Agents, Ex-Intelisys President Jay Bradley Form M&A Alternative to Private Equity
It's not a TSD. It's not a so-called "superagency." But this company's business model is sure to shake up the channel.
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Vic Pepe (pictured), Capteon’s CEO, entered the channel after working in CIO positions, and more specifically, as a technology advisor’s customer.
D&M Enterprise Group president Steve Gerhardt approached Pepe many years ago with the offer to help him save money on calling cards. Gerhardt had built a reputation for himself in the channel as one of the hardest working sellers and one of Intelisys’ earliest partners.
Their relationship evolved over the years as Pepe’s company’s transitioned from frame relay to MPLS to SD-WAN.
When Pepe’s career running IT departments came to a close, he considered starting his own consultancy. Gerhardt approached him again with the offer to become partners at D&M. Legacy commissions would go to Gerhardt, but they would share all new business.
To help seal the deal, Gerhardt invited Pepe to Intelisys’ annual Channel Connect conference, where Pepe soaked in the world of the channel. Impressed by the depth of the vendors and the tight-knit partner community, Pepe took Gerhardt up on the opportunity. In addition, Tim Rees joined as a managing partner.
Many agency leaders have publicly and privately admitted that they struggle to justify evolving from beyond a sole proprietorship. For many, making that first hire will dilute one’s hard-earned commissions. But Pepe said Gerhardt didn’t see it that way. And adding managing partners has helped the company grow more than ever, Pepe said.
Having started his job at D&M, Pepe said he start observing how consolidation was shaping the channel. A generational shift took place at Intelisys as many leaders received earnouts from ScanSource. Then came the entrance of private equity investors into the agency side. That movement kicked off in earnest in 2021, with many technology advisors agreeing to deals with so-called roll-ups and superagents.
And the industry talks. Pepe said he heard the stories – good and bad – of partners who sold their businesses. And many of them, particularly those who were remaining at the company to whom they sold, were expressing regret.
“Even the partners that got the massive checks have provided passionate feedback on what they liked and didn’t like about their transactions. It informed us on how to adapt our model,” Pepe told Channel Futures. “We hear the integrations are not going so great. We hear the autonomy is not really there. They’re having to fill out expense reports to take a flight to go see a client.”
Pepe said he approached his team at D&M, having heard all the feedback from peers in the agent community.
“With all the options out there, we said, ‘Wouldn’t it be cool if there were an option that would solve for all these things: Be your own boss, keep most of your compensation along the way, not have goals, keep my logo, put my people in the right positions, and more importantly, make sure my customers are going to be taken care of in the long term,” Pepe said.
They bounced the idea off multiple partners, many of whom indicated their interest, or at least their support, of such an idea. Encouraged, they went ahead, and Capteon was born. The company would assemble a portfolio of agents who will operate independently – retaining their logo, customers, employees and cultures – while getting access to Capteon’s resources. Those companies will ultimately participate in a liquidity event down the road, which Capteon will foster, Pepe said.
“We seek like-minded, like-spirited people who don’t want cash now. They become part of the holding company, and they’re pledging the equity of their company to a qualified liquidity event in the future. Our horizon is three to five years; it’s in the contract.”
Pepe serves as CEO, Gerhardt serves as president, and Rees serves as chief operating officer. Their C-suite includes three other people, including former Intelisys president Jay Bradley.
Autonomy is a huge selling point for agents, Pepe said. And a lack thereof can present a serious cultural clash for an agent agreeing to an acquisition.
For Pepe and the managing partners at D&M, their work life didn’t involve constant oversight from bosses.
“Nobody had to set my goals. I was always going to kick ass. It’s just what made me feel good,” Pepe told Channel Futures.
Moreover, Pepe argued that the agent model is often too flexible to operate in terms of month-to-month quotas.
“Some count it month to month. We count it year-over-year because sometimes we’re working on an enterprise deal that takes seven months or more. Hitting small goals every month is valid, but when you’re working on that big account, and it closes, it pays off,” Pepe said. “When you go to work and take money from somebody, now all of a sudden, you have someone setting your goals – it can take away your freedom and flexibility – and possibly even make you lose focus on the enterprise.”
The initial funding for Capteon will not come from private equity investment, but rather from the partners’ revenue streams. Portfolio agents will give 7% of their net commissions to Capteon as a management fee. Those fees will collectively pay for the resources agents can use from Capteon.
Capteon has already assembled a bench of “advisors,” who will offer expertise in topics like tax and human resources. Pepe noted that Capteon will also track commissions reporting on behalf of partners. He said agent feedback will dictate what other resources Capteon will add.
Moreover, Capteon will cover the expenses agents would need to spend if they were going to pursue an acquisition on their own.
“If you’re a million dollar company looking at 6x and you want to get a $6 million check, there is going to be a $300,000 to $350,000 expense associated to that transaction from legal, investment bankers and all the things that go on,” Bradley said. “The whole of the Capteon transaction covers that expense – in addition, our team (internal and external) is second to none.”
Jay Bradley (pictured), known for his 13-year stint as the president of Intelisys, joined the company following the end of his non-compete agreement with ScanSource. He made his return to the channel with Capteon at Intelisys/ScanSource Channel Connect last October.
He said he’ll meet with agents in his new position as chief partner success officer to ensure their voices are heard.
“I’m going to jump in and put everybody at the table and say, ‘Hey, do we zig? Do we zag? What’s the next move we should make strategically? How do we all work together smarter? How do we really create an entity that checks all the boxes, that improves the multiple for the company at exit?'” he said.
