vember 2011

Managed Service Providers May

2010

SaaS: Hosted Communications and

Information Management Applica-

tions August 2009

Contact:

Russell Crafton, Partner [email protected] 212.508.7110

September 2013

Redwood Capital: 885 Third Avenue, 25th Floor New York, NY 10022

Private Equity in the Cloud and IT Services Sector Financial Investors Taking a Fresh Look at an Evolving Space



WHERE THE ACTION IS

In looking at where private equity has been most active, we consider this from both

the sub-sector standpoint (such as integrators, managed hosting providers) as well

as by asset class (venture, growth equity and buyouts). On pages 6 through 9, we

provide a sector by sector review and highlight a few interesting deals in each area.

As for activity by asset class, as the chart below shows, the majority of activity is

coming from growth equity and buyouts. Venture capital has, and will likely con-

tinue to play, a much smaller role given that most services businesses either require

little capital to start or are not focused on building intellectual property, something

for which venture investors often look.

However, within the buyout and growth equity areas, investment activity has been

extremely active with many leading private equity firms with brand names and long

histories actively pursuing acquisitions. See pages 13 through 20 for a list of just

some of the many private equity led deals that have been completed over the past

few years in the IT services sector.

OTHER REDWOOD IT SERVICES REPORTS

(available on Redwoods website at www.redcapgroup.com)

P/E Activity by Investor Class (2009 to Date)



KEY DRIVERS OF ACTIVITY

There are a number of drivers impacting the industry; creating significant transi-

tions in the underlying nature of the revenue streams and contractual relationships

that solutions providers have with customers, making the IT services sector attrac-

tive.

Key Drivers for Private Equity Players include:

Attractive Recurring Revenue Models

Transition to Managed Services Creates Multiple Expansion

Opportunity For Build-ups & Consolidations

Increasingly Tight Customer Relationships

Fragmentation and Lack of Market Leaders

Attractive Recurring Revenue Models

Contractually recurring services revenues can be a much more attractive revenue

stream than the one-time sales approach with which many players in the sector have

historically operated. Long term, contracted revenue can come in many forms.

While the managed services contract has been the primary area of focus lately,

many systems integrators have generated some form of contractually recurring rev-

enue for years without necessarily calling it that. Maintenance contracts and financ-

ing and leasing fees continue to comprise important recurring streams often over-

looked within systems integrators.

Recurring revenue streams are particularly important in financial buyouts where the

greater predictability of cash flows allows for increased financial leverage with

debt. Data center players, in particular, are very capital intensive, and with the ben-

efit of long term contracts with customers, financial owners in this area can see lev-

erage of up to 4.5x to 5.0x EBITDA.

Transition to Managed Services Creates Multiple Expansion

The market for managed services supporting enterprise IT (including data center,

network infrastructure, information systems, mobility, communications and securi-

ty) has been experiencing very solid growth as businesses continue to adopt this

contractual relationship with their solution providers. According to recent re-

search from Markets and Markets, the managed services market is expected to

growth from $143 billion in 2013 to $256 billion in five years, representing a com-

pounded annualized growth rate of 12.4%.

Impacting valuations, IT services players with contractually recurring revenues

will likely continue to receive valuation premiums owing to the stickiness of their

relationships with customers. Solution providers that are able to migrate their cus-

tomers to managed services contracts, and / or introduce new services provided

under such agreements are also likely to achieve an increase in their implied valua-

tion multiple as their mix of recurring revenues increases.

As with any market in transition, these changes present opportunities for players

able to manage the shift. We think IT services players that are able to provide

managed services for the larger end of the SMB market may see the greatest po-

tential upside. To date, much of the transition to managed services has been with

smaller businesses, however, as mid-size companies begin to shift, they are going

to turn to their historical solution providers. While some of these historical play-

ers are not developing the capabilities they need, those that do can not only transi-

tion their own customers to recurring managed services contracts, but can also

grow their customer base by capturing share from players unable to make the shift.

(Continued on page 4)

KEY DRIVERS OF ACTIVITY



We think this transition will create significant shakeup in the industry and oppor-

tunity for those that get it right.

Opportunity for Build-ups and Consolidations

Many buyout firms have increasingly focused on build-ups (making smaller add-

on acquisitions to a core platform they have acquired) and consolidation plays

(rolling up many similar small players) to help create value beyond purely finan-

cial mechanics and leverage. Given its high degree of fragmentation, the IT ser-

vices sector presents an excellent space for these strategies.

