REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Private Equity in the Cloud and IT Services Sector

September 2013

Financial Investors Taking a Fresh Look at an Evolving Space

INSIDE THIS ISSUE

INTRODUCTION

Page

1. Introduction
2. Key Drivers of Activity
3. Subsector Activity
Managed Hosting

1
3

Systems Integration

Managed Services

Data Center
9
4. Valuation Metrics
10
5. M&A by PE Groups
13
6. Growth and VC Investments 16
Other Redwood IT Services Reports
The following additional reports on the IT
Services space may be found on Redwoods website at www.redcapgroup.com

M&A in the Cloud & IT Services

Sectors July 2012
Cloud Enablement Services November 2011
Managed Service Providers May
2010
SaaS: Hosted Communications and
Information Management Applications August 2009
Contact:
Russell Crafton, Partner
rcrafton@redcapgroup.com
212.508.7110

This report focuses on investment and acquisition activity by

private equity firms in the IT and cloud services sectors.
While for years, financial investors have been intrigued by the
potential opportunities presented by the IT services area,
many have not been willing to put capital to work in the space
until recently. A number of changes are occurring however
including the shift to recurring services, the continued outsourcing of the IT function, and the need for solutions providers to offer broader capabilities, that have now made the area
of IT services an attractive space for private equity. In this
report, we look at the trends that have begun to attract capital,
the spaces in which financial investors are active, and some of
the specific deals actually completed over the past several
years across the venture, growth equity, and buyout landscapes.

OVERVIEW
For years, private equity firms have studied the IT services
market and wrestled with the right way to invest in the sector.
While the highly fragmented nature of the market has presented a compelling opportunity, the one-time nature of the revenue streams for IT consultants and VARs was problematic.
However, with the evolution of cloud and managed services
offerings, the increased shift towards outsourcing, and the ever
increasing need for the integration of technologies (which requires solutions providers to broaden their skill sets), the IT
service sector has suddenly become a very attractive space for
financial investors.

The renewed interest in the space is demonstrated by a number

of recent acquisitions by many leading private equity firms.
On the acquisition side, Oak Hill (acquired managed hosting
provider Intermedia), Silver Lake (acquired API-SPL & GoDaddy), Court Square (acquired Avaya channel partner SPS)
are just of few of the firms active in buyouts. Within the
growth equity area, players like General Atlantic (QTS), Canaan (iYogi), and Columbia Capital (Cloud Sherpas) have also
made sizeable investments.

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REDWOOD CAPITAL: SECTOR OVERVIEW

WHERE THE ACTION IS

Private Equity and the IT Services Sector

little capital to start or are not focused on building intellectual property, something
for which venture investors often look.

In looking at where private equity has been most active, we consider this from both
the sub-sector standpoint (such as integrators, managed hosting providers) as well However, within the buyout and growth equity areas, investment activity has been
as by asset class (venture, growth equity and buyouts). On pages 6 through 9, we extremely active with many leading private equity firms with brand names and long
provide a sector by sector review and highlight a few interesting deals in each area. histories actively pursuing acquisitions. See pages 13 through 20 for a list of just
some of the many private equity led deals that have been completed over the past
As for activity by asset class, as the chart below shows, the majority of activity is few years in the IT services sector.
coming from growth equity and buyouts. Venture capital has, and will likely continue to play, a much smaller role given that most services businesses either require
OTHER REDWOOD IT SERVICES REPORTS
(available on Redwoods website at www.redcapgroup.com)

P/E Activity by Investor Class (2009 to Date)

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REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

KEY DRIVERS OF ACTIVITY

KEY DRIVERS OF ACTIVITY

debt. Data center players, in particular, are very capital intensive, and with the benefit of long term contracts with customers, financial owners in this area can see leverage of up to 4.5x to 5.0x EBITDA.

