In May 2002, three Californian private equity firms got together to execute what, at the time, seemed like an unremarkable transaction. Under the guidance of software industry veteran Jim Schaper, Golden Gate Capital, Parallax Capital Partners and Symphony Technology engineered the buy out of the Adage product line, an ERP package with a strong pedigree in process manufacturing and distribution owned by US higher education IT specialist Systems and Computer Technology (SCT).

But that acquisition, which they named Agilisys and later Infor Global Solutions, was the starting point for one of the most audacious consolidation moves ever undertaken in the IT sector. Over the space of four years, the vast bulk of the ERP industry that serves mid-sized companies has been rolled together by (often over-lapping) private equity interests, a strategy shift that reached its peak in May with Infor’s acquisition of fellow consolidator SSA Global and the creation of the world’s third largest ERP software vendor.

Infor now boasts annual revenues of $1.6 billion and trails only Oracle and SAP in size. The whole laundry list of products that SSA has recently been selling alongside its own BPCS software – Baan, Marcam, CA Interbiz, Infinium , EXE, E.piphany – will be added to an already swollen Infor portfolio that includes products inherited through the buy-outs of Mapics, JBA, GEAC ERP, Comshare, Mercia, and others.

That has left the tens of thousands of customers who use one or more of those products scratching their heads. Why would a group of cash-rich money-men want to control the ERP mid-range; will they continue to invest in R&D for individual products to an adequate level; will they merge some products and kill of others? The questions go begging.

The justification for the consolidation is more easily dealt with. Golden Gate Capital, the investment vehicle behind Infor, argues that the highly fragmented structure of the ERP mid-market was untenable. Scores of different companies serving niche product areas and geographies have been struggling in the face of an all out attack on the mid-market by Oracle and SAP from above and Sage and Microsoft from below. They have to get big, get broad or go out of business.

Others view the moves differently. “What these ‘collector’ companies do is buy vendors that have a mature product with a big installed base and collect the maintenance revenue,” says Nigel Rayner, an analyst at research group, Gartner. “They’ll keep the product lines going for as long as they can, making just enough R&D investment to stay in the market.”

The Infor/SSA Global combination creates the ultimate ‘collection’ – a characterisation that Schaper, who continues to lead Infor as CEO, resents. But he is not blind to the fact that most customers are tied to Infor for some time.

“The original estimates for the average length of an ERP contract were about ten years,” he observes. “Thanks to the cost of changing ERP software and the failed implementation horror stories in the press, they have mainly lasted two to three times that in practice.”

And that means Infor and its funder, Golden Gate Capital, is in control of a huge asset base.

Golden Gate is one of several private equity funds to have made a major impact on the IT industry in the past year. Such equity funds have been low-key since the early 1990s when investment turned its attention to venture capital and the prospect of stock market flotations and growth stocks. But in recent years, such deals are returning in strength as investors have eyed undervalued public companies sitting on assets that could be more valuable if taken private.

ERP vendors make particularly appealing targets as their maintenance fee-based business models grant them a high level of cash flow. This lets acquirers borrow money to pay for part of the acquisition itself – a part debt, part equity transaction – thereby maximising the buying power of investors’ cash.

One reason that private equity is returning in such strength is the amount of frustrated money around, explains Peter Rowell of investment bank Regent .

“In Europe alone, venture capitalists sit on about e65 billion that is looking for a home,” he says. “But the traditional targets for this money – fast growing companies in which they would normally buy a 20% to 25% stake – are becoming few and far between, so they are looking at taking over established companies.”

The list of technology companies acquired using private equity in the last year is long. Golden Gate, itself, has opened up a second front in business applications by combining the former GEAC financial management business and corporate performance software company Extensity then fleshing that out with the purchase of UK financial package vendor Systems Union.

Outside of the stampede of deals in ERP, names that have passed into private equity hands recently include business continuity company SunGard Systems, content management software company Hummingbird and voice and data telecoms consultancy Azzurri.

For the companies themselves, being plucked off the stock market by private capital can be a blessing: It liberates them from pressure to maintain quarterly performances that please financial markets.

“When you are private, you can trash your P&L in the name of a long term goal – public companies just can’t do that,” says Regent’s Rowell.

And for many of the smaller ERP vendors, being consolidated is no bad thing either, says Rowell. “For some companies, the options are either to be acquired and associated with an organisation with a much wider reach and product breadth, or be left alone as a small software company without the capital to keep up with the rest of the market.”

Paul Coleman, outgoing CEO of GGC’s latest pick-up Systems Union, shares this sentiment. “In order to compete globally, you need to have a certain size and a certain geographical coverage. We didn’t want to go through with the acquiring, the politics and the shareholders meddling with our agenda in order to get that by ourselves. [Accepting GGC’s acquisition offer] kills five birds with one stone.”

But what about the customers? Should they be worried if their ERP supplier has just been snapped up by a shadowy cabal of financiers?

That depends on their attitude to technology, says Gartner’s Rayner. “If you are technologically conservative,” he says, “or follow just behind the cutting edge, having a supplier acquired by a collector company is a positive . They are likely to maintain the product line just how you want it, with more financial security than the vendor would have had on its own.”

“But if you are technologically aggressive, you’ll want all the latest functions and features and a collector company is unlikely to make sufficient R&D investment to make that happen.”

If Golden Gate Capital’s shining example inspires yet more private equity involvement in the business applications space, there will be plenty of money to fuel consolidation. Infor’s Jim Schaper reports that while negotiating his company’s own acquisitions, he has found himself competing with more private equity firms than ever before, and they are becoming ever more successful.

In an environment where there is pressure to consolidate, and abundant capital to fund that consolidation, says Rayner, “everybody is a target”.