Build-Ups: The fragmented nature of the industry provides ample sources of

both platform companies as well as add-on acquisitions. We believe that build-up

strategies present an excellent opportunity as enterprise customers are increasingly

looking to single source their IT needs with a provider that can handle an ever

growing list of IT resources and be better able to handle the integration amongst

these resources. Many private, entrepreneur-owned businesses lack either the cap-

ital or the expertise to expand their businesses into new markets, either through

acquisition or internal investment. This presents financial investors with the op-

portunity to acquire a platform business with a strong focus and customer base,

and then bring the capital and management talent necessary to grow it beyond

where its current owner can take it.

Private equity groups currently pursuing build-up strategies in the IT services in-

clude Oak Hill with its acquisition of managed hosting provider Intermedia (see

page 6) and Court Square with invest acquisition of telephony and contact center

integrator SPS (See page 7).

Consolidation Plays: The recent shift to managed services and SaaS models has

provided a new strategy and much better model for consolidating smaller players,

especially in the managed and cloud services areas where there are still numerous

small players with very similar offerings (such as hosted exchange, hosted teleph-

ony, data MSPs). As SMB customers become much more closely tied to their

solution provider under recurring services contracts, and as the shift to the cloud

puts more control in the hands of the solutions provider (as opposed to the product

vendor), we believe that consolidation strategies involving the roll up of many

smaller players have a much greater chance of succeeding than in the past. We

think this higher success rate will be due to the higher switching costs for custom-

ers thus reducing the risk for the churn as customer bases are acquired and consoli-

dated onto single platforms.

Not surprisingly, private equity groups have been much more active in this space.

Just over the past two years, a number of notable transactions have occurred that

highlight the move by rather large, sophisticated players to take another shot at

creating national players through consolidation (for example, All-Covereds roll-

up of 20 plus smaller MSPs) to serve the IT services needs of the SMB market.

Increasingly Tight Customer Relationships

While businesses with contractually recurring revenues, such as data center and

managed hosting providers, have been a main focus for financial investors, there

are many systems integrators, outsourcers and consultancies that have a large re-

curring revenue element to their business, even though they dont have long term

contracts with their customers. This particularly seems to be the case with play-

ers serving mid-sized and larger enterprises where they are regularly generating at

least several million dollars a year in revenue. In many cases, the end customer

has outsourced much of their IT support to the solution provider and as a result,

every year, there is some new project, significant technology refresh, or just the

deployment of dozens of personnel each year to the customer for ongoing support

and maintenance.

Weve seen many systems integrators, especially those supporting large software

applications, that have 80% of their revenue regularly come from existing custom-

ers, year after year. While this may not be contractually recurring, the customer

will likely continue to spend and would have difficulty moving to another vendor.

Given this recurring dynamic, we believe players in the space may offer attractive

valuations as there is less capital chasing them, and yet they still provide the sta-

bility of a customer base that is desired.

(Continued from page 3)

(Continued on page 5)



Fragmentation and Lack of Market Leaders

Much of the IT services market still remains highly fragmented, except for the

data center space which has seen a significant consolidation over the past several

years. While the large enterprise market is sourced by a more concentrated group

of vendors including HP EDS, Dell Perot, Accenture, IBM Global Services and a

handful of others, the lack of a few dominant leaders in the SMB market presents

significant opportunity. And given the large number of SMB enterprises, there is

likely room for dozens of successful players.

Our point on this is that one does not need to be overly concerned with competi-

tion or the dominance of a few large players (as in the data center market). While

the managed hosting, integration and consulting markets are competitive, they are

very large markets and there are plenty of customers to go around for providers

that can offer a compelling service.

Further, this fragmentation is also a result of the limitations that many of even the

largest players in these markets face. Most IT services players doing under $1

billion in revenue are still privately owned and lack the capital and management

expertise necessary to expand into new areas through acquisition. Likewise, many

managed hosting players are still small and mostly focused on a narrow set of of-

ferings, such as hosting Microsoft Exchange, Oracle databases or even simple

websites. For these players, if a private equity group can integrate the right man-

agement talent, and provide capital for growth and acquisition, they may find that

a solid player that has flat lined could be just the right platform for growth; and

these are just the players that can be acquired at realistic, cash flow based multi-

ples.