There are a number of drivers impacting the industry; creating significant transitions in the underlying nature of the revenue streams and contractual relationships
that solutions providers have with customers, making the IT services sector attrac- Transition to Managed Services Creates Multiple Expansion
tive.
The market for managed services supporting enterprise IT (including data center,
network infrastructure, information systems, mobility, communications and securiKey Drivers for Private Equity Players include:
ty) has been experiencing very solid growth as businesses continue to adopt this
Attractive Recurring Revenue Models
contractual relationship with their solution providers. According to recent research from Markets and Markets, the managed services market is expected to
Transition to Managed Services Creates Multiple Expansion
growth from $143 billion in 2013 to $256 billion in five years, representing a compounded annualized growth rate of 12.4%.
Opportunity For Build-ups & Consolidations

Increasingly Tight Customer Relationships

Fragmentation and Lack of Market Leaders

Attractive Recurring Revenue Models

Contractually recurring services revenues can be a much more attractive revenue
stream than the one-time sales approach with which many players in the sector have
historically operated. Long term, contracted revenue can come in many forms.
While the managed services contract has been the primary area of focus lately,
many systems integrators have generated some form of contractually recurring revenue for years without necessarily calling it that. Maintenance contracts and financing and leasing fees continue to comprise important recurring streams often overlooked within systems integrators.

Impacting valuations, IT services players with contractually recurring revenues

will likely continue to receive valuation premiums owing to the stickiness of their
relationships with customers. Solution providers that are able to migrate their customers to managed services contracts, and / or introduce new services provided
under such agreements are also likely to achieve an increase in their implied valuation multiple as their mix of recurring revenues increases.
As with any market in transition, these changes present opportunities for players
able to manage the shift. We think IT services players that are able to provide
managed services for the larger end of the SMB market may see the greatest potential upside. To date, much of the transition to managed services has been with
smaller businesses, however, as mid-size companies begin to shift, they are going
to turn to their historical solution providers. While some of these historical players are not developing the capabilities they need, those that do can not only transition their own customers to recurring managed services contracts, but can also
grow their customer base by capturing share from players unable to make the shift.

Recurring revenue streams are particularly important in financial buyouts where the
greater predictability of cash flows allows for increased financial leverage with

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REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Opportunity for Build-ups and Consolidations

puts more control in the hands of the solutions provider (as opposed to the product
vendor), we believe that consolidation strategies involving the roll up of many
smaller players have a much greater chance of succeeding than in the past. We
think this higher success rate will be due to the higher switching costs for customers thus reducing the risk for the churn as customer bases are acquired and consolidated onto single platforms.

Many buyout firms have increasingly focused on build-ups (making smaller addon acquisitions to a core platform they have acquired) and consolidation plays
(rolling up many similar small players) to help create value beyond purely financial mechanics and leverage. Given its high degree of fragmentation, the IT services sector presents an excellent space for these strategies.

Not surprisingly, private equity groups have been much more active in this space.
Just over the past two years, a number of notable transactions have occurred that
highlight the move by rather large, sophisticated players to take another shot at
creating national players through consolidation (for example, All-Covereds rollup of 20 plus smaller MSPs) to serve the IT services needs of the SMB market.

Build-Ups: The fr agmented natur e of the industr y pr ovides ample sour ces of
both platform companies as well as add-on acquisitions. We believe that build-up
strategies present an excellent opportunity as enterprise customers are increasingly
looking to single source their IT needs with a provider that can handle an ever
growing list of IT resources and be better able to handle the integration amongst
these resources. Many private, entrepreneur-owned businesses lack either the capital or the expertise to expand their businesses into new markets, either through
acquisition or internal investment. This presents financial investors with the opportunity to acquire a platform business with a strong focus and customer base,
and then bring the capital and management talent necessary to grow it beyond
where its current owner can take it.

Increasingly Tight Customer Relationships

(Continued from page 3)

We think this transition will create significant shakeup in the industry and opportunity for those that get it right.

