PEGs have also been very active as buyers/investors. We have seen valuations move up as the buyer demand has accelerated in 2011-2012. PEG demand for high growth firms and for those firms with recurring revenue dynamics has been particularly high. Last week we closed a capital raise for a very high growth consultancy focused on “Big Data.” Two very well-known financial institutions committed $50 million to this investment round.

Finally, we are seeing more interest from PEGs in making minority equity investments. Obviously expanding their investment parameters allows PEGs to deploy more capital. I also think that many PEGs now realize that there is a vibrant market for owners who want to maintain control yet still raise money. This structure makes the most sense for very high growth companies who want to invest in the future and also want the prestige factor that comes being associated with brand name investors.

We continue to see significant interest from both financial and strategic buyers looking to hedge their bets in the Cloud/Saas consulting sector.

This activity validates the interest levels we saw in 2011 for Saas and Cloud based consulting firms. Large consulting firms have been proactively seeking to acquire firms that have Saas or Cloud computing skills to bolster their current offerings or add new practice areas to stay ahead of the demand curve for such skills. As with the multiples being paid for firms such as Successfactors and Taleo, we are seeing buyers willing to pay a hefty premium for Saas and Cloud computing skills.

The cloud is actually a little bit of all that. The essence of the cloud is man’s basic want and need to enhance functionality while lowering TCO on somebody else’s real estate. Gosh, we’re greedy, aren’t we!

But think about it for a second—a company decides it’s “going to the cloud” and that it’s done with all its servers, boxes, cables, ERP, data storage, switches, routers, blah, blah, blah—that is no small task. In reality, it is an outrageously complex undertaking. And like I’ve said in past blog posts, when there is ‘change’ and it is ‘complex’, services companies with a consulting bent will tend to flourish…..especially if they can manage a piece of that away from the client. So let’s focus on just ERP and data from my litany up above.

In the ERP space, Workday will be going public later this year as the rock star contender going up against SAP and Oracle. And in Big Data, Splunk just filed. When companies like this enter the public markets with great success, it is due to their growth trajectory. And when they grow, the ecosystem for their services partners grows too. We will be coming to market with a few companies over the next months along this theme. There are emerging markets in cloud-based ERP (Workday) and Big Data (Splunk) with tremendous underpinnings—and while the software companies are the centers of those universes, or rock stars, the services partners are growing at a similar rate with attractive value propositions. And if you ask me, given where software multiples are these days, the smart money (with strong returns) is in services……but maybe I’m biased.

While the conventional credit model points out that they lack significant asset levels (except for A/R) on their balance sheets, there is a market out there for cash flow-based lending beyond the A/R based revolvers. With the exception of one transaction this year, every deal we have closed has had some sort of debt in the capitalization. The range has been between 2-4x LTM EBITDA and the pricing has been LIBOR + 500 bps all the way up to twice that (LIBOR floor at 125-150bps).

An interesting dynamic, or observation, is how the traditional senior/sub structure and respective lenders are now competing with “unitranche” players. Unitranche is essentially a blended debt structure which combines the elements of both by providing a note with a slightly higher rate (akin to mezz returns) with senior preferences and rights (akin to senior debt), while being a single voice and throat to choke:)

Why are we seeing such good business results while the world feels more uncertain than ever? A few possible reasons for this:

1. We are a relatively small firm that focuses exclusively on advising growth companies. Given this we are anecdotal at best and our focus will ensure that we meet with the “best of the best”. Thus, it is possible that my rosy view is due to the fact that people who I meet with are doing really well but the 99% of others I am not meeting with aren’t doing so well.

2. The law of “Small Numbers”. Perhaps it is easier for successful lower mid-market firms to grow on a percentage basis because they are small and can take share even in uneven markets.

3. Our sectors of focus (primarily pure services and tech-enabled services firms) are perhaps performing better than others? Maybe corporate buyers of services are outsourcing more and thus our sector is benefiting from this trend even while the economy overall is growing so slowly.

4. The unemployment rate of 9% is a gross simplification and generates a lot of news. When you peel back the onion of this statistic, you find that the unemployment rate of college-educated professional/knowledge workers is actually 4% or less! Therefore, our clients in professional services and staffing are seeing excellent demand for their services because corporate America can’t find the knowledge workers it needs to push ahead mission-critical IT initiatives.

The bottom line is that I think we’re seeing great results partially due to the factors above as well as several others I have not mentioned.

What does this conclusion mean to company owners as they plan for 2012 and beyond?

First, don’t overreact to macroeconomic news! For businesses under $500 million, the relevant metric is spend on your services/products by your customer base. Even if the spend is projected to be flat, it is very possible to gain market share with superior service. Therefore, I would encourage you to stretch your organization to achieve aggressive goals next year despite the bad news we read each day.

Second, not all segments are created equally. While it is important to “stick to your knitting,” it may be that the particular segment you are in is not growing while other adjacent segments are growing very quickly. For example, traditional media advertising is declining while on-line spend is increasing. For media firms, this means that a digital offering is important. This evaluation of your business is a crucial aspect of strategic planning. I recommend you periodically take a step back from the business and evaluate the next 2-5 years.

Third, to drive growth in uncertain times, I recommend disconnecting budgeting and compensation systems. If your senior management compensation plans are tied to exceeding budget, it is highly likely managers will forecast conservatively. In turn, creating an environment where lower growth is acceptable. I believe challenging managers to establish more aggressive budgets fosters a results-driven culture whereby individuals are more motivated to succeed, regardless of the outcome.

In conclusion, there are LOTS of businesses doing very very well. I hope yours is one of them!

The good news is that there are HIT consulting companies that are changing all that. With everything from EMR/EHR (electronic medical records/electronic health records) systems to revised workflow, these companies are able to vastly improve case management in virtually any acute, ambulatory and long-term care environment. The healthcare industry is the single largest as a percentage of GDP, and yet no other industry lags more in technology infrastructure. When you couple this with legislative tailwinds, it is easy to see that there will be CHANGE. Consulting companies do well with change, and that is the core investment thesis for this space.

For those of us who were around in the early ‘90s, we saw a very similar evolution in ERP. Everyone knew they needed it but they didn’t know how to do it; they didn’t know how to implement or optimize SAP or Oracle. So they turned to the guys that did know, and those were the guys with the quals in a particular software ecosystem. It’s the same thing with Epic, Cerner, eClinicalworks, and others. Ensuing is the quintessential land-grab for an emerging sector.

The ultimate vision, in my mind, is for every individual to have the ability to get online and pull up their personal medical record from any browser. But in the spirit of walking before running, it’s the HIT consulting companies that are, effectively, getting the handwritten notes off of the clipboards and organized in online environments. And then it should get really fun when EMR becomes ubiquitous and we can start to focus on things like global payments and genomics………the expiration of HITECH incentives and penalties will become inconsequential in light of the vast list of opportunities.

We also noted the development of the SaaS consulting market. This refers to companies providing consulting and implementation services around Salesforce in the CRM space and around Workday in the HR segment.

2 businesses have raised substantial amounts of capital to consolidate the SaaS consulting space and it appears that the big services firms are looking hard at this segment.

More IT services updates to come… The CHILDS conference (March 29th in Boston) will certainly address this segment.