MSPs: The Backbone of Mid-Market IT
Managed Services Providers (MSPs) have become indispensable for mid-market and small enterprises that lack the budget or expertise to maintain internal IT departments. They handle everything from 24/7 help desk support to cybersecurity monitoring, cloud migration, Microsoft 365 management, compliance readiness, and disaster recovery.
For private equity investors, this isn’t just IT outsourcing — it’s a critical service with sticky recurring revenue. Clients sign multi-year contracts, face high switching costs due to embedded systems and institutional knowledge, and rely on their MSP as a “trusted IT department.” Those dynamics make MSPs highly resilient, even in downturns.
Why Private Equity Sees Opportunity
Unlike some industries that consolidate for cost savings alone, the MSP sector has several unique characteristics that make it attractive to PE:
- Fragmented Vendor Base: Thousands of MSPs operate as regional, founder-led businesses with <$10M revenue. Few have national scale, leaving ample whitespace for consolidation.
- Recurring, Contracted Revenue: Monthly recurring revenue (MRR) is the lifeblood of MSPs and provides PE funds with predictable cash flows that support leveraged buyouts.
- Cybersecurity Demand: Rising cyber threats push clients toward MSPs that can offer advanced security operations center (SOC) services, compliance monitoring, and endpoint protection — services smaller MSPs can’t scale effectively.
- Vendor Partnerships: Larger MSP platforms command preferred pricing and support from vendors like Microsoft, Cisco, and Palo Alto Networks, creating cost and service advantages.
- Geographic Reach: A regional MSP may serve 200–500 clients within a metro area. By rolling up multiple regions, a PE-backed platform can offer “local service, national scale.”
The MSP Roll-Up Playbook in Practice
Private equity roll-ups in this space typically follow an accelerator model:
- Acquire a Platform MSP: Usually $20M–$50M+ in revenue, with mature systems (ConnectWise, ServiceNow, or Autotask), a seasoned management team, and industry certifications (SOC 2, ISO 27001).
- Add-On Acquisitions: Target smaller MSPs with $3M–$10M in revenue in adjacent geographies or niche verticals (healthcare IT, legal tech, financial services).
- Integration & Standardization: Consolidate onto a single ticketing/monitoring system, align cybersecurity offerings, and centralize NOC (Network Operations Center) and SOC services.
- Cross-Selling Services: Expand client wallet share by layering higher-margin services like cloud migration, VoIP, managed security, and compliance reporting.
Execution Risks Unique to MSPs
The MSP roll-up strategy is compelling, but it carries distinct integration risks:
- Founder Dependency: Many MSPs are still founder-led, with the owner holding key client relationships. Earn-outs, retention packages, and cultural alignment become critical.
- Tool Stack Rationalization: Different MSPs may use different RMM (remote monitoring and management) and PSA (professional services automation) tools. Merging them without disrupting service can take years.
- Valuation Multiples: Platform MSPs often command 10–14x EBITDA, while smaller MSPs trade at 5–7x. Bridging expectations between sellers who “hear about” higher multiples and PE buyers who price based on size and maturity is a recurring challenge.
- Client Experience: A too-rapid shift to centralized support can alienate clients who value the “local IT guy who knows our business.” Maintaining high-touch service during integration is key.
What’s Next for MSP Consolidation
Cybersecurity and compliance pressures — from HIPAA to FTC Safeguards to SEC cybersecurity disclosure rules — will only increase demand for MSPs. Layering in AI-driven monitoring tools, co-managed IT models, and industry-specific solutions will differentiate scaled players.
PE-backed platforms that manage integrations thoughtfully and preserve the customer-first DNA of acquired MSPs will be positioned to exit either to larger strategics (global IT services firms) or secondary PE buyers seeking scale.
