Apr 11, 2022

Security Solutions Market Update: The Defensible Play, Recurring Revenue Attracts Heightened Buyer Interest

Security Solutions MarketCloud Computing Capabilities Bolster Security Solutions Sector

Capstone Partners released its April 2022 Security Solutions Market Update, reporting that security solutions companies continue to weather the pandemic, as new variants of COVID-19 further impair Commercial end markets. However, Residential end markets are expected to uplift sector revenue by 2023. Ongoing labor shortages, coupled with supply chain disruptions, have cut into sector participants’ bottom lines, forcing security solutions providers to buttress margins by pursuing acquisition targets in defensible end markets and integrating advanced technology capabilities such as cloud-based access control and video management system solutions.

Security Solutions merger and acquisition (M&A) activity set an annual record in 2021, as a large portion of the initial transaction inventory was fueled by business owners seeking to close deals before year-end ahead of prospective tax increases. The vast pipeline of transactions nearing or already in closing processes is expected to drive a flurry of M&A activity through 2022, with January levels outpacing the same period in 2021 by 85%. M&A transaction multiples in the sector have averaged a robust 10.2x EV/EBITDA over the past three years, outperforming the broader Business Services industry as buyers exhibited aggressive bidding behavior for defensible assets.

The Fire & Life Safety segment has undoubtedly been a focal point of expansion through organic growth and M&A activity, with fire and life safety targets comprising more than one-third of deals in the sector in 2021. Private equity firms have taken a particular interest in the space, implementing quick-turn, add-on acquisition strategies to bolster portfolio companies’ workforces and remain compliant with stringent state and federal fire codes. Strategic buyers have also been active in the segment, enhancing regional market share in fire-prone areas of the U.S. and fortifying margins through recurring revenue streams. Notable deal activity includes the Capstone-advised sale of Signet Electronic Systems’ Fire Alarm division to Encore Fire Protection in November 2021.

Also included in this report:

  • Which public strategic buyers have pivoted their acquisition strategies to target cloud-enabled security solutions providers.
  • Drivers behind the surge in private equity activity in the sector, including portfolios that have engaged in multiple add-on acquisitions.
  • 2022 projections on deal activity, sector revenue, and public market performance.

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