How private equity investment can support the growth of businesses in the IT security sector

Opinion by Mike O'Brien

Private equity investors are always on the lookout for opportunities to invest in businesses with real potential in growth areas.

Private equity investors are always on the lookout for opportunities to invest in businesses with real potential in growth areas.

Identifying these companies is challenging, particularly in the current environment, and we are constantly travelling around the country meeting management teams from a wide range of sectors.

This approach gives us a great opportunity to really get to know the challenges and opportunities facing different industries as well as gaining detailed understanding of how businesses within different sectors are faring in the current economic climate.

IT security is a sector which has been increasingly catching our attention. Our meetings with IT security company managers and large purchasers of IT security have highlighted that this sector is one which looks set to defy the economic gloom.

According to a recent report from the Cabinet Office, cyber crime costs British business about £21bn a year. This includes £9.2bn from the theft of intellectual property and £7.6bn from industrial espionage.

Countering cyber attacks has risen rapidly up the UK agenda in recent years with cyber security recently promoted to a 'Tier One' risk to national security by the Government. This status was reinforced by the Government's allocation of £650m to cyber security as part of its four-year National Cyber Security Programme.

The growing threat posed by cyber crime was underlined by recent research by Deloitte, which revealed that three-quarters of technology, media and telecoms firms had been the subject of cyber attacks in the past year, an increase of 13 per cent on 2010. A fifth of technology firms confessed that they had suffered up to 20 breaches in the past year.

Against this backdrop, it is unsurprising that the IT security market has seen exponential growth over recent years. Businesses worldwide have an ever-increasing reliance on information systems, and the proliferation of digital connections between organisations and individuals has led to a greater exposure to the threat posed by cyber criminals.

Over the next three years, this threat looks set to grow, driven by a number of factors: growth in data use; a large market movement towards cloud computing; and proliferation of corporate end-points such as PDAs and tablet computers.

In the UK, there has been a 480 per cent increase in internet usage since 2001, and the internet accounts for around six per cent of its GDP. If it were a sector in itself it would be larger than either utilities or agriculture.

To keep pace with the changing information landscape while simultaneously mitigating the increased threat, both multinational firms and smaller companies will be compelled to put IT security at the centre of their operations.

For IT firms to be able to meet this growing demand and maximise the potential which exists in the market, securing investment to scale up and provide a viable alternative to the large security vendors will be imperative.

In particular, there is a real opportunity for smaller IT firms that are more nimble and responsive than many of the larger IT firms to take a significant share of this growing market, supplying not just large companies but the burgeoning SME market, which is increasingly coming to the realisation that IT security is a subject to be taken seriously.

However, many IT suppliers may find securing the funding they need from the banks challenging. Private equity firms can help fill this funding gap and provide capital injection, business expertise and support networks to businesses that would otherwise have to put growth plans on hold.

Private equity investment is all about adding real value by providing capital to help businesses grow organically, through acquisitions or via international expansion. Within the IT security sector, opportunities exist for firms to make bolt-on acquisitions, helping them to broaden service offerings and provide a more holistic service to their customers.

The IT security market is evolving rapidly, and those players that move decisively to take advantage of the huge opportunities that exist will be those that thrive in the future.

Mike O'Brien is a partner at Gresham Private Equity

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