The physical security market has seen some major M&A activity in the past few years. This M&A activity, especially seen in the video surveillance market, has been driven by a several factors: pricing pressure, product commoditization and competition with Chinese companies.
The physical security market has seen some major M&A activity in the past few years. This M&A activity, especially seen in the video surveillance market, has been driven by a several factors: pricing pressure, product commoditization and competition with Chinese companies. These have made it more difficult for vendors to maintain margins and turn a profit. As a result, companies are selling off non-core business units that are not as attractive, or buying other companies in order to expand their current offerings to become “total solution” providers.
Limitations and opportunities in the market
“The industry is dominated by large corporate players that have consolidated over the years,” explained Erik Krieger, Partner at Portland, Oregon-based private equity firm Riverlake Partners. “Private equity groups have been less active in this space due to the fact that large corporations are invested in this field, and it is difficult to compete on price given the strategic benefits of an industry player.”
Nevertheless, given this industry dynamic, Krieger sees an opportunity for private equity firms in unique niches such as remote video monitoring and video surveillance as a service (VSaaS). He is also particularly attracted to the recurring monthly revenue model and the predictability of the revenue.
“There is a changing mindset that favors video solutions versus the use of security guards (human beings). With the improvements in newer technologies over the past five to ten years, integrated solutions are capable of securing large properties in remote locations, and with increasing accuracy,” he added.
Slow innovation limits investments
Another factor that limits private equity and venture capital investments in the security industry is slower innovation compared to the other industries. However, Chip Hazard, General Partner of Flybridge Capital partners, a Vidsys investor also pointed to opportunities that still exist in the market. “Younger, software-powered companies can drive new solutions into the marketplace. As devices of all types (sensors, cameras, legacy systems, etc.) generate data and insights, there is room for analytics, correlation engines and data management platforms that can play a role in the physical security realm,” he said.
Hazard’s words are backed by numbers. A recent report from PricewaterhouseCoopers (PWC) and U.S.-based National Venture Capital Association (NVCA) states that US$58.8 billion was invested in venture capital across America in 2015. Of these investments, the vast majority was in software companies, especially in companies dealing with cybersecurity and cloud computing solutions (40 percent), followed by biotechnology (18 percent), and other categories such as consumer products and services (8 percent) and media and entertainment (8 percent) and financial services.
Potential areas for investment
Investors for either private equity and venture capital firms focus on technology, and not necessarily on a specific market vertical. As such, investments in physical security might be overlooked as the market has an image of a mature market with little technological innovation.
However, companies that can offer strong software solutions with an emphasis on analytical capabilities as part of their offering will stand out as the most likely recipients of outside investments from private equity or venture capital firms. This, of course, includes video analytics, VSaaS and Internet of Things (IoT) systems.
Josh Daniels, CEO of VideoSurveillance.com pointed to video analytics as a potential area for investment. “Video analytics have made significant advances in the past few years. Initially, they over-promised and under-delivered. Today, they are important tools in reducing false alarms as well as improving post-incident investigation. However, to be effective, field operations must have the know-how to design security solutions to integrate sensors, cameras and analytics software in ways that will reduce false alarms and enable better decision making in active security response situations. Compared to sensors and communications technologies, video analytics is still relatively early-stage, but its potential justifies continued investment in the future.”
“IoT-driven systems can create a better security posture, but they also introduce new potential vulnerabilities, so making sure they are properly architected and secured will also be an interesting investment theme in the future. IoT is not just about a single system or device, it’s about how these different systems work together to provide situational awareness and real-time information to drive better and faster results. That said, within the various categories, the greatest value is likely to be created at the analytics layer of the stack,” added Hazard.
Physical security may remain a private game
It is hard to say if we will see more private equity or venture capital firms moving into physical security. It is more likely not to happen and M&A activity will probably remain between established players in the industry. However, it will be interesting to see if there will be any “spillover” from physical security to other industries, for example retail or marketing. These new uses beyond security also holds great potential for investment.