Cyber security investing hasn’t attracted much attention from family offices. That’s changing

Cybersecurity investment opportunities have never appealed to family offices in the same way as mainstream technology applications. But it is time they did. 

Stocks in the sector have echoed big US tech stocks in bouncing back from their coronavirus swoon. Venture capital fundraisings this year have been small, but tasty. 

The sector is in a unique position to benefit from greed as well as fear as companies and governments rely on technology to buoy up their prospects. Which also means they need to spend large sums to protect it against cyber attack.

Surveys repeatedly show cybersecurity is a top concern for wealthy families. They have shuddered at events surrounding UK family offices led by billionaires Sir Frederick and Sir David Barclay, rocked by courtroom allegations by Sir Frederick that he has fallen victim to a sophisticated espionage operation carried out on behalf of members of next-gen seeking a commercial advantage. 

The events imply that family offices may one day feel the need to erect firewalls to protect one generation against the activities of another.

Following the coronavirus outbreak, data provider MarketsandMarkets said the cyber-security sector will grow 12% a year to $230 billion by 2021, which compares well to GDP forecasts of zero, or less. 

According to MM: “Increasing focus on cybersecurity as a critical business imperative and not just a support function is expected to drive the market.”  Deloitte says businesses need comprehensive solutions, adding that “securing the perimeter” is not enough as crime gets smarter.

Coronavirus has changed behaviour patterns across the world, particularly during the lockdown, allowing cybercriminals to get under the radar. 

Legal firm Grubman, Shire Meiselas & Sacks has confirmed the theft of data from celebrity clients such as Madonna and Lady Gaga. EasyJet confirmed the theft of credit card data involving nine million clients less than a week later. The attacks are unrelated but each one stokes paranoia. 

The internet of things has opened up further vulnerabilities. Printers or phones using the internet, for example, could provide a wireless link for malware. Narratives like these can be exaggerations but they still boost sales of cybersecurity equipment to anxious clients. Cybersecurity operators can also charge a hefty fee because clients are rarely sure how their equipment operates. They just know they want it. 

Tension is increasing at a political level. A deteriorating relationship between the US and China is likely to lead to a growing risk of cyberwar, building on US criticism of Huawei. Iran and Israel have been involved in cyber skirmishing for some time. And let’s not get going on Russia.

Government agencies will pay what it takes for protection against cyber terrorism. Beneficiaries include Peter Thiel’s Palantir, now close to the US military. CrowdStrike, led by billionaire George Kurtz, has targeted Chinese and Russian hackers for the US authorities.

Palo Alto Networks, founded by Israeli-American Nir Zuk, has erected sophisticated firewalls for government agencies. 

Cybersecurity firms can afford to pay for the best executives. Palo Alto has given a record-breaking $128 million pay package with its new CEO Nikesh Arora who once worked for Google and SoftBank. 

Veteran entrepreneur Philippe Courtot has led a series of companies, but he has stayed longest at his cloud-based security company Qualys since 2001 which has generated exceptional returns over the years, as well as challenges which still intrigue him.

Investors often access ETFs which track cyber-security indices. Two popular offerings are First Trust Nasdaq Cybersecurity ETF and ETFMG Prime Security. Each of them are above the price they struck in January. They are 40% higher over three years,  more than twice returns from the S&P 500.

But venture capital deals are more mouthwatering. By way of example, Armis Security raised $112 million of venture capital, according to Crunchbase, and sold itself to Insight Partners for $1.1 billion in January. Companies often get sold before they float because this is often the best way to access talent in a tight market.