KBS - Managed Service Providers - Market Insight

MARKET INSIGHT – MANAGED SERVICE PROVIDERS

M&A ACTIVITY CONTINUES TO RISE WITHIN IT MANAGED SERVICES

The UK IT managed services sector is witnessing unprecedented growth with a surge in mergers and acquisitions (M&A). We have taken an in-depth exploration of the company sales landscape for this Managed Service providers (MSPs), presenting valuable insights into the key trends shaping company sales activity, including the strategic moves of prominent acquirers and the role of private equity in driving industry consolidation. As a result of us handling a number of completed deal transactions and continued outreach within this sector, here is an overview of the current trends we have noted in this sector. + RISING INFLUENCE OF PRIVATE EQUITY Private equity now drives around 70% of UK IT managed services M&A deals, fuelled by buy-and-build strategies aimed at consolidating market share. + EMPHASIS ON CYBERSECURITY AND CLOUD ACQUISITIONS Acquisitions in the cybersecurity and cloud sectors are growing as businesses respond to increasing cyber threats and cloud adoption, now comprising 40% of deals. + STRATEGIC MOVES IN DIGITAL TRANSFORMATION The rising demand for digital transformation, software development, and automation is prompting more acquisitions, particularly of companies providing bespoke IT solutions. + SECTOR RESILIENCE AMID ECONOMIC UNCERTAINTY Despite inflation and rising interest rates, deal values remain robust, reflecting confidence in the long-term growth of managed IT services. + MOVE TOWARDS FULL-SERVICE IT PROVIDERS Larger IT firms are acquiring smaller MSPs to offer comprehensive, end-to-end solutions, positioning themselves as one-stop-shop providers for SMEs.

CURRENT LANDSCAPE

Deal activity in the IT managed services sector is characterised by robust private equity involvement, as evidenced by the previously referenced statistic that approaching three-quarters of UK transactions in this sector during 2024 have been PE-backed deals. Sizeable transactions such as Kin + Carta’s £239million acquisition by Valtech, and Kerv’s £800million valuation, underscore the sector’s high value despite economic headwinds.

KEY TRENDS

Several key trends have shaped the UK M&A market in the IT managed services sector in recent years:

Increased private equity involvement: Private equity (PE) continues to play a dominant role in IT managed services M&A, with PE-backed investments accounting for around 70% of all UK deals in 2024. This trend reflects a growing interest in buy-and-build strategies, where private equity firms acquire smaller MSPs to consolidate market share. For instance, Hg Capital has been notably active in backing acquisitions in this space. A focus on cybersecurity and cloud services: Acquiring companies that provide cybersecurity and cloud based services has become a strong focus. With the rise in cyber threats and increased adoption of cloud infrastructure, MSPs offering robust cybersecurity solutions and scalable cloud services are highly attractive targets for acquirers. The proportion of cybersecurity M&A deals in the IT services sector has risen to around 40%. Strategic acquisitions for digital transformation: Due to the ongoing digital transformation of companies, there is heightened demand for custom IT solutions and software development. Companies offering tailored digital transformation services such as software engineering, automation, and digital consulting, have been key targets for both strategic acquirers and private equity.

Resilience despite economic headwinds: Despite economic challenges, including inflation and higher interest rates, deal values have remained robust, particularly for high-value IT service companies. This reflects strong

confidence in the sector’s long-term growth prospects, driven by the increasing need for managed IT services amid digitalisation and remote working trends. A shift towards one-stop-shop service providers: Consolidation in the market is enabling IT service companies to become full-service providers for SMEs. Larger players are acquiring smaller, specialised MSPs to offer end-to-end technology solutions, including network management, communications, and cybersecurity, thus becoming one-stop-shops for their clients.

The UK IT managed services sector is witnessing unprecedented growth with a surge in acquisitions, fueled by a shift towards greater digital capability

The trends outlined above highlight the evolving landscape of IT managed services M&A, characterised by consolidation, digital transformation and increasing PE interest.

WHAT IS THE MAIN APPEAL OF THE IT SECTOR TO PRIVATE EQUITY?

Attracted by the sector’s high growth potential and penchant for recurring revenues, private equity houses have flooded into the IT channel in recent years. Having initially picked off larger, £100million-plus targets, PE funds have more recently shifted their focus to the mid-market space.

As a result of this feeding frenzy, there are a plethora of private equity houses who now hold investments in the UK IT managed services sector.

Many of these, including LDC, Bowmark Capital, August Equity, Beech Tree and Livingbridge – back four or more MSPs apiece, and we maintain good relationships with many global funds.

In a pattern that might be considered as “bucking the trend” but not at all unexpected for the sector, deal volume increased in 2020 and again in 2021, despite the COVID-19 pandemic. This is indicative of the fact the pandemic, and the associated trends of remote and hybrid working, was positive for the future of MSPs – a testament to the increased requirement for IT services created by the shift in hybrid working. investors:

PRIVATE EQUITY CONNECTIONS

We maintain active relationships with many leading private equity houses that either hold or are actively seeking acquisitions in the IT MSP space, and which also receive funds from institutional investors.