(Continued from page 4)



The managed hosting space has seen some of the highest levels of activity by pri-

vate equity firms in the last few years due to the contractual nature of the business

and the strong organic growth opportunities. From Silver Lakes acquisition of

GoDaddy to Oak Hills acquisition of Exchange hosting provider Intermedia, a

number of the most recognized leveraged buyout groups have been quite active.

We expect to see a continued steady flow of platform acquisitions by private equity

groups as well as many follow-on consolidation deals by recently acquired players.

Already, the new financial owners of both Intermedia and GoDaddy have been ac-

tive in leveraging their platforms. In the case of Intermedia, the company has ac-

quired Zlago (cloud services for SMBs) and Telanetix (hosted voice services) as it

looks to broaden its solution offering beyond just Microsoft offerings to provide a

complete suite of cloud based services to SMBs.

GoDaddy has also continued its M&A activity after becoming a portfolio company

of SilverLake, recently acquiring LoCu for $70m, providing a service for small

businesses to help get located and found through online channels.

We expect to the managed hosting area to be the most active space going for pri-

vate equity groups over the next several years, given the fragmentation of the mar-

ket, the organic growth prospects, and the contractual nature of the revenue

streams.

Subsector Review: Managed Hosting

Intermedia / Oak Hill Capital:

Target: Intermedia

Acquirer: Oak Hill Capital Par tners

Date: May 2011

Amount: NA

Description: Intermedia is the largest inde-

pendent provider of managed hosting for Mi-

crosoft Exchange. Oak Hill has significant expe-

rience in the data center space (having done both

Telecity Redbus and ViaWest). As evidence

that they have big expectations for Intermedia,

Oak Hill installed former Savvis head Phil Coen

as CEO. While Intermedia and Oak Hill are

likely still working through the strategy, we ex-

pect it will include at least one or more acquisi-

tions to broaden the solution set and transform

Intermedia into a broad Master MSP.

Source: Intermedia, 5/26/11, Press Release

Cloud Sherpas / Columbia Capital:

Target: Cloud Sherpas

Investor: Columbia Capital

Date: December 2012 / May 2012

Amount: $40m / $20m

Description: Cloud Sherpas decision to raise

additional capital at this time is in response to

accelerating adoption of cloud technology by en-

terprises and the opportunity to lead the market

transition as a CSB. The new funds will allow

Cloud Sherpas to better serve existing and pro-

spective customers who are rapidly increasing their

use of cloud services and are anxious to move off

legacy on-premise systems. The new capital will

also be used by Cloud Sherpas to grow its presence

in key geographic regions, extend partnerships

with Google and salesforce.com, and expand into

emerging technology categories.

Source: Cloud Sherpas, 12/20/12, Press Release

GoDaddy / SilverLake

Target: Go Daddy

Acquirer: SilverLake

Date: June 2011

Amount: $2,250m

Description: Go Daddy is the wor ld's largest on

-ramp for cloud-based software and services. The

company serves more than 9.3 million global cus-

tomers and manages more than 48 million domain

names. Greg Mondre, Managing Director,

of Silver Lake said: "Go Daddy is powerfully posi-

tioned for future growth as it continues to innovate

and add to its truly unique platform of cloud-based

software and services. At the same time, we plan

to maintain and augment all of the attributes that

have made Go Daddy a clear market leader today,

including world class customer support and com-

petitive pricing for its 9.3 million customers."

Source: Silverlake, 7/1/11, Press Release



The systems integration subsector has become of increasing interest to buyout firms

with a number of leading private equity groups including Thomas H. Lee, Court

Square, Nautic Partners, Platinum Equity, all becoming active.

Driving this interest are a couple of important dynamics. First, is the fragmentation

and the opportunity to leverage a larger platform to acquire other complementary

players and create a more full service solution provider that can better meet the full

needs of mid-size enterprises. Second, is the trend to managed services and recur-

ring revenue models and the ability to acquire one-time revenue oriented businesses

at 4.5x to 6.0x EBITDA now, transitioning some of that stream to a managed ser-

vices model over the next several years. Under this strategy, acquirers and inves-

tors hope to create value through the multiple expansion resulting from a shift to a

higher quality contractual revenue stream.

