With the rapid development of digitalization, cybersecurity has become a top concern for governments, enterprises and individuals. As cyber threats continue to rise, the cybersecurity market has seen explosive growth, attracting lots of investments from venture capital and private equity firms. In 2022, cybersecurity became one of the hottest investment areas for private equity firms. There are several key factors driving private equity investments in cybersecurity companies.
First of all, the cybersecurity market has huge growth potential. As technology advances, more devices are connected, vast amounts of data are generated, and companies are increasingly relying on internet and cloud services, the risks of cyber attacks are rising rapidly. Governments and enterprises have to increase cybersecurity spending. Research firm Gartner predicts that global cybersecurity spending will exceed $170 billion by 2022. The fast-growing market provides massive opportunities for cybersecurity startups and attracts private equity investments.
In addition, cybersecurity companies fit well into private equity’s investment philosophy – help portfolio companies professionalize operations, expand into new markets and acquire competitors. The cybersecurity industry is still fragmented with many small startups. Private equity firms can help cybersecurity companies scale up through add-on acquisitions. Moreover, PE firms can leverage their operating resources to help cyber startups establish sound management structures and processes.
Furthermore, cybersecurity companies have recurring revenue models, which PE firms favor. Most cybersecurity firms provide subscription-based solutions and managed services that generate stable and predictable cash flows. The recurring revenue models ensure high retention rates and predictable growth, matching well with private equity’s 3-5 year investment horizon.
Lastly, cybersecurity companies are resilient to macroeconomic conditions and have high growth even during recessions. Cyber threats exist no matter how economy performs. The mission critical nature of cybersecurity solutions leads to stable demands. Moreover, cybersecurity falls into the ‘digital transformation’ category that seeing continued investments even during economic downturns. The recession resilience makes cybersecurity companies ideal targets for private equity firms.
high profile private equity investments in cybersecurity
There have been lots of high profile private equity investments in cybersecurity companies over the past few years. In Feb 2022, Thoma Bravo acquired SailPoint, an identity security solutions provider, for $6.9 billion. This is the largest PE deal in the cybersecurity industry to date. Previously in 2021, Thoma Bravo partnered with Medallia to acquire cybersecurity firm Proofpoint for $12.3 billion. The acquisition of Proofpoint was also a record breaking cybersecurity deal at that time.
Besides Thoma Bravo, other PE firms like Vista Equity, Symphony Technology Group, Advent International are also actively looking for cybersecurity deals. Vista Equity Partners is one of the pioneers in cybersecurity investments. It acquired cyber firm Websense for $4.5 billion back in 2015, one of the earliest mega PE deals in cybersecurity. In 2020, Vista acquired RSA Security from Dell Technologies for over $2 billion. Symphony Technology Group acquired McAfee from Intel in 2016 for $4.2 billion. In 2021, STG continued its cybersecurity shopping spree and acquired FireEye’s product business for $1.2 billion.
In addition to acquiring established cybersecurity vendors, PE firms also actively fund young startups through venture capital arms. Top-tier VC firms like Bessemer, Sequoia, Lightspeed have raised billions to invest in early stage cyber startups. Later when the startups gain market traction, they become targets for private equity buyouts and take-privates. The vibrant startup ecosystem constantly supplies new fast-growing companies for private equity firms to acquire.
factors driving private equity interest in cybersecurity
There are several factors driving private equity’s high interest in cybersecurity investments:
1. The cybersecurity industry has stable growth despite macroeconomic changes. Cyber threats exist no matter how the economy performs. Cybersecurity spending by enterprises and governments persists during downturns.
2. Cybersecurity companies have recurring revenue models. Subscription and managed services generate predictable revenue streams. High customer retention and sticky revenue provide resilience during turbulent times.
3. Cybersecurity companies benefit from secular digital transformation trends. Digitalization results in more points of attacks. The shift to cloud expands the threat landscape. These secular trends drive long-term growth of cybersecurity industry.
4. Cyber M&A market is fragmented, providing opportunities for private equity firms to consolidate. Economies of scale can be realized through add-on acquisitions of small cyber startups.
5. Cybersecurity touches critical business and infrastructure operations, leading to stable demand growth. Cybersecurity solutions protect mission critical systems and data, leading to predictable growth.
