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Thematic investing

investment insight from pictet-security advisory board 

Stars align for cyber security boom

June 2019

The Advisory Board

Geopolitical tensions, more regulation, the rise of 5G. This unlikely trio of stars shines on the cyber security industry and its investors.

The Trump administration’s attack on Huawei was a stark reminder that its trade war with China runs deeper than the US trade deficit. Much of the dispute is about national defence – which is a boon for the security industry and those who invest in it. 

fig. 1 SPENDING BOOM
Worldwide spending on security solutions, USD billion
Worldwide spending on security solutions
Source: IDC, 2018

In a world where information is power, it is arguably the digital rather than the physical space that needs defending most – as amply demonstrated by Russian interference in the 2016 US presidential election via social media.

Fending off disruptive attacks, protecting information and shielding citizens from covert and potentially malicious influences have become national priorities for many of the world’s advanced economies.

Global spending on cybersecurity is growing at around 10 per cent a year – three times as fast as the broader economy – and is on track  to reach USD120 billion by 2021 (see Fig. 1).

Geo-political tensions could well provide an additional boost to the industry and to investor returns, according to members of the Pictet-Security Advisory Board. 

Europe's rise

Crucially, the security industry is broadening out beyond its historic North American heartland. Europe is incubating a growing number of promising cyber security innovations and businesses, Advisory Board members and fund managers noted after conducting an extensive round of site visits and meetings with start-ups from across the continent.

There are several reasons why. 

First, Europe’s governments have realised they can’t go it alone. Across the region, they have been engaging with businesses in the field of cyber security, culminating in a European Union initiative to invest up to EUR450 million into a new private-public partnership in this area. In the UK, meanwhile, tax changes have encouraged investment in early stage technology start-ups, with cyber security firms among the beneficiaries. 

Second, Europe benefits from a wealth of security expertise. As the European financial industry shed jobs in the aftermath of the 2008 debt crisis, many of the continent's brightest minds migrated to tech industries. 

The third reason is regulation. The introduction of EU’s Global Data Protection Regulation (GDPR) in 2018 has further fuelled demand for cyber security across industry. 

Fourthly,  European firms are also well-placed to benefit as mutual antagonism between the US and China opens up opportunities for security services from third parties.

Estimates vary, but research firms are forecasting double-digit annual growth for Europe’s cyber security market over the next half a decade1.

Fig. 2 A usd13 billion a year problem
Cost of cybercrime attacks in 2018 by type of attack, USD bn
Cost of cybercrime attacks in 2018
Source: Accenture, "The cost of cybercrime", 2019

IoT challenge

That, in turn, should leave the industry in a better position to meet the challenge posed by the growth of Internet of Things (IoT).

As 5G technology is introduced around the world, ever more devices will be connected to the Internet. By 2021, there could be as many as 25 billion connected devices world-wide, from around 14 billion currently. And those devices – from fridges to door bells – could account for up to a quarter of all  cyber-attacks2.

With growth in connected devices comes an explosion of private data, whose accuracy and authenticity becomes increasingly crucial to verify. Artificial intelligence tools could help achieve this, while in the long term quantum computing could offer the speed and capacity to handle the volumes of bytes.

Cyber consolidation

Together, the latest technological developments, regulatory shifts and governments’ increased focus on defence in the face of geopolitical tensions create an exceptionally fertile environment for growth - and investment opportunities -  in the cyber security sector.

Testifying to this is a wave of merger and acquisition activity. Recent high-profile deals include Thoma Bravo’s USD2.1bn takeover of Imperva, a company held in Pictet-Security portfolio at the time of the acquisition, and Cisco’s USD2.35 billion purchase of identity authentication specialist Duo.

Investors in the security industry not only have the opportunity to tap into the secular growth trend, but also can benefit from a degree of protection in case of unpredictable major events on the global stage, the Advisory Board members concluded.