Private equity groups currently pursuing build-up strategies in the IT services include Oak Hill with its acquisition of managed hosting provider Intermedia (see
page 6) and Court Square with invest acquisition of telephony and contact center
integrator SPS (See page 7).
Consolidation Plays: The recent shift to managed services and SaaS models has
provided a new strategy and much better model for consolidating smaller players,
especially in the managed and cloud services areas where there are still numerous
small players with very similar offerings (such as hosted exchange, hosted telephony, data MSPs). As SMB customers become much more closely tied to their
solution provider under recurring services contracts, and as the shift to the cloud

While businesses with contractually recurring revenues, such as data center and
managed hosting providers, have been a main focus for financial investors, there
are many systems integrators, outsourcers and consultancies that have a large recurring revenue element to their business, even though they dont have long term
contracts with their customers. This particularly seems to be the case with players serving mid-sized and larger enterprises where they are regularly generating at
least several million dollars a year in revenue. In many cases, the end customer
has outsourced much of their IT support to the solution provider and as a result,
every year, there is some new project, significant technology refresh, or just the
deployment of dozens of personnel each year to the customer for ongoing support
and maintenance.
Weve seen many systems integrators, especially those supporting large software
applications, that have 80% of their revenue regularly come from existing customers, year after year. While this may not be contractually recurring, the customer
will likely continue to spend and would have difficulty moving to another vendor.
Given this recurring dynamic, we believe players in the space may offer attractive
valuations as there is less capital chasing them, and yet they still provide the stability of a customer base that is desired.
(Continued on page 5)

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REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

(Continued from page 4)

Fragmentation and Lack of Market Leaders

Much of the IT services market still remains highly fragmented, except for the
data center space which has seen a significant consolidation over the past several
years. While the large enterprise market is sourced by a more concentrated group
of vendors including HP EDS, Dell Perot, Accenture, IBM Global Services and a
handful of others, the lack of a few dominant leaders in the SMB market presents
significant opportunity. And given the large number of SMB enterprises, there is
likely room for dozens of successful players.
Our point on this is that one does not need to be overly concerned with competition or the dominance of a few large players (as in the data center market). While
the managed hosting, integration and consulting markets are competitive, they are
very large markets and there are plenty of customers to go around for providers
that can offer a compelling service.
Further, this fragmentation is also a result of the limitations that many of even the
largest players in these markets face. Most IT services players doing under $1
billion in revenue are still privately owned and lack the capital and management
expertise necessary to expand into new areas through acquisition. Likewise, many
managed hosting players are still small and mostly focused on a narrow set of offerings, such as hosting Microsoft Exchange, Oracle databases or even simple
websites. For these players, if a private equity group can integrate the right management talent, and provide capital for growth and acquisition, they may find that
a solid player that has flat lined could be just the right platform for growth; and
these are just the players that can be acquired at realistic, cash flow based multiples.

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REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Subsector Review: Managed Hosting

The managed hosting space has seen some of the highest levels of activity by private equity firms in the last few years due to the contractual nature of the business
and the strong organic growth opportunities. From Silver Lakes acquisition of
GoDaddy to Oak Hills acquisition of Exchange hosting provider Intermedia, a
number of the most recognized leveraged buyout groups have been quite active.
We expect to see a continued steady flow of platform acquisitions by private equity
groups as well as many follow-on consolidation deals by recently acquired players.
Already, the new financial owners of both Intermedia and GoDaddy have been active in leveraging their platforms. In the case of Intermedia, the company has acquired Zlago (cloud services for SMBs) and Telanetix (hosted voice services) as it

Intermedia / Oak Hill Capital:

looks to broaden its solution offering beyond just Microsoft offerings to provide a
complete suite of cloud based services to SMBs.
GoDaddy has also continued its M&A activity after becoming a portfolio company
of SilverLake, recently acquiring LoCu for $70m, providing a service for small
businesses to help get located and found through online channels.
We expect to the managed hosting area to be the most active space going for private equity groups over the next several years, given the fragmentation of the market, the organic growth prospects, and the contractual nature of the revenue
streams.

Cloud Sherpas / Columbia Capital:

GoDaddy / SilverLake

Target: Inter media

Target: Cloud Sher pas

Target: Go Daddy

Acquirer: Oak Hill Capital Par tner s

Investor: Columbia Capital

Acquirer: Silver Lake

Date: May 2011

Date: December 2012 / May 2012

Date: J une 2011

Amount: NA

Amount: $40m / $20m

Amount: $2,250m

Description: Inter media is the lar gest independent provider of managed hosting for Microsoft Exchange. Oak Hill has significant experience in the data center space (having done both
Telecity Redbus and ViaWest). As evidence
that they have big expectations for Intermedia,
Oak Hill installed former Savvis head Phil Coen
as CEO. While Intermedia and Oak Hill are
likely still working through the strategy, we expect it will include at least one or more acquisitions to broaden the solution set and transform
Intermedia into a broad Master MSP.