Additionally, investors have also found that many of these businesses already have

a large recurring revenue nature, either through the same of maintenance contracts

and leasing arrangements, or just based on steady degree of repeat business from

existing customers. For some larger integrators and consultants, we often see exist-

ing customers regularly providing 70% to 80% of each years new sales. While

much of this is not contractual, given the nature of the customers and solutions sup-

ported, it nevertheless tends to be recurring, year after year.

Subsector Review: Systems Integration

SPS / Court Square:

Target: Strategic Products & Services

Acquirer: Cour t Square Par tners

Date: October 2011

Amount: NA

Description: Cour t Square Par tners has ac-

quired Strategic Products and Services, a leading

integrator of Avaya telephony solutions including

PBXs, call centers and a wide range of other te-

lephony and data solutions. This transaction is one

of several recently in the Avaya channel others

including Genstars acquisition of ConvergeOne

and PAETECs acquisition of Tulsa based Avaya

dealer Xeta Technologies.

Source: CapitalIQ

CompuCom / Thomas H. Lee:

Target: CompuCom

Acquirer: Thomas H. Lee

Date: Apr il 2013

Amount: $1,100m

Description: CompuCom has established itself

as a clear leader in providing cost-effective IT

service management and solutions and is well

known for its exemplary customer service. We

believe the Company is well-positioned to capture

additional market share in its traditional areas of

strength as it deepens its expansion into new ser-

vices towers. We look forward to partnering with

the talented CompuCom management team to

further grow the business and to continue building

value, said Seth Lawry, Managing Director at

THL.

Source: CompuCom, 4/8/13, Press Release

FishNet Consulting / Investcorp:

Target: FishNet Consulting

Acquirer: Investcorp

Date: J anuary 2013

Amount: $200m

Description: FishNet, of Over land Park, Kan.,

provides information-technology security sales and

consulting services for large- and medium-sized

companies, as well as for the U.S. government.

Andrew Flett of Investcorp said, Whats appeal-

ing for us is FishNet is the leading company in a

highly fragmented space, he continued, he ma-

jority of the market is comprised of small, regional

players, but FishNet is among the select few com-

panies that has been able to establish a leading

national presence .

Source: Chris Dieterich, 1/22/13, www.wsj.com



The managed services space has been one of the most active in terms of private

equity investment with most of that activity focused on growth equity as opposed to

venture capital (i.e. early stage / start-up). Given that the managed services market

is still relatively small and highly fragmented, there tend to be fewer options of

scale for larger buyout groups looking to invest $50m in equity or more.

To date, most of the activity in managed hosting involves rounds of expansion capi-

tal, like Canaan Partners investment in premium tech services player iYogi or Tu-

dor Growth Equitys investment in SingleDigits.

There have also been a few smaller financial buyers that are specifically targeting

the managed services space. Technology Capital Investors, based in New York,

and TUC Brands, based in Canada have each been acquiring smaller MSPs, typical-

ly focusing on regional players with $3m to $15m in revenue and paying around

1.0x revenue. With each of these players, they are attempting to consolidate MSPs

under a single umbrella and then provide some degree of centralized support, cross

selling or other services to leverage their consolidated scale.

Subsector Review: Managed Services

Bravura / Technology Capital Investors:

Target: Bravura Networks

Acquirer: Technology Capital Investor s

Date: September 2011

Amount: NA

Description: Bravura Networks, a San Diego,

Calif.-based MSP and member of CRN's Next-Gen

250, has been acquired by Technology Capital

Investors (TCI). Sam Attias of TCI said, The

attraction to us was they are vertically focused. We

want to continue to see them vertically focused.

They built a nice business with some efficient

operations providing traditional managed services

over the years. Bravura found TCI as a great

partner to build a full cloud offering to stay com-

petitive in the ever changing marketplace.

Source: crn.com, 9/12/11, Press Release

Single Digits / Tudor Growth Equity:

Target: Single Digits

Investor: Tudor Growth Equity

Date: May 2012

Amount: $10m

Description: New funding will be utilized to

support rapid growth and product development for

ensuring laptops, smartphones, tablets and other

WiFi-enabled devices, are securely connected to

the Internet and managed/supported vis--vis tradi-

tional IT infrastructures and new cloud-based ser-

vices and applications. We look for companies

that have a firm grasp on their target markets

operational challenges, said Jeff Williams, Part-

ner, Tudor Growth Equity. The funding will enable

Single Digits to quickly into the healthcare and

higher education verticals, while strengthening

their core hospitality and retail markets.

