The Big Business of Cybersecurity:

PE Firms All In as Cyber Attacks Threaten Private Industry

Cybersecurity, as a line item in corporate budgets, can get comfortable. Chances are, its belt will not be tightened in 2016. The 2015 cyber attacks on corporate giants Target, Anthem, and Sony Pictures (to name a few) sured up its position—and ensured that most CEOs would skip over data protection during their annual search to cut fat. In fact, according to research firm Gartner, global spending on cybersecurity is on the rise and expected to reach $108B in 2019, an increase of almost $31B from 2015.

Few situations wield the power of a carefully orchestrated cyber attack on an unsuspecting target. The bigger the company, the larger the attack surface, and often, the greater the potential for damage. Data breaches unseat CEOs, affright prospective clients, and soil reputations. Therefore, it is no surprise that despite market unease, private equity investment in cybersecurity companies has remained steadfast. The low supply, high demand relationship is attractive to private equity, and there are a plethora of companies looking to fortify their global presence through capital infusion. Bain Capital’s 2015 announcement regarding the intent to purchase Blue Coat Systems for $2.4B will be one to watch, and is expected to be finalized in 2016.

As long as hacks make headlines, the supply­demand relationship for cybersecurity is expected to remain appealing—and signs point to the continuation of this trend through 2016. Alfred Zaccagnino, CEO and Founder of the Samarian Group of Companies, has closely followed the course of private equity investments in cybersecurity companies. “Cybersecurity will remain on our radar as long as the conditions remain favorable. All signs indicate it is a probability that cybersecurity will continue to have a presence in PE portfolios.” states Zaccagnino.

An outlook this good begs the question: what is the downside of private equity investment in cybersecurity companies? Keeping up with hackers—and hactivists—requires an evolving strategy (that’s code for lots of capital). On the operations side, keeping revenue up with escalating costs can pose a challenge for companies. Additionally, because of the low supply, high demand relationship, valuations of cybersecurity companies can be inflated.

Private Equity in the Restaurant Sector: Hot or Not?

The formula for success in restaurant investment seems more art than science—and many middle market PE firms have demonstrated they perfected it in international markets during 2015. Successful restaurant franchises are scalable, revenue generating machines that can be replicated across both domestic markets and overseas. The entity may start with three or four profitable brick­and­mortar locations, then build credibility and hone their model by launching ten to fifteen additional stores. Planning for new, potentially international markets may be the next logical step—and the perfect time to roll out the red carpet for PE firms.

Franchises that have expanded internationally have experienced extremes in performance. Domino’s Pizza Enterprises entered the Japanese market, “quickly became the number two player”, and is predicted to become number one, according to an interview with Chief Executive office Don Meij by CNBC. G rowth has been strong and impressive —t he franchise reported a 48% increase in profit over a twelve month period in 2014. Creative marketing campaigns and revenue streams have been launched and, as the numbers show, made quite an impression on a sizable, hungry audience.

Other brands have flopped, failed or floundered by underestimating the demands of an international venture, sinking robust investments into operations and supply chain logistics, and failing to customize their offerings to the culture of the market. Recent changes in the global foodservice market include Yum! Brands announcement that their locations in China would become independent, publicly­traded franchises. This announcement was made after Yum! brands made headlines regarding food safety issues.

According to LEK Consulting report volume XVI, Issue 45, most countries remain (outside of the United States) “sharply underpenetrated” by chained quick service (QSR) restaurants, and casual dining restaurants (CDR). India has the fewest QSRs, with only seven units per one million people above the poverty threshold. To put this in context, the United States has 516 QSR units per one million people above the poverty threshold. In developing a formula for international success, however, many more variables must be considered, such as lease prices, availability of prime locations, operations and supply chain expenses to name a few.

