The Dark Side of Private Equity in IT

(Note: I first covered this topic in my SBT newsletter in May. But it needs even more focus in the year ahead.)

Is Private Equity Good or Bad?

The obvious answer is "neither," of course. So let's be more specific: Does private equity investment in our industry do more good than bad? I think it has done good and it has done bad, but the future is headed in the wrong direction.

Appropriate for this time of year, PE in IT is a lot like the classic Dickens tale of Ebenezer Scrooge and the ghosts of past, present, and future. There has been more good than bad; the present is a mixed bag; and the future will be bleak unless something changes. The future hasn't been written.

But there's hope! Read on.

Note: Almost no one in our industry and channel is free to say what they want about the companies they do business with. The "media" outlets will never openly tell the darker side of what they know about vendors because they don't want to lose advertising. Most of the opinion leaders and popular web sites are exactly the same. And so are all of the companies that make money putting on shows.

I have had many conversations with people in the industry who have been threatened by a vendor. They are being told to not discuss problems regarding the vendor because they are subject to a "non disparagement" clause in their contract. So, they don't complain in online forums or discuss openly for fear of being sued.

I know that ConnectWise has had such a clause for a long time. And I've heard that Kaseya has one for the companies they've purchased in the last several years. I'm not sure how these square with the First Amendment of the U.S. Constitution, but I do know that economic free speech is not as protected as political free speech.

SO: Members are left grumbling in meetings when they are pretty sure it's not being recorded, or mumbling on anonymous forums such as Reddit.

Our industry is not alone. Private Equity is generally bad for business, certainly bad for people, and sometimes very good for investors. There was a great line in the New York Times: "Companies bought by private equity firms are far more likely to go bankrupt than companies that aren’t. Over the last decade, private equity firms were responsible for nearly 600,000 job losses in the retail sector alone." * (Emphasis is mine)

The idea of private equity is very straight forward: You get a bunch of investors together; you buy a company; you reorganize and improve that company, often with economies of scale not otherwise available; and you make a huge profit. Rinse and repeat with more and more companies. Sounds great. It rarely works out that way.

When private equity first sets its eyes on an industry, there are many legitimate good deals. They buy a company, fire a bunch of people, make some changes, and sometimes improve some things. But then a few good deals evolve into an infestation of private equity. That's where the MSP or SMB IT channel is now.

During the infestation period we're in now, "everyone" thinks they're going to get rich buying vendors, running them into the ground, and sucking all the profit they can out of the industry. Similarly, different groups of investors are doing the same thing with individual MSPs. They are buying up individual companies in deals that are very bad for the sellers, gutting the companies, and taking all the profit elsewhere.

What's NOT included in this equation?

Humans: You or your employees

Clients (end users)

Relationships

Ethics, beliefs, and culture

Customer service, or even decent quality service

Product improvements

If you haven't seen the episode of The Sopranos where Tony takes over his friend's sporting goods store, YouTube it. Basically, Tony forces his friend Dave to do a lot of things he knows he shouldn't, eventually forcing him into bankruptcy. Dave doesn't understand and asks Tony why he did all this.

Tony expounds: "It's my nature. The frog and scorpion."

In the end, private equity in our industry is a LOT like Tony Soprano cleaning out his friend's store, destroying everything about it, and taking as much money as he can before he walks away. That's where we are today.

Kaseya is the current bad example. They're not the first, the worst, or the last. But they've certainly shown our industry how fast you can take businesses built on great products and great service and turn them into the most hated, despised companies in the channel. Private equity has taken some great companies and some great people and turned them into money-hungry cogs in a system that does not care one tiny bit about you, your clients, your employees, or the industry as a whole.

I'm not sure how this ends. With a little inflation and some higher interest rates, it may not be possible to keep paying the investors what they require for their annual cathedraticum. I fear that bankruptcies, consolidations, and even anti-trust lawsuits are just ahead for our industry.

A VERY common tactic to look out for: A private equity investment company will split a company into two companies, with all the debt in one of those companies. Then, one company goes bankrupt and the PE folks keep the profitable pieces. The leftovers and the stinking pile of waste? That's someone else's problem. This will happen. But you probably won't hear much about it in any channel-centric media. So keep an eye on channel-adjacent news outlets.

It will be hard for you to see the real news, because you won't see it in any of the magazines or tradeshow companies. You certainly won't hear about it on stage. No one wants to lose sponsors or advertising.

The Good News is ...

If you're a smaller company, or you don't need to sell, you can focus on your clients, your employees, your culture, and excellent customer service. You will thrive in this environment because you can focus 100% on being the opposite of the companies who have been consumed into the Borg-like collective of private equity.

PE-backed companies cannot care about you.

PE-backed companies cannot care about your clients.

PE-backed companies cannot care about your culture.

PE-backed companies cannot care about good service.

PE-backed companies cannot care about your employees.

But YOU can embrace all of those things and thrive!

I'm not saying it will be easy or quick. The road ahead is going to be difficult, no matter what you do. Our industry is going to go through some tough stuff. But YOU can thrive. You can survive. You can come out the other end profitable and doing great.

If I can help, let me know.

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* See https://www.nytimes.com/2023/04/28/opinion/private-equity.html. Note, also, that Institutional Investor puts the total of jobs lost to PE in the last ten years at 1.3 million. See https://www.institutionalinvestor.com/article/b1gfygl4r8661f/LBOs-Make-More-Companies-Go-Bankrupt-Research-Shows.