Presidio CEO: Private Equity Favors Scale As Channel Consolidation Looms

“The channel market is going to continue to consolidate. Scale is going to continue to become more and more important, and it will be harder and harder for local and regional providers without scale to thrive and [for] some of them it may be hard to survive,” said Presidio CEO Bob Cagnazzi.

Channel scale is the most important driver today when private equity firms choose which solution provider to invest money in, according to Presidio CEO Bob Cagnazzi. With channel consolidation ahead, Cagnazzi says gaining scale and resources from private equity funding enables channel partners to thrive in today’s highly competitive and complex IT market.

“The channel market is going to continue to consolidate. Scale is going to continue to become more and more important, and it will be harder and harder for local and regional providers without scale to thrive and [for] some of them it may be hard to survive,” said Cagnazzi, who has held CEO and top executive roles in the channel for more than three decades.

Presidio has been backed by various private equity firms since 2005. Under Cagnazzi’s leadership, Presidio was acquired by private equity firm BC Partners in 2019 for approximately $2.1 billion, quickly taking the public company private. Cagnazzi said some channel partners will need private equity to survive in the years ahead and he understands what IT financial investors are seeking in a solution provider today.

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“Now you’ve seen through COVID that scale is important. Why? The market has changed because clients are consuming in a different way, and that different way requires two important things that [private equity] is looking for,” said the CEO of Presidio, which ranks No. 22 on CRN’s Solution Provider 500 list.

One of the major areas private equity firms are looking at when investing in a solution provider is who has the technical skillsets across the entire stack.

“You have to understand how a change in the network impacts security, how it impacts your storage, your compute, your applications. You didn’t have to worry about that before because everything in IT was very siloed,” said Cagnazzi. “So you could have a lot of fragmented boutique providers that did just networking, or just co-location, or just security, or just storage like EMC. You could do that because clients worked in silos. They consumed and they architected in silos. It doesn’t work that way anymore.”

Channel partners today need the financial resources to scale across the technology spectrum while also adding talent and resources, which is where private equity firms come into play. “You also need to have the customer base that’s large enough that you can leverage all those resources rather than have them sitting on the bench,” he said. “You’ve got to be able to keep them busy.”

Another big area private equity looks at is if solution providers are developing the correct solutions and services with a good amount of capital expenditure or “capex” behind it.

“The solutions that you’re developing now, do you have a capex component to them or are they highly expensive resources?” the Presidio CEO said. “You need to have the capital base to invest in the capex portion of those solutions that your building. So scale becomes more important today. Private equity is interested in our industry because they realize that, ‘Okay, scale now is going to be truly important.’’’

Cagnazzi said there are a few different types of private equity firms in terms of mindset and strategy.

BC Partners, for example, acquired Presidio to become a consolidator to spur growth. Presidio has acquired a slew of smaller channel partners over the years including cloud consulting specialist Coda Global in 2020 to boost its cloud business, as well as Ireland-based Arkphire earlier this year to significantly increase its global footprint.

Another type of private equity strategy is around the mid-market, according to Cagnazzi.

“You have other private equity firms saying, ‘I’m going to buy somebody and I will dress them up a bit, then I’m going to sell them to a consolidator.’ That’s in the mid-market now which says, ‘I’m going to pick up a small channel partner, I might do one or two acquisitions, then I’m going to transact that through another private equity firm,’” said Cagnazzi. “Private equity realizes that consolidation has become really important, which again, is all around scale.”