Livingbridge: Portfolio company FluidOne looking for bolt-ons

Palatine: Portfolio company Acora looking for bolt-ons

Horizon: Portfolio company Modern Networks looking for bolt-ons

Alpine: Portfolio company Evergreen looking for bolt-ons

Bowmark: Portfolio company LittleFish looking for bolt-ons

YFM: Actively looking for acquisitions in this space

Chiltern: Portfolio company Cybit looking for bolt-ons

Beech Tree: Portfolio company Arc Systems actively looking for bolt-ons

FPE Capital: 35 deals in the

August Equity: Backs Air IT, who themselves have acquired several companies

software/IT space and actively looking for bolt-ons

Inflexion: Holds Kerv, who themselves have been advised by our Group, and Redcentric

Connection Capital: Supported Mode Solutions’ acquisition of eacs

One Equity Partners: Acquired Trustmarque in an aims to scale MSP services

Permira: Portfolio companies including cyber security-focused MSP, Mimecast

MOTIVATIONS OF TRADE ACQUIRERS AND CONSOLIDATORS

+ MARKET EXPANSION AND SCALE Through acquisition of MSPs, consolidators can uickly expand their market footprint, buying established companies with existing customer bases helps them grow without building operations from scratch. + BROADER SERVICE OFFERINGS Consolidators are using acquisitions to create a comprehensive, end-to-end IT solution. Many SMEs prefer a “one-stop shop” for IT services, including cloud, security, and infrastructure management. + ACCESS TO SPECIALISED SKILLS AND TECHNOLOGY MSPs often have specialised knowledge in areas like cybersecurity, cloud, or data management, which are high demand fields. Trade consolidators gain access to these skills and technology portfolios through acquisitions. + RECURRING REVENUE STREAMS The financial stability that MSPs’ subscription models offer is particularly appealing to private equity-backed consolidators looking for steady returns on investment in a growing market. + DIGITAL TRANSFORMATION AND SECURITY DEMAND The surge in remote work and increased cybersecurity threats have raised demand for managed services and consolidators see acquisitions as a way to quickly address these growing needs in the market. + SYNERGIES AND COST EFFICIENCIES Consolidators achieve economies of scale by integrating back-office functions, technology infrastructure, and personnel across multiple acquired companies. This consolidation reduces overhead and can enhance profitability. In recent years, trade consolidators’ interest in acquiring MSPs has been driven by the need for scale, wider expertise, and a stronger market position in what is a highly competitive and continually evolving technology market. As digital transformation accelerates, businesses of all sizes increasingly depend on MSPs for robust, integrated solutions across cybersecurity, cloud, infrastructure, and support services. Acquirers see an opportunity in this demand surge to build comprehensive, “one-stop shop” solutions by bringing together specialised providers. This approach allows them to better serve a diverse client base while enhancing operational efficiencies and leveraging economies of scale. For example, consolidators like Ekco, Daisy Group, and Mode Solutions have made acquisitions that expand their service offerings and geographic reach, creating powerful synergies in both resource allocation and customer service​. Additionally, the financial predictability of the MSP model, with its recurring revenue streams from subscription or contract-based services, is another strong incentive. This stable revenue appeals especially to private equity backed consolidators who are looking to secure steady returns. Additionally, acquiring MSPs allows consolidators to incorporate cutting-edge capabilities quickly which are essential as businesses face growing threats and demand for secure, scalable IT infrastructure​ Ultimately, these acquisitions enable consolidators to deepen their presence in a lucrative market, foster innovation, and respond effectively to the evolving needs of businesses in a digital-first economy.

WHAT TYPES OF BUSINESS ARE STRATEGIC ACQUIRERS PURSUING?

UK-based MSPS are looking to strategically acquire companies that can help them expand market presence, diversify their service offerings, and strengthen their technical expertise. Ideal acquisition targets include those with niche capabilities, a robust customer base, strong growth metrics, and alignment with emerging tech trends.

+ NICHE SERVICE PROVIDERS

+ HIGH-GROWTH & HIGH-MARGINS Companies with a proven track record of fast growth or those serving high-demand sectors are especially attractive.

Those with a highly specialised service offering who can bring specific, niche expertise and a strategically beneficial client base.

+ HOLDERS OF PROPRIETARY TECH/IP + SME-FOCUSED PROVIDERS Businesses with proprietary software, processes, or intellectual property that can provide a competitive advantage are highly valued. Many acquisitions focus on MSPs with a strong presence amongst SMEs who often require ongoing IT support and provide a stable, recurring revenue stream.

+ STRONG RETENTION RATES

+ THOSE IN NEW MARKETS

Strategic acquirers value companies with long-standing client bases who provide predictable income and often offer opportunities to upsell or cross-sell additional services.

