Global Security (IT, Homeland and Defense) Review 1Q10 - VB/Research

Terrorist attacks, an increasing number of sophisticated cyber security incidents, and ongoing military operations in Iraq and Afghanistan propelled investment in the Global Security (IT & Homeland) and Defense sector in the first quarter of 2010 to $3.3 billion. This represented a 14% increase on 4Q09 ($2.9 billion) and a 145% increase on 1Q09 ($1.3 billion). Total investment in 1Q10 was split between: early-stage venture capital ($791 million – 25%); late-stage venture capital ($297 million – 9%); private equity development capital ($370 million – 11%); and private equity buyouts ($1.8 billion – 55%).

Although the quarterly growth rate in investment in 1Q10 was below 4Q09, this quarter’s recovery was significantly more balanced, with all investment stages (except buyouts) and all sectors (except defense) experiencing increased investment volumes. It should be noted that last quarter’s investment volumes were artificially bolstered by General Atlantic LLC’s $1.65 million buyout of TASC from Northrop Grumman, which accounted for over half of total investment in 4Q09.

More companies were financed in every sector in 1Q10 than in the previous quarter, with defense showing the most significant increase, from 10 to 25 companies financed, an increase of 150% on 4Q09. The number of buyouts also increased substantially from eight in 4Q09 to 23 in 1Q10. Notable buyouts included the $448 million buyout of safety and survival solutions equipment provider Survitec Group by Warburg Pincus LLC and the $404 million buyout of laboratory services provider LGC Ltd by Bridgepoint Capital.

Douglas Lloyd, CEO of VB/Research commented: “Investment activity in the first quarter of the year underlines rising confidence among venture capital and private equity investors in the Global Security (IT & Homeland) and Defense sector as well as the general economic climate. Although the quarter-on-quarter growth rate in 1Q10 was lower than that in 4Q09, this quarter’s recovery is in many ways more remarkable, given the substantial increase in the number of companies sourcing capital. The fact that the number of first time investors more than doubled this quarter is further evidence of renewed interest and greater confidence in the sector.”

Investment in physical security companies during 1Q10 rose to a two-year high. The visual surveillance sector performed particularly well this quarter, with investment in developers of these technologies amounting to $186 million in 1Q10, almost three times the $67 million invested in 4Q09. This increase was underlined by the $25 million raised by serverless video data storage company Pivot3, from Focus Ventures, InterWest Partners LLC, Lightspeed Venture Partners LLC, Mesirow Financial and Silver Creek Ventures. This is an area which VB/Research expects to receive continued investment over the course of 2010. Increased demand will primarily be driven by market penetration of NVRs and Open Platform Storage systems, which are expected to grow at a CAGR of over 25% between 2007 and 2012.

Early-stage venture capital funding, an important indicator of the market’s performance as it fuels the entire deal lifecycle, recorded an unprecedented increase this quarter with $791 million pumped into early-stage businesses versus $425 million in 4Q09. North America accounted for 80% of venture capital funding this quarter, which is in line with investment levels over the course of the last two years.

In 4Q09 VB/Research stated that the IPO renaissance in the Global Security (IT & Homeland) and Defense sector had begun with the $437 million IPO of A123 Systems, Inc., in September 2009. Although no other listings in the sector took place in 1Q10, there are a significant number of companies that have set their IPO terms and are aiming to go public in 2010. These include: Mirion Technologies Inc., Meru Networks, Inc., Sensata Technologies, Inc., Panda Security, Glasshouse Technologies, Inc., Carbonite, Inc., Belair Networks, ExaGrid Systems, Inc., Fortify Software, Inc., and SafeNet, Inc.

For further information on this press release please contact:

Douglas Lloyd:

+44 (0) 207 251 8000

douglas.lloyd@vbresearch.com