Description: Cloud Sher pas decision to r aise

additional capital at this time is in response to
accelerating adoption of cloud technology by enterprises and the opportunity to lead the market
transition as a CSB. The new funds will allow
Cloud Sherpas to better serve existing and prospective customers who are rapidly increasing their
use of cloud services and are anxious to move off
legacy on-premise systems. The new capital will
also be used by Cloud Sherpas to grow its presence
in key geographic regions, extend partnerships
with Google and salesforce.com, and expand into
emerging technology categories.

Description: Go Daddy is the wor ld's lar gest on

-ramp for cloud-based software and services. The
company serves more than 9.3 million global customers and manages more than 48 million domain
names. Greg Mondre, Managing Director,
of Silver Lake said: "Go Daddy is powerfully positioned for future growth as it continues to innovate
and add to its truly unique platform of cloud-based
software and services. At the same time, we plan
to maintain and augment all of the attributes that
have made Go Daddy a clear market leader today,
including world class customer support and competitive pricing for its 9.3 million customers."

Source: Cloud Sherpas, 12/20/12, Press Release

Source: Silverlake, 7/1/11, Press Release

Source: Intermedia, 5/26/11, Press Release

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REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Subsector Review: Systems Integration

The systems integration subsector has become of increasing interest to buyout firms tors hope to create value through the multiple expansion resulting from a shift to a
with a number of leading private equity groups including Thomas H. Lee, Court higher quality contractual revenue stream.
Square, Nautic Partners, Platinum Equity, all becoming active.
Additionally, investors have also found that many of these businesses already have
Driving this interest are a couple of important dynamics. First, is the fragmentation a large recurring revenue nature, either through the same of maintenance contracts
and the opportunity to leverage a larger platform to acquire other complementary and leasing arrangements, or just based on steady degree of repeat business from
players and create a more full service solution provider that can better meet the full existing customers. For some larger integrators and consultants, we often see existneeds of mid-size enterprises. Second, is the trend to managed services and recur- ing customers regularly providing 70% to 80% of each years new sales. While
ring revenue models and the ability to acquire one-time revenue oriented businesses much of this is not contractual, given the nature of the customers and solutions supat 4.5x to 6.0x EBITDA now, transitioning some of that stream to a managed ser- ported, it nevertheless tends to be recurring, year after year.
vices model over the next several years. Under this strategy, acquirers and inves-

SPS / Court Square:

CompuCom / Thomas H. Lee:

FishNet Consulting / Investcorp:

Target: Str ategic Pr oducts & Ser vices

Target: CompuCom

Target: FishNet Consulting

Acquirer: Cour t Squar e Par tner s

Acquirer: Thomas H. Lee

Acquirer: Investcor p

Date: October 2011

Date: Apr il 2013

Date: J anuar y 2013

Amount: NA

Amount: $1,100m

Amount: $200m

Description: Cour t Squar e Par tner s has acquired Strategic Products and Services, a leading
integrator of Avaya telephony solutions including
PBXs, call centers and a wide range of other telephony and data solutions. This transaction is one
of several recently in the Avaya channel others
including Genstars acquisition of ConvergeOne
and PAETECs acquisition of Tulsa based Avaya
dealer Xeta Technologies.

Description: CompuCom has established itself

as a clear leader in providing cost-effective IT
service management and solutions and is well
known for its exemplary customer service. We
believe the Company is well-positioned to capture
additional market share in its traditional areas of
strength as it deepens its expansion into new services towers. We look forward to partnering with
the talented CompuCom management team to
further grow the business and to continue building
value, said Seth Lawry, Managing Director at
THL.