“The growth of private equity’s role in the foodservice sector—and its sub­sectors—has been remarkable. Multiples have been strong, acquisitions have been plentiful, and it will likely prove to be a sector to watch again this year,” states Alfred Zaccagnino, Founder and CEO of The Samarian Group of Companies, a boutique private equity firm headquartered in Manhattan with a growing international presence.

The uptick of PE activity within this sector is reflective of its appeal. Top restaurant companies are selling for 10 times their earnings, an attractive multiple to PE. But new markets—and companies—must be tested, analyzed, and vetted before the leases are finalized and the signs go up.

The Expanding Role of Private Equity in Aviation

American media headlines portray industry volatility, lack of resiliency— the airline industry as helpless victim of market forces crippled by red tape, national tragedies, and federal regulation. The vox populi begrudges increased fares, fees, and foul­ups. But study global aviation market trends vis a vis private equity—and the upslope reveals the other side to the story. A story in which private equity is the perfect player, and the aviation industry is the perfect playground. Complete with twists, turns, and obstacles; and plenty of fun in the endgame.

The capital demands on airlines are steep. Fuel prices are high—fuel efficient aircraft is a must to keep costs down. Purchasing fleets of fuel efficient aircraft requires an outlay of capital that can be painful—or crippling—to bottom lines. So airlines have turned to leasing to mitigate cash flow demands—and private equity has seized the opportunity to be lessor.

Air travel is here to stay—the Airline Monitor projects a 4.8% annual increase in air traffic for the next twenty years. Consumer demand both nationally and globally remains strong, and history reveals volume has nearly doubled every fifteen years. Supply is low—airplane manufacturing is dominated by industry giants Boeing and Airbus—who’s waiting lists are years long. Given the capital demands, entrants to the supply side are unlikely—nodding to the stability of the supply­demand relationship.

Long­term, the transfer of assets (planes) between carriers is straightforward, lowering risk for investors and making it attractive to private equity.

“The aviation industry holds interest for private equity firms across the globe”, notes Alfred Zaccagnino, founder and President of the Samarian Group of Companies, a private equity firm headquartered in New York with a strengthening global presence. “The industry has proven resilient and demand has trended upward. The supply­demand relationship is interesting. All indicators show the number of private equity and aviation partnerships will continue to grow.”

Private Equity in Professional Sports: Perfecting the Endgame

Sports and entertainment, to most professional sports fans, feels redundant. Sports are entertainment. Football commands the attention of half of America’s population on any given Sunday, and marketing departments are hard at work attracting the other half. A favorite team, in any sport, that earns the “W” brings unrivaled bliss, impish satisfaction, and bragging rights. Sports are woven into the fabric of our culture; each game reminds us of our love for winning, hatred for losing, and our obsession with keeping score. Green fields, hardwood courts, and sheets of ice become battlegrounds of finesse, agility, pride and grit. We can’t get enough. Professional sports are America’s entertainment, and they’re here to stay.

Win-loss records, historically, have weighed heavy on bottom lines. Victories, winning seasons, and championships can be elusive. But to private equity, winning games doesn’t  matter. It doesn’t have to. Returns count–wins don’t– and history shows private equity could have the candy-making secret. In a nine year span, the enterprise value of the NHL’s Toronto Maple Leafs tripled, according to Forbes, accounting for $413M in value. So how does mediocre on-ice performance, a disenchanted fan base, and no chance of making fingerprints on the Stanley Cup lead to industry-leading returns?  It’s the business equivalent of terroir to wine grapes, merroir to oysters– the bounty is derived from the perfect, delicate balance of key factors and forces. It’s making astute moves, redefining surplus, and living for the bottom line and the trophy. It’s business sense unencumbered by love for a team.

“The role of PE in professional sports will continue to evolve. As professional sports has leveraged technology to engage fans and broken new ground in revenue generation, doors have opened for private equity,”  notes Alfred Zaccagnino, President and Founder of the Samarian Group of Companies, a private equity firm headquartered in New York City. “If current trends continue, ownership of professional sports teams will continue to be a promising sector for private equity in the next decade.”