6. Cybersecurity companies align well with private equity investment philosophy and expertise. PE firms specialize in scaling companies through acquisitions, global expansion, product portfolio enhancement and implementing sound management processes.
7. Cybersecurity provides diversification for private equity portfolios. Cybersecurity exhibits low correlation to other sectors and macroeconomic conditions due to secular growth drivers.
8. Strong pressure from regulators and public sentiments to improve cybersecurity provides tailwind for the sector. High profile hacking incidents lead to tighter cybersecurity requirements and higher spending.
In summary, the importance of cybersecurity for national security, business operations, and infrastructure protection continues to rise. The need for cybersecurity solutions will keep increasing driven by technology advancements and data proliferation, providing a visible long-term growth trajectory for private equity investors.
key private equity investors in cybersecurity
Here are some of the most active private equity investors in the cybersecurity space:
– Thoma Bravo – the dominant private equity player in cybersecurity with multiple mega deals including Proofpoint, SailPoint, Barracuda Networks, etc. They leverage their security operations resources to help portfolio companies scale.
– Vista Equity Partners – a pioneer of cybersecurity investments dating back to 2015. Notable deals include Websense, RSA Security, Ping Identity, Tibco, etc. They improve portfolio companies with Vista standard processes and best practices.
– Symphony Technology Group – growing quickly in cybersecurity through acquisitions of McAfee, FireEye Products, Imperva, Optiv, etc. They focus on software and tech-enabled services sectors.
– Advent International – purchased Forcepoint from Raytheon in 2019. Invested in Cobalt, a pentesting firm, and invested in passwordless authentication startup Transmit Security.
– Permira – acquired Tenable, a leader in vulnerability management, for $2.1 billion in 2020. Also invested in Gigamon, a network visibility solutions provider.
– American Securities – acquired Radware, a cybersecurity solution vendor, for $1 billion in 2021. Focuses on partnerships with existing management teams.
– HG Vora Capital Management – acquired security analytics firm Exabeam in 2022 for $4.4 billion. Focuses on carve-out deals.
– Silver Lake – huge tech investor with over $90 billion in combined assets. Notable cybersecurity deals include McAfee take-private and Proofpoint acquisition.
As cyber threats increase, it is expected that more private equity firms will follow the trend and look to build cybersecurity portfolios through acquisitions of fast growing young startups as well as public companies in this resilient and stable growth sector.
outlook for private equity investing in cybersecurity
The outlook for private equity investments in cybersecurity looks highly promising:
1. Cybersecurity remains a top priority for governments and enterprises as cyber risks grow exponentially driven by digital transformation trends like cloud, IoT, etc.
2. High profile hacking incidents and state-sponsored cyber attacks will spur higher budget allocation and tighter policies around cybersecurity.
3. The cybersecurity industry is still highly fragmented, providing ample consolidation opportunities for private equity investors.
4. Venture funding in cybersecurity is accelerating, creating a healthy pipeline of innovative startups to acquire for private equity firms.
5. Cybersecurity companies fit perfectly with private equity’s investment approach – carve-outs, add-on acquisitions, leveraging sector expertise, implementing structured management processes, etc.
6. Stable recurring revenue models provide predictable growth and resilience to economic changes, perfectly matching private equity’s 3-5 year investment horizon.
7. Low correlation with macroeconomic conditions and other sectors offers portfolio diversification benefits for private equity firms.
8. Limited exposure to supply chain issues that plague many hardware-focused sectors in the current environment.
9. The talent pool for cybersecurity professionals continues to expand driven by education programs and training courses specialized in security.
Overall, private equity investments in cybersecurity are likely to keep growing over the next decade. Cybersecurity is becoming the new hotspot for private equity investors given favorable secular trends, predictable growth profile, recession resilience, fragmented vendor landscape and synergies with private equity skillsets.
In conclusion, cybersecurity is an increasingly important area for private equity investment given its secular growth drivers, predictable revenue models, synergies with private equity expertise and huge fragmentation opportunity. High profile hacking incidents will continue to push cyber higher on government and corporate priority list. With cyber threats rising exponentially driven by technologies like cloud and IoT, the cybersecurity industry is poised for massive growth, providing abundant opportunities for private equity consolidation and take-privates.