Evergreen hungry for more Australian MSPs

Evergreen expects to acquire more Australian MSPs this year than in 2024, the company’s vice president of M&A, Sydney Hockett, told techpartner.news.

Hockett was speaking in April, ahead of Evergreen’s appearance at The M&A Session events in Sydney on July 3 and Melbourne on July 24, where Tech Research Asia’s (TRA) Mark Iles will present TRA’s first Australian M&A Report.

“We’ve done 10 acquisitions [in ANZ] up until now – one in New Zealand and then nine in Australia – and we have a couple more in the works,” Hockett said. “We very much expect that to be a higher number this year, and those are goals that we've set out.”

Since we spoke with Hockett, Evergreen has announced the purchase of Brisbane-based REDD.

“As we thought about our international expansion it was very important that we did quite a bit of market mapping work up front. Worst case scenario would have been that we do one or two acquisitions that are quite literally on an island from the rest of our portfolio. If we're going to expand, the intention was always to build a very sizeable portfolio.

“We also have an opportunity to capitalise on being early in the sense that there's certainly other acquirers, but there's less private equity roll-ups than we see in the US and the UK market as well. So a benefit of being early and taking that bet is something that I think will hopefully pay off for us.”

Interest rate fluctuations hadn’t shaken the company’s appetite for MSPs in Australia, when we spoke with Hockett in April.

“We have the benefit of scale and our ability to do acquisitions, our ability to access capital to do acquisitions, remains fairly stable,” she said.

“As interest rates fluctuate it's very hard for buyers that may be in the early stages of raising capital. It's very expensive to do that, versus being more established. It makes that easier and you can kind of hedge against that risk a bit more.”

MSPs also remained a “great investment”, in Hockett’s view. “I think they've proven that through all the macro-economic fluctuations that have happened, even since we got started in 2017. There is an appetite for most financial buyers to be invested in MSP, and so that has not changed and that's why valuations have made remained relatively steady even as the macro economy fluctuates.”

“But I do think for buyers, their ability to do acquisitions does depend on where they are in their life cycle of raising funding and having committed capital to do their acquisitions.”

Target criteria

Evergreen’s acquisition criteria includes businesses having approximately $5 million revenue, more than $800,000 EBITDA and at least 50 percent of revenue recurring.

“We're less focused on businesses that are pure software VARs or CSPs. I think that can be a component of the recurring revenue, but we want to see a significant component of those sticky recurring services,” Hockett said.

Financial maturity is also important, as is customer profile. Do MSPs have “really high customer concentration with any one customer or few customers? What does your retention look like? What does your organic growth or new logos look like?”

Team structure is also a consideration. Is the business “incredibly founder dependent or do you have a more built-out management team and org chart with different swim lanes for different people?”

“Operational maturity is something that you hear a lot about in this space and that we pay attention to,” Hockett added.

“Businesses tend to hit plateaus – around three million of revenue, around five and around 10. And at each of those levels, there's generally an investment that has to be made that's going to take the business from a very founder-centric, small team to  more built-out team that. That can be painful from a profit standpoint for a while, but it's going to fuel that next phase of growth.

“So I think adhering to any framework that keeps the team accountable to that is really powerful. It's not something we necessarily require, but I would say our strongest businesses are certainly running on EOS or some other framework that’s oriented around operational maturity.”

Building relationships

One of the challenges for Evergreen’s team is getting to know myriad MSPs. Evergreen recently hired Zaun Bhana as director of MSP M&A for ANZ, after 21 years running Perth-based Leap Consulting.

“We've always been impressed with Leap and what he has done there, and as [Zaun] started thinking about what was next for him, it was almost too good to be true for us,” Hockett said.

“It's so valuable for us to have someone who not only has all the connections in this space and knows a lot of people, but a really deep understanding of the businesses that we're buying.”

The ANZ CEO of Evergreen’s MSP-focused subsidiary Lyra Technology Group is Waruna Kirimetiyawa. “Waruna and Claire [Reynolds, Lyra finance associate] are also two really important people that we have, where you get that face-to-face interaction and on-the-ground understanding that also makes the logistics of time and place easier,” Hockett said.

Expansion in the “grey area”

In addition to its MSP portfolio, Evergreen invests in cloud-based ERP businesses – predominantly those focussed on Microsoft Dynamics, Sage, Acumatica and NetSuite and related services. That portfolio is US-focussed but Hockett said there is “probably a near term path to international expansion there”. Evergreen also invests in government services providers, with a focus on federal government.

“As we continue to grow, I think there will 100 per cent be opportunities for expansion within the grey area that sits between those three industries – particularly between the ERP and the MSP side, there's quite a lot of crossover,” Hockett said.

“We actually got started in the ERP space because we acquired a company that was half ERP, half MSP, and so there's clearly a lot of alignment.”

Security and compliance, and public cloud, are among the “adjacencies” top of mind for Evergreen in the MSP market.

“There's nothing wrong with being a generalist MSP”

Hockett agreed “in some ways” with the suggestion MSPs should specialise or scale.

“I think where you've seen MSPs misstep is taking that almost a step too far, and that you have to just completely focus on one end market,” she said.

“There can be benefits to that, but I actually think it's a little bit more nuanced than that. There's nothing wrong with being a generalist MSP – everybody needs MSP services. But I think it's more about how you're doing it. What I think that really comes down to is the shift from being a reactive service provider to a proactive technology advisor.

“Rather than just focussing on ‘how fast can we close the tickets that you're sending in to us?’, it’s asking ‘how are we being a mission critical consultant, advisor, partner to you?’. That doesn't have to mean you're doing something ultra niche, it's just you're doing it really well and you're making yourselves invaluable to the customer.”

Hear Evergreen’s Zaun Bhana and other buyers and sellers discuss M&A, and Tech Research Asia’s Mark Iles present his M&A Report, at The M&A Session event in Sydney on July 3 and Melbourne on July 24. Register to attend.