Source: Single Digits, 5/17/12, Press Release

iYogi / Canaan Partners:

Target: iYogi

Investor: Canaan Par tners

Date: December 2010

Amount: $30m

Description: iYogi raised $30 million in a new

round of financing to further boost the companys

swift global growth. The new round of investment

in iYogi will expand services outside the existing

consumer market and the Windows Operating

System platform. It will provide the company with

the capability to extend its platform to the global

SME market and also aggressively address the

growing need for supporting mobile consumer

devices. Investors in the round are interested

in the increasing dependency on technology and

anticipate a surging need for continuing on-

demand tech support services.

Source: iYogi, 12/13/10, Press Release



The data center market has probably seen the most activity from private equity over

the past 5 to 7 years, although going forward we expect that private equity players

will be either be building upon existing investments or exiting the space through

sales to large strategics like Equinix or some of the major carriers like Verizon

(Terremark) or CenturyLink (Savvis) that have now acquired large data center plat-

forms.

One group active in the space has been Oak Hill, which had also acquired and built

up Telecity Redbus back in 2005 and in 2010 acquired ViaWest. Oak Hill is also

an investor in managed hosting provider Intermedia. Players recently entering the

market including Madison Dearborn and Providence Equity, two very large and

established funds that saw an opportunity with Canadian player Q9. As many com-

panies increasingly look to move data outside the U.S, the Canadian market may

offer a unique growth opportunity over the next few years.

Subsector Review: Data Center

Q9 Networks / Madison Dearborn & Prov-

idence Equity:

Target: Q9 Networks

Acquirer: Madison Dearborn/Providence Equi-

ty

Date: June 2012

Amount: $1,058m

Description: Q9 is Canada's leading provider of

outsourced data center solutions such as hosting,

co-location and cloud computing services. The

investor group is encouraged by Q9s management

team and the combination of Q9's innovative data

center services with Bell's world-leading network

and hosting infrastructure offers leading data cen-

ter and cloud solutions for private and public

sector organizations of all sizes in Canada.

Source: Q9 Networks, 10/17/12, Press Release

QTS / General Atlantic:

Target: Quality Technology Services (QTS)

Investor: General Atlantic

Date: May 2012 / October 2009

Amount: $25m / $150m

Description: The company is expecting to use

the capital infusion to expand its downtown Atlan-

ta data center and acquire a Virginia property to

serve as a new data center. General Atlantic is

encouraged by QTS current footprint and service

portfolio touch every major component in the data

center and hosting markets, from large customized

data center to colocation to managed services.

This follow on investment by General Atlantic is

a testament to both QTS continued ability to exe-

cute on the companys business plan and the over-

all strength of the hosting sector.

Source: Data Center Knowledge, 5/26/10

ViaWest / Oak Hill:

Target: ViaWest

Acquirer: Oak Hill

Date: Apr il 2010

Amount: $420m

Description: ViaWest offer s cost-effective, high-

ly secure, interconnected data center facilities de-

signed to meet the needs of a wide range of busi-

ness and public sector clients. Bob Morse, a part-

ner of Oak Hill Capital, said, Explosive growth in

Internet traffic and a growing preference by all but

the largest corporations to outsource their own data

centers is driving tremendous demand for high-

quality, stand-alone data center solutions. ViaWest

is ideally positioned to serve this growing demand,

and we look forward to supporting the companys

management team as they continue to build the

franchise.

Source: ViaWest, 4/20/10, Press Release



Valuations for IT Services players vary rather significantly depending on the nature

of the revenues (recurring vs. one-time), the growth trajectory, and the margin po-

tential. However, from the charts below and over the next several pages, the data

highlights a few key trends that are important to understand.

Recurring Services Valued at Rich Premium: Recurring services are valued at a

significant premium in the marketperhaps more than double that of non-recurring

revenues. We believe this premium is due to two key factors. First, recurring ser-

vices businesses are currently experiencing rather high growth as businesses in-

creasingly adopt managed service offerings. More importantly, recurring services

involve lower risk over time as customers are much more stable. As shown in the

table below, cloud and managed services and the data center players trade at aver-

age multiples of 11.8x and 18.5x respectively, clearly reflecting strong growth ex-

pectations. These are more at more that double that of the EBITDA multiples for

integrators.

