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The finance market finally begins to heat up

The finance market finally begins to heat up It still may be a challenge to find the right financing partner, but the money and interest in security is there

The financial side of the security industry has gone through its ups and downs in recent years. A shrinking pool of specialty lenders, more stringent financing guidelines and for those looking to sell accounts, lower multiples, are just some of the challenges faced by installers and systems integrators seeking financing for capital improvements or to grow their business. It has also contributed to how much money is available and the rigorous process applicants need to go through to secure funding. But those who work within the finance industry say the market is at a turning point. New funding sources are entering the field and there is more interest from venture capital firms today then ever before, in addition to several dealer funding programs that have made a comeback as a traditional source of money to installers. “There is probably more money seeking to be deployed in the security industry today then there has been in any time in history, with much of it looking at the alarm segment of the business,” said Michael Barnes, partner of Barnes Associates, a specialized investment banking and consulting firm in the security industry. And it’s not just about more money being available, but there are also new companies that are interesting in investing the security market, in one way or another. “While capital has been constrained in the security market for a while, I’m beginning to see new players,” said Paul Sargenti, chief executive officer of SAFE LP. “And we’re seeing a significant amount of equity sponsors.” The interest in either funding or investing in the security market has never been abscent, but in recent years the market has been going through what some call a correction to the over-lending and high multiples that plagued the 1990s. It wasn’t always this way Depending on how you look at it and at which end of the table you sit, one of the highest points of the financing side of the security market came in the 1990s, when money flowed freely and multiples frequently reached the 40-time range. Installers looking to sell their business had their pick when it came to potential buyers and could command some of the highest multiples this market has ever seen. It was not uncommon to see small transactions call for a 30-time multiple, while larger sales reached higher. The downfall came when many companies, including ADT Security Services and Protection One, engaged in the practice of buying as many accounts as possible to gain a mass of customers. But the high cost associated with buying accounts, coupled with the high attrition rates that followed, eventually took a toll. “In the older days, some lenders were too aggressive,” said Tom Pagnani, investment officer for CapitalSource. Lenders began to pull back, with one significant change happening in 2002 when ADT Security Services dramatically cut its authorized dealer program. Alarm owners who relied on selling accounts to provide constant funding found themselves without a financing source as ADT Security either reduced the number of accounts it would buy from some installers or ended financing all together for others. Other changes followed, when a joint venture between SAFE LP and GE Capital to finance the security market called Safe Financial, ended any new financing. The company is in business today, but only to manage its portfolio of existing loans. Others, such as MCG Capital, which provided financing to installers and systems integrators, decided to exit the security market completely. “A lot of finance companies that were active five years ago aren’t there anymore,” said Michael Szwajkowski, managing director at CapitalSource. And for installers, fewer lenders meant fewer choices. Times proved tough for some installers, who found themselves with few options for financing. Either the program they were once heavily involved in had been altered or their long-time lender stopped funding them. And though new players have begun to enter this field, there are still challenges associated with finding financing. “There’s a shrinking marketplace for loans at this point in time,” said Tony Smith president of Security Finance Associates, “which means that those that are looking for loans better have their companies in excellent shape.” Changes ahead Today the pool of lenders in the security market continues to decrease. One most recent exit happened in December, when the Milestone Security Partners portfolio of business sold to CapitalSource, one of the newest lenders to enter the field (See related story on page 21.) Milestone’s parent company, Provident Alarm, decided to leave this market. But despite fewer specialty lenders in the market, financial institutions are taking a second look at the security industry. And, as a result, the security industry has begun to see some strong companies enter the fold, with plenty of capital at their disposal and a commitment to funding this market. CapitalSource, for example, is one of those newcomers. While the company’s name is newer to this field, its experience in the security industry is anything but. Thanks to its acquisition of SLP Capital in 2004, it gained a team of employees experienced in funding security companies. Financial Security Services has also renewed its interest in the market. A new round of financing for this company is enabling it to put together a program on funding smaller alarm companies that need between $1 million and $3 million. “There are a lot more opportunities,” said Jeff Peiper, president and chief executive officer of FSS. “Some dealers don’t have the financial wherewithal to go the local banks. And some of them need the services that we can provide billing, collections and monitoring.” Along with traditional means of financing, owners of security companies have other avenues available to them. Venture capital firms have not only begun to invest in the technology and manufacturers of the security market, but also are even beginning to provide funding to systems integrators. The same is true with companies going public. In recent years, several systems integrators have taken the initial public offering route to raise capital to pay down debt, fund an expansion or just to raise awareness about the business. The industry is beginning to see more financial resources, said Sargenti, and that’s evident with some of the acquisitions that have taken place recently, such as Interface Security Systems’ recent purchase of Greater Alarm of California. “Well run, well capitalized companies will always carry value in the marketplace,” he said. Taking a second look When it comes to financing alarm companies today, lenders are also more critical of a company’s balance sheet, their overall financial stability to. It can influence how much a lender is is willing to lend, if at all. “The capital is much more discriminating,” said Bill Polk, director of CapitalSource. “It’s not that anyone with fog and mirrors gets financing.” But even with tighter controls, money is available to owners of security companies. Sargenti said many companies are waiting in the wings and watching the security market, but have yet to jump in due to a lack of understanding. “There’s a lot of money sitting on the side and a lot of funds that can’t find the returns and cash flow that our industry offers,” he said. Despite all the changes that have taken place, from fewer lenders to more restrictions, many of those interviewed by Security Systems News say the security industry is stronger today as a result. “The market is better off in the sense that both the lender and the borrower are more intelligent in their approach, more measured and more deliberate,” said Barnes.

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