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Introduction

Large channel partners are getting larger. This has been happening for the last few years. The newest twist to growth is channel partners seeking financing from private equity (PE) firms. While some channel partner growth was organic but more took the “tried and true” mergers and acquisitions (M&A) route. The impact of PE investment in today’s channel is very significant and could radically change the dynamics of the IT channel partner ecosystem. Many of the owner operated channel partners report that they have not been successful in securing public/banking financing, in part due to their non-traditional models, in some cases not having the collateral needed to secure the loan.
Many channel partners rely heavily on factoring. Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount .
For a time, IT distributors had been involved to help broker deals on behalf of some partners. Some are still involved in this activity. The past is less relevant than the present. There has been a tremendous amount of interest, and investment in the IT channel community by PE firms.

Neuralytix believes the shift to PE ownership will cause a transformation of the overall IT partner landscape. Many of these companies are successful businesses, working to achieve goals, take advantage of financially sales driven goals set up by vendors, which at times has created a different than traditional business models. Some have been caught in this game of overstating sales to get the higher MDF funding. Regardless, the systems and business models will need adjustment to get in line with a true independent model that benefits the partners; as these channel partners move away from the dependence on vendor money.

PE will bring significant business value, best practices, and demands for ROI. PE firms are true financiers with limited time, patience, and the dynamics necessary to exploit the vendor-channel programs and relationships. Each deal is expected to be profitable, not full of economic gymnastics.

The PE firms are a disciplined group who will have one eye open at all times protecting, and hopefully, growing their investment. If these investments are successful, vendors need to beware that the partner now has influential PE members on its team, and in many cases, on its board of directors.

Vendors watch out!

Vendors have been, and likely will continue, to be drawn to the largest channel partners who are responsible for the largest percent of indirect sales. The vendor’s stake goes up as they each race to keep, or expand, their partner community. Vendors watch out that as its channel partners get larger, they are able to wield a bigger stick at the negotiating table.

Partners are making their own business decisions about their future, using vendors as enablers for their own business growth. For the first time, the channel partners are now calling a lot more of their own shots. The influx of PE capital proves the point and reality – the IT channel is maturing. This signals a new level of maturation of the channels’ business.

Partners watch out

There are a variety of reasons partners are seeing investment. The overall trend is to expand through acquisitions for expansion of new offerings. Some recent examples are Pomeroy, who is looking to merge with other partners. NWN wants to grow managed services to compete with telcos and other big players. Sirius is looking for funding to acquire more IT partners to expand their business. These are just a few examples, but the common thread is growth – a very honorable intention.

However, Neuralytix is concerned about the timing and the patience of PE firms with respect to the time necessary to realize the return on their investment.

Interestingly, some of the PE capital going to the channel maybe, or will be, the same firms funding large or emerging vendors. Take for example is leveraged buyout by PE firms with respects to the recent Dell/EMC acquisition.

The question is will there be a true separate of church and state in the IT vendor and partner world? Equally important is how much influence can the PE firms yield on the partners to serve the various investments? For example, will the new Dell/EMC increase its partner revenue through these investments? If this works, will PE start to follow suit?

The bottom line is, will the partners have the freedom to choose best of breed versus balancing the needs of the vendors versus technology choices? This could be one of the many types of sea changes the market may see!

Guidance

There are many more PE transactions taking place in the IT market and its ecosystem. Arguably there are many different elements to each deal. Neuralytix will cover this is a future Insight focusing on the types of PE deals that are occurring with IT channel partners. We will look further into the pros and cons of these deals, what it means to the partner and the IT route to market ecosystem.