The Market Rewards Growth: The scatter plot below clearly shows that the mar-

ket rewards growth. This is perhaps most evident in the relatively significant dif-

ferences in the multiples for the offshore consultants (Wipro and Cognizant) rela-

tive to their North American counterparts. Somewhat surprisingly, the scatter plot

also indicates a relatively good correlation between the EBITDA multiple and

growth. While this should theoretically be the case, it is not always quite so evident

when actually plotted. We believe this tighter correlation in IT services is due to

the more predictable nature of the business (relative to cutting edge, product tech-

nology spaces where longer expectations are often not reflected in near term perfor-

mance.

Sources: Capital IQ, Venturewire, Redwood Capital

2012 EBITDA and Revenue Multiples

VALUATION METRICS

2013 EBITDA / 2013 EBITDA Growth Rate




Publicly Traded IT Services Companies



Shown below are the stock indices for each of the categories of public companies

show on the prior page. As noted below, while the S&P 500 has increased modest-

ly from early October 2009, the indices for cloud and managed services as well as

data center players are up nearly 100%. This reflects the strong growth for cloud

based offerings, although the entire IT sector has also risen rather strongly with

large cap technology actually higher now than its peak in 2007.

Other indices have also performed well, relative to the general market, including

distributors and consultants. Integrators on the other had have underperformed, or

at least Black Box and Insight Enterprises have, these being the two integrators

comprising our index.


Public Stock Trends



Financial buyers have been increasingly active in the IT services area. As noted

before, businesses with recurring revenue models have been a primary attractor as

these businesses provide a predictable revenue base. In addition, the high growth

prospects as well as the consolidation opportunities in fragmented or emerging mar-

kets has also provided an attractive framework.

While recurring revenues are a key focus, there has been an increasing amount of

buyout activity focused on traditional systems integrators and channel partners.

Court Squares acquisition of Avaya channel partner SPS, InvestCorps acquisition

of security integrator Fishnet, and Platinum Equitys Pomeroy acquisition represent

just a few deals of integration and consulting oriented businesses. In these spaces,

financial buyers see an opportunity to secure a solid platform upon which they can

grow through acquisition by adding complementary product offerings to provide a

more full suite of offerings. This plays on the trend among customers to single

source their IT outsourcing needs.

Finally, the players in this area include many of the most well known buyout

groups including Madison Dearborn, Oak Hill, InvestCorp, Thomas H. Lee, Silver-

Lake, and TA Associates. In addition, based on discussions, we know that many

other leading firms are actively looking for opportunities in the sector.

Selected M&A 2009 - Present

ACQUISTIONS BY FINANICAL BUYERS IN IT AND CLOUD SERVICES



Selected M&A 2009 - Present (continued)



Private fundraising in the IT services area has picked up significantly since the

downturn of 2008 with most investment activity focused on two areas: capital in-

tensive facilities-based businesses like data centers, and managed hosting or man-

aged services business with a recurring revenue model.

Fundraisings for managed services and managed hosting players have been quite

numerous over the past two years (see table below) with many rounds of between

$10 million and $25 million in size. Investors in these businesses are many of the

traditional IT investors or growth equity firms. In addition, companies raising

these rounds tend to be much more geographically dispersed, as opposed to certain

technology areas where they players are highly concentrated in Silicon Valley or

perhaps Boston / New York.

While the introduction of recurring revenue models is certainly attractive to finan-

cial investors, we believe that it is more important for buyouts using leverage than

growth equity investors putting pure equity to work. The most significant driver of

growth equity investing in this sector is simply the very high levels of organic

growth taking place in the managed hosting, managed services and cloud services

areas. With the significant shift by businesses to adopt these services, at the ex-

pense of the traditional solution provider model or internal IT staffs, the growth

prospects are high. This leads to very attractive ROI opportunities for the invest-

ment of new capital. They dont call it growth equity for any other reason.

GROWTH AND VENTURE CAPITAL INVESTMENTS

Selected Venture and Private Equity Investments2009 - Present

Sources: Capital IQ, Venturewire, Issuer press releases




Selected Venture and Private Equity Investments2009 - Present (continued)



Member FINRA/SIPC

Redwood Capital Group is an investment banking firm serving the technology, communications media, business services and other

growth industries. The firm focuses on mergers & acquisitions, corporate finance, restructuring and valuation advisory services for

its clients worldwide.

2013_09-private equity in the it services space.pdf

Documents

services space

services area

services market

services sector introduction

recurring services

cloud services sectors

sector overview private

cloud enablement services