It’s no secret that non-public fairness has been on a cybersecurity kick as of late—and for good motive. With on-line assaults and digital fraud solely turning into extra prevalent, international spending on expertise to guard delicate knowledge and knowledge is anticipated to achieve an unprecedented $124 billion this yr, in response to analysis agency Gartner.
Which means there are extra firms than ever in search of to supply cybersecurity options, and people firms want capital to develop. Enter the likes of personal fairness large KKR, which closed its $711 million Subsequent Era Expertise (NGT) Development Fund in 2016 with a watch towards investing in growth-stage firms within the realm of expertise, media and telecommunications (TMT).
So far, the cybersecurity sector has confirmed an integral a part of KKR’s funding strategy to the fund, which additionally targets enterprise software program, fintech, and shopper web firms. The NGT Fund has delivered returns via the likes of endpoint safety software program agency Cylance, which was acquired by BlackBerry for $1.four billion earlier this yr, and is a lead investor in British synthetic intelligence agency Darktrace, which closed its most up-to-date funding spherical in September at a $1.65 billion valuation.
Extra just lately, KKR agreed to take a minority stake in Florida-based startup KnowBe4 by way of a $50 million funding that valued the corporate at $800 million, as Fortune first reported in March. KnowBe4, which counts infamous hacker Kevin Mitnick amongst its management, presents cybersecurity coaching to firms and their staff that goals to construct a “human firewall” towards phishing assaults and knowledge breaches.
KKR managing director Vini Letteri has helped information these investments, overseeing a 20-person crew unfold throughout Silicon Valley, New York and London. In line with Letteri, the NGT Fund, which right this moment has 11 firms in its portfolio, is now “about 90 % invested.” Whereas 2018 was “a extremely sluggish yr” for the fund amid a high-valuation surroundings—with KKR making just one new funding, in Portugal-based tech agency OutSystems—this yr has already confirmed extra lively, with each the KnowBe4 deal and a February funding in Michigan-based software program agency OneStream.
Letteri sat down with Fortune at KKR’s workplaces in Midtown Manhattan to debate cybersecurity bets, whether or not knowledge actually is the brand new oil, and the way one-third of the KKR crew fell for a phishing hoax.
What prompted KKR, a longtime large within the personal fairness realm, to launch a progress fund?
I feel the technique is an outgrowth of one thing that Henry [Kravis] and George [Roberts] have been attempting to drive on the agency. We made a strategic resolution to shift in the direction of what we’d name growth-oriented buyouts. That’s, going after firms which have excessive income progress however nonetheless have the chance to scale—versus monetary buyouts of legacy, cash-rich, slow-growth firms, the place you set leverage on them and make your return by containing prices. The thesis behind these growth-oriented buyouts was that you simply make your returns by serving to preserve or speed up income progress and serving to [companies] increase.
We had been seeing a variety of alternatives come our method which we thought had been actually fascinating, however had been simply too small for our buyout fund. At present, our North American buyout fund is $14 billion, and the thought of writing $50 or $100 million checks from a fund that measurement, it simply wasn’t going to maneuver the needle.
And also you even have the phenomenon of those firms staying personal so much longer. Once I began on the agency a dozen years in the past, the common firm stayed personal round six-and-a-half years earlier than they went public; right this moment that quantity is round 11 years. So that you’ve seen this shift in worth creation from what historically used to occur within the public markets now occurring within the personal markets, and we didn’t have a pool of capital to put money into these firms—which is how the Subsequent Era Expertise Fund happened.
How would you describe the profile of the businesses that the fund seems to put money into?
We’re not attempting to take technical danger or enterprise mannequin danger; we consider that because the land of enterprise capital, the place you’re attempting to take an concept and construct an organization round it, however you’re unsure in case you can construct the expertise or if any person can pay for it. The chance-reward there will be large, however that doesn’t match up with our urge for food and the place we expect we will be differentiated.
The place we really feel like we’re actually good is [investing in] firms which have moved via that technical danger section and have product-market match, which we usually time period as having revenues of $25 million or extra. I feel on entry, our firms on common have someplace within the $50-to-$60 million of revenues vary, however they’re rising quick and we see a chance to scale these usually native or regional companies into international enterprises.
Cybersecurity has been one of many key funding areas that the NGT Fund has centered on. What’s prompted you to focus on that market?
On the cybersecurity facet, you hear these phrases that folks throw round, like “Information is the brand new oil,” or no matter. We give it some thought as, there’s been this large shift in property and in worth from bodily property to digital property, and the issues that usually defend these digital property right this moment are passwords and networks and different forms of issues.
Felony exercise is now not breaking into banks and artwork museums; it’s stealing knowledge and knowledge, and also you see this digitization of crime, if you’ll, which we expect is admittedly fascinating. On each board that we sit on, which is tons of of boards, cybersecurity is a subject of dialog. A decade in the past, no person had heard of a chief cybersecurity officer or a chief info safety officer; now, just about each firm has them, and the necessity for cover is simply going to extend over time.
What drew the fund to put money into KnowBe4, and the way does it match inside your technique?
Regardless of the entire protections that you simply put in place for endpoint and community safety, 90% of safety flaws nonetheless occur on the employee or shopper degree, which is why KnowBe4 was so fascinating.
I feel I can share this; as a part of our diligence, we labored with our CSO [chief security officer] to truly launch a phishing assault on a subset of KKR staff. We predict this place is stuffed with high-integrity, clever individuals—and even then, over a 3rd of the workers that we despatched it out to went forward and clicked on the malicious e mail. We introduced that up within the funding committee assembly, and it turned so apparent that if, in a spot like this, individuals nonetheless have to undergo that kind of coaching, then it’s obtained to be broadly relevant out within the market.
And it’s steady [training], as a result of some of these assaults change on a regular basis. The fascinating factor about KnowBe4 is that they’re continuously updating the coaching, the content material and growing new kinds of issues to remain in entrance of that.
You’ve stated that top valuations hindered your capacity to make offers final yr. What’s your present tackle valuations? Has the surroundings cooled in any respect?
Usually, valuations proceed to be fairly excessive inside the market. In the event you have a look at the info, it will inform you that there’s been extra money that’s gone into each venture- and growth-stage firms, however there’s been a decrease variety of offers, so the dollars-per-deal have gone up.
In our position as stewards of our stakeholders’ capital, we’ve got to remain actually disciplined. In the event you have a look at 2018, it was a extremely sluggish yr for us from a brand new funding standpoint; we made one new funding, a fantastic firm known as OutSystems primarily based out of Lisbon, Portugal. We issued 13 time period sheets—we had one which was accepted, which was OutSystems, after which of the 12 the place we weren’t the last word winner there, 11 of these was due to worth. We went again, talked to our crew, regarded via fashions, and we simply couldn’t get snug budging from our provide. We’ve made two investments already this yr [KnowBe4 and software firm OneStream], so we’ve already doubled what we did final yr.
Together with your fund now round 90% deployed, what’s subsequent?
I feel it’s honest to say the technique has been very profitable. We’ve got no plans on stopping what we’re doing.