Description: FishNet, of Over land Par k, Kan.,

provides information-technology security sales and
consulting services for large- and medium-sized
companies, as well as for the U.S. government.
Andrew Flett of Investcorp said, Whats appealing for us is FishNet is the leading company in a
highly fragmented space, he continued, he majority of the market is comprised of small, regional
players, but FishNet is among the select few companies that has been able to establish a leading
national presence .

Source: CapitalIQ

Source: CompuCom, 4/8/13, Press Release

Source: Chris Dieterich, 1/22/13, www.wsj.com

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REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Subsector Review: Managed Services

The managed services space has been one of the most active in terms of private
equity investment with most of that activity focused on growth equity as opposed to
venture capital (i.e. early stage / start-up). Given that the managed services market
is still relatively small and highly fragmented, there tend to be fewer options of
scale for larger buyout groups looking to invest $50m in equity or more.

and TUC Brands, based in Canada have each been acquiring smaller MSPs, typically focusing on regional players with $3m to $15m in revenue and paying around
1.0x revenue. With each of these players, they are attempting to consolidate MSPs
under a single umbrella and then provide some degree of centralized support, cross
selling or other services to leverage their consolidated scale.

To date, most of the activity in managed hosting involves rounds of expansion capital, like Canaan Partners investment in premium tech services player iYogi or Tudor Growth Equitys investment in SingleDigits.
There have also been a few smaller financial buyers that are specifically targeting
the managed services space. Technology Capital Investors, based in New York,

iYogi / Canaan Partners:

Bravura / Technology Capital Investors:

Single Digits / Tudor Growth Equity:

Target: iYogi

Target: Br avur a Networ ks

Target: Single Digits

Investor: Canaan Par tner s

Acquirer: Technology Capital Investor s

Investor: Tudor Gr owth Equity

Date: December 2010

Date: September 2011

Date: May 2012

Amount: $30m

Amount: NA

Amount: $10m

Description: iYogi r aised $30 million in a new

round of financing to further boost the companys
swift global growth. The new round of investment
in iYogi will expand services outside the existing
consumer market and the Windows Operating
System platform. It will provide the company with
the capability to extend its platform to the global
SME market and also aggressively address the
growing need for supporting mobile consumer
devices. Investors in the round are interested
in the increasing dependency on technology and
anticipate a surging need for continuing ondemand tech support services.

Description: Br avur a Networ ks, a San Diego,

Calif.-based MSP and member of CRN's Next-Gen
250, has been acquired by Technology Capital
Investors (TCI). Sam Attias of TCI said, The
attraction to us was they are vertically focused. We
want to continue to see them vertically focused.
They built a nice business with some efficient
operations providing traditional managed services
over the years. Bravura found TCI as a great
partner to build a full cloud offering to stay competitive in the ever changing marketplace.

Description: New funding will be utilized to

support rapid growth and product development for
ensuring laptops, smartphones, tablets and other
WiFi-enabled devices, are securely connected to
the Internet and managed/supported vis--vis traditional IT infrastructures and new cloud-based services and applications. We look for companies
that have a firm grasp on their target markets
operational challenges, said Jeff Williams, Partner, Tudor Growth Equity. The funding will enable
Single Digits to quickly into the healthcare and
higher education verticals, while strengthening
their core hospitality and retail markets.

Source: iYogi, 12/13/10, Press Release

Source: crn.com, 9/12/11, Press Release

Source: Single Digits, 5/17/12, Press Release

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REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Subsector Review: Data Center

The data center market has probably seen the most activity from private equity over established funds that saw an opportunity with Canadian player Q9. As many comthe past 5 to 7 years, although going forward we expect that private equity players panies increasingly look to move data outside the U.S, the Canadian market may
will be either be building upon existing investments or exiting the space through offer a unique growth opportunity over the next few years.
sales to large strategics like Equinix or some of the major carriers like Verizon
(Terremark) or CenturyLink (Savvis) that have now acquired large data center platforms.
One group active in the space has been Oak Hill, which had also acquired and built
up Telecity Redbus back in 2005 and in 2010 acquired ViaWest. Oak Hill is also
an investor in managed hosting provider Intermedia. Players recently entering the
market including Madison Dearborn and Providence Equity, two very large and

