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Buyout shops hunt for deals as cybersecurity warfare worsens

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“If you have not already done so, I urge our private sector partners to harden your cyber defences immediately,” declared US President Joe Biden in early March.

Delivered one month into Russia’s assault on Ukraine, the stark message from the White House underlined a new determination among lawmakers to protect the West’s technology systems from attacks by rogue hackers and foreign states.

Be it tougher rules from the US Securities and Exchange Commission (SEC) or incoming European Union directives, new cybersecurity legislation is now being drawn up and companies are facing unprecedented pressure to protect themselves.

Covid has also brought the issue into sharp focus, as the mass shift to homeworking poses a new dilemma for companies with legacy IT infrastructure.

As demand for protection from governments and corporations grows, private equity firms are on the hunt for deals in the sector.

“Cybersecurity is at the forefront of everyone’s mind. It’s in the news all the time, both with Covid and the current conflict. It’s now a board agenda item,” Mark Smith, a director in the technology group at investment bank Houlihan Lokey, tells Private Equity News.

He adds: “Investors are turning to resilient areas and cybersecurity is absolutely seen by private equity as one of them.”

In March, McAfee was acquired by a private equity consortium including Advent International and Permira for $14bn in the world’s largest cybersecurity deal.

One month later, PE software  giant Thoma Bravo said it was buying security software vendor Proofpoint in a deal valued at $12.3bn.

In the US, private equity deal activity in cybersecurity hit $13.6bn during the second quarter of this year, down from $21.7bn in the previous three months but up from $5.9bn when compared to the same quarter last year, according to Pitchbook data shared with Private Equity News.

Meanwhile, European PE investment into cybersecurity hit a record $8bn in the second quarter of this year. Livingbridge is among the UK-based buyout shops that have been deploying capital in the sector over the past 12 months.

Joseph Pacini, co-founder of Germany- and Singapore-based midmarket private equity firm SGT Capital, says a major driving factor in PE appetite is the new legislation putting pressure on companies to report incidents and improve oversight.

A new EU directive will force critical sectors ranging from banking to transport to better protect networks and invest in cybersecurity, while in the US the SEC has proposed a rule requiring publicly listed companies to report incidents, their capabilities, and their board’s expertise and oversight concerning  cybersecurity.

“It’s really shifting the responsibility from a back-office ‘as-long-as-it-is-working’ attitude to a front office ‘are-we-doing-this-appropriately’ one,” says Pacini.

He adds: “Now these regulations are shifting so that CEOs are having to grab cybersecurity by the horns for their businesses.”

In June, SGT Capital bought Utimaco, a platform provider of high-security technologies for cybersecurity and compliance solutions, from Stockholm-based EQT.

Advancement in technology also means cybersecurity demands will grow in the years to come, Pacini argues.

“Let’s take a smart home as an example. Within the next 5-10 years, smart home innovation will become more robust. Let’s say you let your home know you’re on holiday, so it can change temperature and reserve energy. The last thing you want anybody nefarious to know is that you’re on holiday, so when you leave, how do you assure that information is not being hacked by anybody else?

“This is a system that goes across industries. The more interconnected we are, the more careful we have to be with the data.”

Such trends are helping to protect valuations despite a wider slump in the tech sector, according to Houlihan Lokey’s Smith.

“Within cyber, there’s been pressure on public market valuations as there has been across the tech ecosystem, but within private transactions, because of the tailwinds and because private equity still has the same amount of money to spend…we’re not seeing that valuation pressure to the same extent. There are still deals happening at good pricing.”

To contact the author of this story with feedback or news, email Sebastian McCarthy

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