Companies that provide access to new regions or market segments are ideal for expansion-focused MSPs. A local presence or relationships in underserved areas can be a significant asset.

In recent years, trade consolidators’ interest

in acquiring MSPs has been driven by the need for scale, wider expertise, and a stronger market position in this highly competitive and continually evolving market

SECTOR DEAL ACTIVITY

WAVE9 RECEIVES MAJOR INVESTMENT FROM MODERN NETWORKS Modern Networks, backed by Horizon Capital, has acquired Wave9, a company based in Staffordshire that provides secure, filtered internet and telecommunications services to schools.

IBIT SOLUTIONS ACQUIRED BY TECHSOL GROUP Digital transformation company, Techsol Group completed the acquisition of managed services provider, IBIT Solutions. The acquisition will enable Techsol to expand its presence to the Midlands and to be able to offer a more diverse service offering to its customer base across the region. KBS DEAL IASME CONSORTIUM ACQUIRED BY PHENNA GROUP Investor in niche TICC companies, Phenna Group, completed the acquisition of cyber certification provider, IASME Consortium in a dela that represents Phenna’s first move into the cyber security space. KBS DEAL

FLUIDONE COMPLETES THE STARTEGIC ACQUISITON OF COMPANY AND NETWORK CONSULTANTS FluidOne, backed by Livingbridge, has acquired Computer and Network Consultants (CNC), an award-winning IT services provider based in Sussex, serving around 250 small and medium-sized businesses.

TAUPO CONSULTING ACQUIRED BY PURELY COMPUTING Scotland-based Taupo Consulting has successfully been acquired by Purely Computing. This acquisition marks a significant step forward for both companies, enhancing their capabilities and market presence.

KBS DEAL

TACTUS GROUP COMPLETES BIST ACQUISITION BIST Group, situated in Yorkshire, has been successfully acquired by Tactus Group. This merger aims to strengthen both organizations’ offerings and create new opportunities within the industry. KBS DEAL

EUROTECH SERVICES ACQUIRED BY EQUITY NETWORKS IT support and maintenance service provider, Eurotech, was acquired by Equity Networks as part of their ongoing buy and build strategy. The acquisition will allow Equity Networks to tap into ETS’ niche client base. KBS DEAL

BABBLE COMPLETES MIDLAND COMMS ACQUISITION abble, a UK-based cloud service provider, acquired Midland Comms and the MSP division of Cloudstream Technology in early 2023. These acquisitions expanded Babble’s customer base, adding over 850 clients and strengthening its position as a comprehensive provider of IT and communications solutions.

BEECH TREE PRIVATE COMPLETES ARC SYSTEMS INVESTMENT Beech Tree Private Equity invested in Arc Systems, an Essex-based MSP offering cloud and IT managed services. The investment aims to accelerate Arc’s growth and expand its Microsoft services offerings.

KEY ACQUIRERS & INVESTORS

MARKET INSIGHT The managed IT services sector in the UK is a substantial and expanding market, with revenues of over $89 billion USD as of 2023, driven by widespread digital transformation across industries and the demand for scalable IT solutions. SMEs constitute a key client base, seeking cost-effective and reliable IT support without the expense of dedicated in-house teams. The sector is forecasted to grow by 30% from 2023 to 2027, propelled by heightened demand for cloud infrastructure, cybersecurity services, and compliance solutions. Additionally, the rise of remote work, artificial intelligence, and data analytics continues to drive managed IT services growth, positioning the sector as a critical component of UK businesses’ strategic IT planning.

UK IT SERVICES MARKET REVENUE (BILLION USD, 2023 - 2027)

140

115.80

120

109.08

102.36

95.45

100

89.22

80

60

40

Revenue (bn USD)

20

0

2023

2023

2023

2023

2023 Source: Statista

The UK IT managed services sector, and subsequent M&A and investment appetite, is poised for growth driven by the below, with businesses increasingly relying on external experts to manage their IT infrastructure, drive digital transformation, and enhance cybersecurity. The demand for cloud services, cybersecurity solutions, and digital transformation expertise, combined with increasing pressure to improve efficiency and control costs, positions the sector for continued expansion.

+ INCREASED CLOUD ADOPTION

+ CYBERSECURITY CONCERNS

+ TRANSFORMATION & AUTOMATION + SME DEMAND FOR IT SUPPORT

+ 5G AND I o T INTEGRATION

+ COST PRESSURES

+ SUSTAINABILITY & GREEN IT

+ TALENT SHORTAGES & SKILLS GAPS

+ REMOTE WORKING

+ MANAGED IT FOR INDUSTRY- SPECIFIC SOLUTIONS

The managed IT services sector within the UK is forecasted to grow by 30% from 2023 to 2027, propelled by heightened demand for cloud infrastructure, cybersecurity services, and compliance solutions