ViaWest / Oak Hill:

QTS / General Atlantic:

Q9 Networks / Madison Dearborn & Providence Equity:

Target: ViaWest

Target: Quality Technology Ser vices (QTS)

Acquirer: Oak Hill

Investor: Gener al Atlantic

Target: Q9 Networ ks

Date: Apr il 2010

Date: May 2012 / October 2009

Amount: $420m

Amount: $25m / $150m

Acquirer: Madison Dear bor n/Pr ovidence Equity

Description: ViaWest offer s cost-effective, highly secure, interconnected data center facilities designed to meet the needs of a wide range of business and public sector clients. Bob Morse, a partner of Oak Hill Capital, said, Explosive growth in
Internet traffic and a growing preference by all but
the largest corporations to outsource their own data
centers is driving tremendous demand for highquality, stand-alone data center solutions. ViaWest
is ideally positioned to serve this growing demand,
and we look forward to supporting the companys
management team as they continue to build the
franchise.

Description: The company is expecting to use

the capital infusion to expand its downtown Atlanta data center and acquire a Virginia property to
serve as a new data center. General Atlantic is
encouraged by QTS current footprint and service
portfolio touch every major component in the data
center and hosting markets, from large customized
data center to colocation to managed services.
This follow on investment by General Atlantic is
a testament to both QTS continued ability to execute on the companys business plan and the overall strength of the hosting sector.

Source: ViaWest, 4/20/10, Press Release

Source: Data Center Knowledge, 5/26/10

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Date: J une 2012

Amount: $1,058m
Description: Q9 is Canada's leading pr ovider of
outsourced data center solutions such as hosting,
co-location and cloud computing services. The
investor group is encouraged by Q9s management
team and the combination of Q9's innovative data
center services with Bell's world-leading network
and hosting infrastructure offers leading data center and cloud solutions for private and public
sector organizations of all sizes in Canada.

Source: Q9 Networks, 10/17/12, Press Release

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Private Equity and the IT Services Sector

VALUATION METRICS
Valuations for IT Services players vary rather significantly depending on the nature pectations. These are more at more that double that of the EBITDA multiples for
of the revenues (recurring vs. one-time), the growth trajectory, and the margin po- integrators.
tential. However, from the charts below and over the next several pages, the data
The Market Rewards Growth: The scatter plot below clearly shows that the marhighlights a few key trends that are important to understand.
ket rewards growth. This is perhaps most evident in the relatively significant difRecurring Services Valued at Rich Premium: Recurring services are valued at a ferences in the multiples for the offshore consultants (Wipro and Cognizant) relasignificant premium in the marketperhaps more than double that of non-recurring tive to their North American counterparts. Somewhat surprisingly, the scatter plot
revenues. We believe this premium is due to two key factors. First, recurring ser- also indicates a relatively good correlation between the EBITDA multiple and
vices businesses are currently experiencing rather high growth as businesses in- growth. While this should theoretically be the case, it is not always quite so evident
creasingly adopt managed service offerings. More importantly, recurring services when actually plotted. We believe this tighter correlation in IT services is due to
involve lower risk over time as customers are much more stable. As shown in the the more predictable nature of the business (relative to cutting edge, product techtable below, cloud and managed services and the data center players trade at aver- nology spaces where longer expectations are often not reflected in near term perforage multiples of 11.8x and 18.5x respectively, clearly reflecting strong growth ex- mance.

2012 EBITDA and Revenue Multiples

2013 EBITDA / 2013 EBITDA Growth Rate

Sources: Capital IQ, Venturewire, Redwood Capital

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Private Equity and the IT Services Sector

Publicly Traded IT Services Companies

Sources: Capital IQ, Venturewire, Redwood Capital

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Private Equity and the IT Services Sector

Public Stock Trends

Shown below are the stock indices for each of the categories of public companies
show on the prior page. As noted below, while the S&P 500 has increased modestly from early October 2009, the indices for cloud and managed services as well as
data center players are up nearly 100%. This reflects the strong growth for cloud
based offerings, although the entire IT sector has also risen rather strongly with
large cap technology actually higher now than its peak in 2007.

