Outsourcers Keep Value In Downturn

Outsourcing remains a hot sector for private equity investments.

On Tuesday, the Charterhouse Group and Thompson Street Capital Partners announced they have bought Colo4 LLC, an outsourced provider of colocation services to third parties. Companies outsource their computing infrastructure to Colo4 rather than build their own data centers.

It’s unclear what Colo4 sold for, but Charterhouse has invested in the sector before. In 2004, Charterhouse bought Lason inc., a provider of information management and business process outsourcing to customers in financial services, healthcare and government. Charterhouse sold it in 2007 for more than $120 million, or roughly 5x return on invested capital.

Outsourcers remain a strong sector for PE because many firms have held up during the recession. Just consider ADP, a provider of HR, payroll and benefits administration services, which has nearly $9 billion in revenues and about 570,000 customers. Shares of ADP closed Tuesday at $41.51, near its 52-week high of $45.74 which it hit in late April. However, ADP is not owned by PE (although Capital Research Global Investors has a small stake).

Firms in the space are trading at 10 times EBITDA, one buyout executive says.

One of the biggest PE deals in the space occurred in 2005, when seven PE firms– including Bain Capital, KKR, TPG and the Blackstone Group –bought SunGard for $36 a share. Sungard, which is still private, provides software and technology processing services for clients in the financial services sector. First quarter revenue for SunGard fell 6% to $1.25 billion while adjusted EBITDA was off 9% to $297 million.

“SunGard has withstood the recession insofar as they haven’t declined,” one banker said. “They haven’t grown either, but it’s a positive that they haven’t declined, because many other tech companies have.”