Given a readily available supply of investment money to the security industry, might we see even more mergers and acquisition (M&A) activity in the coming year?
Such appeared to be one message as the Security Industry Association (SIA) Investment Trends Committee presented an update on security-related capital markets, M&A and investment information.
In the “middle market loan market,” where all but the top several security industry companies might look for money, there are plenty of funds available for M&A transactions, says Will Schmidt, Managing Director, Security Lending Group Company, Capital Source. “There is improvement every quarter, with more issuance (of money) going to M&A or growth activity (rather than refinancing). The shift toward new money issuance supports a capital investment trend that reflects an improving economy.”
Schmidt adds: “In the security market, we continue to see more favorable pricing to borrowers in the last 12 months.”
Venture capital firms are also eager to invest in the security market. “Private equity firms are flush with capital, and rebounded well from the depths of the recession,” says Andrew Dodson, partner, Parthenon Capital Partners, a private equity firm. “2014 saw another very strong year of private equity fundraising.” He notes private equity currently has $535 billion in “dry powder” (money to invest).
“Debt markets are very robust, and leverage multiples have continued to increase, approaching those seen prior to the recession,” says Dodson, who emphasises a reduction in the amount of needed equity.
“Private equity firms are flush with capital, and rebounded well from the depths of the recession,” |
The security market offers investment opportunities to meet any investor’s goals, adds Dodson. “The industry has both pockets of very strong stability as well as pockets of very high growth,” he says. He sees larger private equity firms investing in stable and predictable companies (such as alarm monitoring), while venture and growth equity will be attracted to high-growth areas like home automation and the Internet of Things (IoT).
Although portrayed in the media as the next big thing, aspects of home automation have been around almost 50 years. What’s changing, and driving awareness and likely rapid growth, is the addition of smart phones to the mix, and a declining cost of sensors. Alper Cetingok, managing director, Raymond James, referenced a consumer survey revealing that 11 percent of consumers either have or intend to purchase a connected device. The adoption rate will grow, and more customers with lower household incomes will adopt the technologies as pricing comes down. An adoption rate of 40 percent or higher would equate to dramatic growth.
Consumer research also points to a bright future for security companies related to the Internet of Things. Security companies received the highest response rate on “trustworthiness” (around 45 percent) compared to other players in the home automation space, such as cable companies and Internet providers.
Another pocket of potential rapid growth in the security market is cloud-based and managed services. In terms of cloud adoption, the security market has lagged the broader IT industry’s 30-percent-plus adoption rate. “It’s much lower in security, but it’s starting to happen now,” says John E. Mack III, executive vice president, Imperial Capital.
“Valuation drivers for cloud-based and managed services are similar to those of traditional alarm companies, but these new model companies tend to outperform traditional metrics, which lead to higher potential valuations,” Mack says.
