The growing attractiveness of the B2B communications sector for private equity investors

Market evolution

In the wake of the privatisation of BT in 1984, the deregulation of the UK telecoms market led to the entry and rapid growth of new infrastructure and mobile network providers, such as Virgin, CityFibre and TalkTalk. The subsequent emergence of independent resellers further contributed to the erosion of BT’s market share and that of other large providers, which were not as well-positioned to service the fragmented SME market. With BT still accounting for around 40% of the market today, there remains a real opportunity for smaller, agile resellers with well-developed sales capabilities to increase their penetration and gain further share.

The UK’s B2B communications and IT market is now worth over £13 billion, of which the SME segment represents £5.5 billion and is growing at 6% per annum. Service provision to the sector is highly fragmented with over 6,000 communication and IT resellers.

In recent years, the focus of these resellers has moved away from traditional calls and lines towards a broader set of mission-critical products including hosted voice, cloud applications, mobile, connectivity and IT services – and these higher value products have found a perfect fit with the evolving business needs of the UK SME sector.

As the provision of broadband, phone and mobile communications has converged with that of IT services, these providers have helped SMEs to source, integrate, manage and operate the end-to-end communications solutions essential for their businesses, as well as delivering add-on services such as cyber security and disaster recovery.

In addition, the proliferation of technology infrastructure providers is causing SMEs to consolidate their relationships into a single managed service provider, with the skills to knit together an increasingly complex and interoperable technology base.

This has enabled technology-savvy B2B providers to add value to their customers by offering both a broader suite of products and an integrated service solution, thereby improving customer retention and achieving higher quality earnings.

At the other end of the spectrum, they have also added value to their technology product partners by offering a cost-effective route to access the fragmented SME market, providing them with a direct sales capability, front-line customer support, billing and account management.

Future trends

These B2B communications and IT resellers represent attractive investment propositions for private equity. First, they are asset-light by design and hence are able to move quickly to adapt to evolving technology, enabling their customers to stay at the forefront of market trends without the risks involved in developing their own solutions.

They also benefit from recurring revenue streams, which will continue to grow as an increasingly mobile workforce adopts cloud services and expands its data usage. At the same time, improvements in connectivity and the rollout of 5G will support the additional take-up of mobile devices and accelerate the adoption of unified communications and hosted voice services.

Cyber security is also becoming a key area of focus for the SME market. This represents a further growth opportunity for managed service providers, including via the acquisition of specialists in the field.

The acceleration of remote working in response to the global COVID-19 pandemic may also lead to structural changes in how businesses operate their offices in the long-term. The future workplace is likely to be a blend of both physical and remote working environments, supported by optimised audio and video collaboration tools such as Microsoft Teams, and enabled by reliable and improved connectivity.

Investment in Focus Group

These were some of the themes that underpinned Bowmark’s recent investment in Focus Group. The company provides a range of integrated technology solutions including hosted voice, cloud applications, mobile, connectivity and IT services to more than 15,000 businesses, and has revenues of over £80 million and around 300 staff.

Focus has achieved strong organic growth by providing cost-effective, bespoke solutions across a wide range of products, with a strong emphasis on customer service. It has also acquired and integrated eight businesses over the past two years to expand its talent pool, build scale and enhance its product range.

Bowmark has significant experience of managed technology services – from our previous investments in Node4, a provider of integrated IT solutions, hybrid infrastructure and cloud-enabled managed services; ASK4, a provider of high-speed internet solutions and managed data services to multi-tenant accommodation; and CSL, a provider of critical connectivity solutions for machine-to-machine communications. Across these sectors, we are seeing a convergence across different areas of infrastructure provision and the emergence of best-in-class providers of connectivity.

Focus sits well with Bowmark’s strategy of investing in service-based companies with strong fundamentals, which have scope for both organic and investment-led growth. The transaction included additional funding of over £150 million to accelerate the company’s acquisition programme, reinforced by Bowmark’s desire to support further investment in its sales capability, data analytics and regional expansion across the UK.