Other indices have also performed well, relative to the general market, including
distributors and consultants. Integrators on the other had have underperformed, or
at least Black Box and Insight Enterprises have, these being the two integrators
comprising our index.

Sources: Capital IQ, Venturewire, Redwood Capital

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Private Equity and the IT Services Sector

ACQUISTIONS BY FINANICAL BUYERS IN IT AND CLOUD SERVICES

Financial buyers have been increasingly active in the IT services area. As noted
before, businesses with recurring revenue models have been a primary attractor as
these businesses provide a predictable revenue base. In addition, the high growth
prospects as well as the consolidation opportunities in fragmented or emerging markets has also provided an attractive framework.

just a few deals of integration and consulting oriented businesses. In these spaces,
financial buyers see an opportunity to secure a solid platform upon which they can
grow through acquisition by adding complementary product offerings to provide a
more full suite of offerings. This plays on the trend among customers to single
source their IT outsourcing needs.

While recurring revenues are a key focus, there has been an increasing amount of
buyout activity focused on traditional systems integrators and channel partners.
Court Squares acquisition of Avaya channel partner SPS, InvestCorps acquisition
of security integrator Fishnet, and Platinum Equitys Pomeroy acquisition represent

Finally, the players in this area include many of the most well known buyout
groups including Madison Dearborn, Oak Hill, InvestCorp, Thomas H. Lee, SilverLake, and TA Associates. In addition, based on discussions, we know that many
other leading firms are actively looking for opportunities in the sector.

Selected M&A 2009 - Present

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Selected M&A 2009 - Present (continued)

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Selected M&A 2009 - Present (continued)

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GROWTH AND VENTURE CAPITAL INVESTMENTS

Private fundraising in the IT services area has picked up significantly since the
downturn of 2008 with most investment activity focused on two areas: capital intensive facilities-based businesses like data centers, and managed hosting or managed services business with a recurring revenue model.
Fundraisings for managed services and managed hosting players have been quite
numerous over the past two years (see table below) with many rounds of between
$10 million and $25 million in size. Investors in these businesses are many of the
traditional IT investors or growth equity firms. In addition, companies raising
these rounds tend to be much more geographically dispersed, as opposed to certain
technology areas where they players are highly concentrated in Silicon Valley or
perhaps Boston / New York.

While the introduction of recurring revenue models is certainly attractive to financial investors, we believe that it is more important for buyouts using leverage than
growth equity investors putting pure equity to work. The most significant driver of
growth equity investing in this sector is simply the very high levels of organic
growth taking place in the managed hosting, managed services and cloud services
areas. With the significant shift by businesses to adopt these services, at the expense of the traditional solution provider model or internal IT staffs, the growth
prospects are high. This leads to very attractive ROI opportunities for the investment of new capital. They dont call it growth equity for any other reason.

Selected Venture and Private Equity Investments2009 - Present

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Sources: Capital IQ, Venturewire, Issuer press releases

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Private Equity and the IT Services Sector

Selected Venture and Private Equity Investments2009 - Present (continued)

www.redcapgroup.com

17
Sources: Capital IQ, Venturewire, Issuer press releases

REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Selected Venture and Private Equity Investments2009 - Present (continued)

www.redcapgroup.com

18
Sources: Capital IQ, Venturewire, Issuer press releases

REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Selected Venture and Private Equity Investments2009 - Present (continued)

www.redcapgroup.com

19
Sources: Capital IQ, Venturewire, Issuer press releases

REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Selected Venture and Private Equity Investments2009 - Present (continued)

www.redcapgroup.com

20
Sources: Capital IQ, Venturewire, Issuer press releases

REDWOOD CAPITAL: SECTOR OVERVIEW

Private Equity and the IT Services Sector

Redwood Capital Group is an investment banking firm serving the technology, communications media, business services and other
growth industries. The firm focuses on mergers & acquisitions, corporate finance, restructuring and valuation advisory services for
its clients worldwide.

Member FINRA/SIPC

www.redcapgroup.com

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