The physical security industry has historically been an attractive market for investors. From large, institutional Wall Street banks and private equity firms to angel investors and novice online traders, both security manufacturers and service providers may offer lucrative returns for those that can astutely navigate industry trends and predict where the market is headed as it relates to the adoption of technology and services.
In fact, one private equity firm, Egis Capital Partners, focuses exclusively on investing in companies in the security space. The firm, which was founded in 2008, has made 14 investments across the industry, including companies like ACRE, the parent organization of such household market names as Vanderbilt, ComNet, Open Options and RS2 Technologies, Alarm.com, one of the leading platforms for connected home security and automation services, and cloud access control pioneer Brivo.
SecurityInfoWatch.com (SIW) recently caught up with Robert Chefitz, Managing Partner at Egis Capital, to get his thoughts on what industry technologies and services are trending up and what characteristics his firm looks for when it comes to investing in companies in the market.
SIW: Why did you decide to focus exclusively on investing in security companies? What made this such an appealing industry?
Chefitz: I was previously a partner at Apax and while I was there I built a portfolio of five companies in the security and protection industries. Ten years ago when I launched Egis and wanted to do something as my own firm at that time, I decided that it made sense to focus on a category that I knew well and also where I had a set of relationships that would make us a value-added investor. We really demonstrated that you could generate terrific returns in the industry. In part, I think the area is attractive first because the security industry has been a real leader in the notion of recurring revenue. Secondly, you can observe technology in the broader economy and anticipate which technologies are going to have a real influence on the security industry.
If you look at our investment in Alarm.com when it first came out of MicroStrategy, I observed that the smartphone had had a substantial impact on retail, banking, dating, and so it wasn’t a big leap of faith to say, “Do individuals want to engage with their smartphones for various functions throughout their day?” And so it certainly made sense that it would have applicability for residential security systems.
The fact that product lifecycles tend to be very long in the security industry also makes it very attractive from an acquisition and investment standpoint. If you think about a basic alarm or access control system, those are pretty long product lifecycles where your R&D budgets are going to be south of 10%. In more dynamic markets, you may expect to spend 20% of your revenues on ongoing technology development, so it’s is one of thing that contributes to the business being as profitable as it is.
SIW: What are some of the things you are looking as an investor in the companies you’re thinking about backing and how has that changed and evolved through the years?
Chefitz: The first part is we’re looking for companies whose management teams have embraced at least an element of technology in their solution and have the capacity for ongoing growth. If you look at a company like ACRE where we were the initial investor in backing (ACRE CEO) Joe Grillo, who sits on our advisory board, he clearly had the capacity to grow beyond that initial acquisition of Mercury. Secondly is being on the right side of technology trends. If you look at our investment in Brivo, I think Steve Van Till did a great job of being on the right side of cloud computing.
And then there are certain categories that become less attractive. Although I was Chairman of Protection 1 when we built it into the third largest company in the residential security monitoring business, for the last 10 years it’s a category I haven’t been interested in because I think the valuations have just been too high. But valuations are coming down so we may be taking a hard look at it again.
SIW: As you look at the landscape today, what are some of the technologies that you believe are primed for investment from firms like yours currently as well as moving forward say several years down the road?
Chefitz: There are probably four. Today, we’re seeing the impact of cloud computing sort of revitalizing some essential security things like access control and video management. IoT has demonstrated to be a giant value extender, so if you think about companies like Alarm.com, when we first became involved with them they were basically managing the big three of intrusion, fire and carbon monoxide and I think they’re now up to 30 different systems that they interact with – HVAC, lighting, garage doors, and the list goes on and on.
A little bit further out, there’s no question that 5G will have a real impact on the security industry, probably with some real impact on remote video surveillance. And then ultimately, there’s artificial intelligence because at the core of the security industry sensors are generating incredible amounts of data and if you can better analyze that data to drive better response – either reactive or predictive – and that’s the real, kind of big promise of artificial intelligence in our industry.
SIW: To what do you accredit the success that your firm has achieved when it comes to making good investments in this space?
Chefitz: I would say it’s really focus. One of the things we take pride in and that is a tremendous asset for us is that 35 of our investors are security industry executives and so we just have a lot of ability to source and diligence deals in a way that others don’t have because they are not as focused as we are.
SIW: What is it that you believe makes a security company successful?
Chefitz: It is a combination of business model management and technology. The business model is so important. If you think about a company like Sonitrol, which is not my portfolio, but their big breakthrough was glass break detection. Had they chosen just to sell sensors, it might have been a $10 million business, but they said we need to take that advantage and convert it into a business model of selling systems and empowering dealers with geographical integrity. When that business got rolled up there was nearly $500 million of value – all from the same technology but the technology converted into a superior business model. And then obviously you have to have a management team that can stitch that altogether and make it work.
About the Author:
Joel Griffin is the Editor of SecurityInfoWatch.com and a veteran security journalist. You can reach him at [email protected].