The job will put him in a familiar posture to what he did at Intelisys: listening to partner feedback and determining what resources and motions they needed.
“I built my reputation – and we built Intelisys – on the premise that the partner comes first. Our business and our needs are in the background, and the partners’ business and their needs are in the foreground,” Bradley told Channel Futures. “And that’s what we did. We made stars out of our partners. They loved it.”
Capteon’s leaders have put together a basic timeline for the group.
They’ll spend a couple of years assembling their group of agents and put the business on the market by the end of year three. Jay Bradley said the company hopes a liquidity event will occur by the end of year four or five at the latest.
Portfolio partners will then decide whether they’d like to stay on with the company in the event of a sale or sign a non-compete for a certain amount of time and potentially retire. Pepe noted that concrete terms of such agreements would depend on the terms of the buyer.
And Pepe said participating agents differ significantly in how they view the future.
“We’ve had partners that say they’ve got another 15-20 years left in them. We have partners that say, ‘This horizon’s perfect for me. In three to five years, I’d like to be done,'” Pepe said. “Our model provides the best options for those life and business goals.”
Bradley emphasized that Capteon does not intend to function as a tech services distributor like Intelisys.
“We do not want to be at TSD. And we’ve met with most of the TSDs already to let them know what our strategy is,” Bradley told Channel Futures.
Pepe said Capteon has met with Telarus, Avant and, of course, Intelisys/ScanSource. And at Capteon’s event in January, only Intelisys featured as a sponsor, rather than Capteon seeking out multiple vendors as sponsor.
“We don’t want to rebuild what those guys have built,” Bradley said. “We don’t want those contracts. That’s a whole practice that takes a decade to build if you’re doing it right.”
Chief partner success officer Jay Bradley said Capteon differs from a private equity backed play in terms of the timing of the payout.
“Yes, [a liquidity event] is in the future. No, you’re not going to put money in your bank account right away. Yes, we believe we can get you a much higher multiple than you can get today,” Bradley said.
“But all of those other factors – all the soft factors of lifestyle – which are so important to so many partners, continue as they are today and even get better as we build this company.”
Bradley added that Capteon’s leadership wants all of the private equity-funded superagencies to find success. He said he regards Capteon, however, as a very distinct organization from them.
“This is not take-your-money-off-the-table-today. This is a double down,” he said. “And for the people who haven’t made a decision to move forward with anything else, this is a good play for them.”
Asked about the trend of TSDs and agents M&A, Bradley said the industry is in the “second or third inning” when it comes to the industry consolidating. And that movement kicked off in earnest with the 2016 sale of Intelisys to ScanSource.
“That blew a lot of people away. It was a big multiple, and it was the highest profile acquisition of a TSD. And I think some subsequent deals have been very good for the channel,” Bradley said.
Asked about the trend of TSDs and agents M&A, Bradley said the industry is in the “second or third inning” when it comes to the industry consolidating. And that movement kicked off in earnest with the 2016 sale of Intelisys to ScanSource.
“That blew a lot of people away. It was a big multiple, and it was the highest profile acquisition of a TSD. And I think some subsequent deals have been very good for the channel,” Bradley said.
Holding company Capteon is positioning itself as the alternative to private equity-funded agent M&A strategies.
Capteon emerged last year in search of technology advisors (agents) who would like to participate in a liquidity event in the upcoming years but don’t need an influx of cash at the present moment. Companies in Capteon’s portfolio will pay 7% of their net commissions to Capteon and receive legal, tax and commission support resources from the holding company. Moreover, the holding company will ultimately shoulder the heavy lifting of preparing for a sale to a strategic buyer. That sale would occur four to five years down the line, Capteon leaders tell Channel Futures.
“We seek like-minded, like-spirited people who don’t want cash now and are also on the rise – they are in massive growth mode. They become part of the holding company, and they’re pledging the equity of their company to a qualified liquidity event in the future. Our horizon is three to five years; it’s in the contract,” said Capteon CEO Vic Pepe, who also serves as managing partner at the technology advisor D&M Enterprise Group.
Capteon’s Vic Pepe
Capteon hosted its first event in January. Eighteen agencies joined Capteon at the event in Dallas. The company has set a deadline of the end of April for agents to join as founding members. Founding partners will see their 7% rebated back at the liquidity event with a 10% APR. Members who join after the deadline will receive the 7% without the 10% APR.
An Alternative
The deal targets agent partners who source a variety of as-a-service telecom and IT offerings for businesses. The agent channel has seen an outpouring of institutional investors who value the monthly recurring commissions these partners have built up over the years, in addition to the nimbleness technology advisors in delivering multiple technologies from multiple vendors.
Pepe said the project emerged from feedback from agents who have sold their businesses or are considering selling them. He said the conversations revealed partners’ unhappiness or unwillingness to give away their autonomy as business owners.
Capteon’s Jay Bradley
Chief partner success officer Jay Bradley said he found Capteon’s model attractive because it enables agents to earn a higher multiple on a future sale without sacrificing their independence and lifestyle in the near-term.
“This gives them all of those opportunities to build something for the future that will pay off handsomely and allow them to continue to live the life they love right now,” said Bradley.
He notably served as the president of Intelisys for more than a decade.
Bradley and Pepe spoke to Channel Futures about why Capteon fit a need in the agent channel. Learn about the company’s inception and model in the 10 slides above.
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