Skip to Content

Security investment and finance in '14

Security investment and finance in '14 New players and investors enter security industry, show interest in innovative pricing and business models, expanded services

YARMOUTH, Maine—Valuations, at least for smaller security deals, were generally higher in 2014 compared to 2013. That is one area of agreement among three security finance and investment experts who participated in a Security Systems News virtual round table.

Participating in this year's round table were: Michael Barnes, founder of Barnes Associates, a consulting and advisory firm that specializes in the security alarm industry; John Robuck, managing director, Security Finance for Capital One's Security Finance team, which provides flexible financing solutions to security companies that need working capital, organic creation cost financing, and/or acquisition support; and Henry Edmonds, president of The Edmonds Group, an investment bank specializing in the security alarm and PERS industries.

Their opinions also diverged on other topics such as the importance of particular deals and some technology trends.

Martha: When you look at the deals in the past year, what distinguishes 2014 from 2013? Valuations? The kinds of companies that were acquired or received investments?  Something else?

Mike: 2014 was in most ways similar to 2013: a lot of interest in the industry and plenty of money chasing deals. There also remains a relatively large spread between seller expectations and what buyers are willing to spend, so every deal is a challenge. If there is a difference, it is probably in two areas. First, an increased confidence in the economy, and second, an increasing concern over the impact and competitive changes likely to result from the cable companies and other MSOs entering the industry. The former is generally resulting in bullish pressure on valuations, while the latter is generally bearish, and particularly so in the residential and small business segment of the industry.

John: M&A for large platforms in the alarm monitoring space was generally down from 2013. However, there continued to be an exceedingly high volume of lower- and middle-market tuck-in transactions. Interestingly, valuations for these smaller deals seemed to increase this year and are starting to approach those of the large platforms. In addition, the private equity community has demonstrated a noticeable increase in interest in the space. There will likely be many new entrants once the M&A activity for larger platforms returns in 2015.

Henry: In 2014, we saw more deals involving non-traditional business models and non-traditional RMR. To me, the unifying theme was eye-popping valuations for new technologies and new approaches to the security market.

Martha: What was the most interesting deal of 2014? Why?

Mike: I think Sequoia Capital's $57 million investment in SimpliSafe is the most interesting deal of the year. It touches on so many of the areas of potential change in the industry. First, SimpliSafe is a relatively new, fast growing alarm company focused on the highly promising DIY market. They have seemingly come out of nowhere and are believed to have more than 100,000 customers. Second, they have chosen to design their own product line, rather than rely on existing suppliers. And lastly, they are using a pricing model different from most mass-marketers. The emphasis is on selling the system to the consumer at a more full upfront price, and then offering the monitoring as a low $15 per month option without a long-term contract, which runs contrary to the general trend toward low- or no upfront fees in exchange for higher RMR and more certain multi-year contracts. It's a new company in an emerging market segment with an innovative business and pricing model that challenges convention, backed by a technology-oriented, deep-pocketed investor.

John: While the CSG recapitalization stands out in many ways, the most interesting transaction from my perspective was probably the Iverify/TransAlarm/Securitas transaction. This one transaction combined a strategic investment by a large international guard company, Securitas, into the electronic security space, with the merger of two ostensibly different businesses, Iverify and TransAlarm. The investment by Securitas is another example of a traditional guard company trying to differentiate and provide more interactive, higher value security services.

Henry: Supporting the theme above, the most interesting deals of the year were Pamlico acquiring PERS company VRI for an “alarm company-type multiple,” Sequoia investing in DYI security company SimpliSafe at a valuation well beyond typically alarm multiples, and Google paying a staggering $3 billion for home automation/smart thermostat company Nest Labs and then Nest buying video streaming company Dropcam.

Martha: What do you believe is the most important technology trend affecting finance and investment in security companies?

Mike: Technology is having a wonderful effect on the industry, but not without its trade-offs.  Like most things electronic, everything is getting faster, better and cheaper. Additionally, the number of services that can be provided has expanded materially. The industry of today feels like a supermarket compared to the fruit stand of the industry past.  While this is a good thing in virtually every respect, it brings a higher level of complexity, which poses a challenge for capital. When RMR was mostly for monitoring, with an occasional maintenance contract, it was easier to understand the key valuation drivers associated with margins and attrition risk. Today's RMR can be comprised of any number of services, with a wide range of underlying technologies, and an equally wide range of potential performance. This proliferation of possibilities is one of the largest challenges and opportunities associated with capital flowing into the industry.

John: At a high level, the advancement of various technologies supporting the deployment of enhanced services to alarm customers is the most important technological trend impacting investment in security companies. The ability to deploy dependable hardware and software solutions with relatively low service costs has resulted in a significant increase to ARPU as well as a slight, but meaningful, uptick in market penetration.

Henry: The most import technology trend?  New technology and lots of it! We are no longer operating in your father's alarm industry. We are being drawn into the technology race by household names like Google. Investors and lenders are embracing this trend through high valuations and strong debt advance rates/ favorable pricing.


To comment on this post, please log in to your account or set up an account now.