Why CRN is calling cloud software companies the next big bet

Over the last few years, private equity firms have been investing billions into IT services. This is a good thing for the companies that rely on cloud services to grow – the more financial power the sector has, the more innovation business users will be able to access. It’s also a positive for the different players in this space – cloud software companies, managed service providers (MSPs), and other channel resellers.

But to understand the long-term impact on the industry, we need to answer an important question: why is private equity taking such a huge interest in IT services?

Let’s look at how much private equity companies are investing in IT services and why cloud providers are attracting investors’ attention.

Private Equity Investments in the IT Services Space in Recent Years

According to M&A advisory firm martinwolf, private equity invested $25 billion into the channel in 2016. That comes after a large amount of activity in the space in 2015 when more than 60 percent of value-added reseller (VAR) and solution provider deals were made by private equity firms.

“Overall, IT services is a growing area,” said Zaid Alsikafi, managing director at Madison Dearborn Partners, in an interview with CRN in 2017. Madison Dearborn Partners (MDP) is no stranger to IT services investments – the Chicago-based firm acquired Intermedia in 2016.

And as companies “figure out how to operate in a more digital world,” investments are likely to keep growing, explains Alsikafi.

This is exactly what has happened. The need for cybersecurity and cloud services has grown as companies shift to more flexible work models and cloud-based IT infrastructure. At the same time, investment has skyrocketed.

From 2016 to 2019, when the U.S. economy was still booming before the pandemic, investments in information technology nearly tripled – in 2019, private equity investors poured $72.47 billion into IT companies. In 2020 investments topped $65 billion.

Even with an economic slowdown in 2021, private equity is still laser-focused on IT service providers – technology deals made up 31 percent of global buyouts in 2021 – which puts IT and software ahead of any other sector.

It’s clear that the interest in IT isn’t slowing down anytime soon. In fact, as companies lean more heavily on the cloud in the future, the private equity world is likely to continue devoting a fair share of energy to this space.

Why Cloud Companies Are Attracting Investors

There are a few reasons why the IT services space – and more specifically, cloud services – is attracting attention. Let’s look at what those are:

• Cloud solutions are scalable. That means that businesses can stick with the same solution as they grow. This feature increases the profit potential for cloud providers and resellers that master the customer relationship.

• Cloud-based communications and security tools are essential to operating a remote or hybrid team. Flexibility is something that more companies are prioritizing since the pandemic, with experts predicting a large chunk of the workforce to remain remote in the long term.

• Companies are continuing to expand their cloud budgets as businesses strive to modernize their IT systems and create digital-first operations. Gartner predicts that more than half of business IT spending will shift to the cloud by 2025.

• Businesses can customize their cloud technology to create a stack that serves their unique needs. With the cloud, customers can access the tools their employees need and integrate their communications and security solutions with key business applications. This capability makes cloud software an indispensable tool for businesses of all sizes – which will drive even more market growth.

• With the cloud, even small businesses can access advanced technology. Instead of having to invest in an on-premises solution and go through a lengthy onboarding process to access new technologies, companies can sign up for subscription-based cloud services, get started with minimal downtime, and scale up or down as needed. This opens up the playing field for more business customers, making room for more IT services companies to be successful.

• And the biggest driver – the subscription model itself. Channel providers and software companies can bring in ongoing revenue when they sell products through a subscription service model.

But not all IT services companies are driving higher and higher revenues with cloud services. The reality is that there are many cloud companies that aren’t making money.

For private equity firms, however, finding the diamonds in the rough is worth it. Those companies that have developed a high-value operational model through a combination of indispensable technology, a commitment to industry-leading security, and excellent customer support are able to drive revenue growth year after year.

Like Intermedia. We tripled our revenue in the five years leading up to the acquisition by MDP, and have continued to grow our product portfolio and customer base since then. Add to that our ability to attract channel partners and be a part of their growth, and we have something that enables everyone to come out winning – Intermedia investors, customers, and partners.

There’s so much opportunity in this space when you know which cloud software companies have what it takes to thrive in the long term.

Intermedia offers customers a worry-free experience – with high-level security, reliability, onboarding, support, and compliance. Businesses can choose from our suite of cloud-based communications, security and compliance, and productivity solutions to optimize their cloud technology stack.

We also have a flexible partner model designed to help our channel partners grow their cloud business and increase profits.

Contact us today to learn more about what Intermedia can do for your organization.