Opportuna Newsletter #3

Hello all,

Welcome to the September edition, focused on Cybersecurity, where we update you on strategic developments, market activities, and the current investment landscape.

As usual, if you have any questions or would like to discuss any aspect of our approach to direct secondaries and late-stage primaries, feel free to reach out!

I will be in Geneva on September 25th for a Bloomberg event, and we are organizing a Single Family Office event in Zurich on October 1st.

Building Opportuna: Advisors, Website, Deck and Pipeline

We spent the later part of August due-diligencing transactions, setting up the website, finalizing the deck, fundraising and assembling the advisor team for the multi-asset SPV and the broader strategy. You will find the website here; you can ping me for a deck.

Our advisors bring a diverse set of deep vertical and domain expertise, a requirement, in our view, to capture alpha in the market. Today’s newsletter focuses on Cybersecurity, I will start with our advisor in that vertical.

Nicolas Fischbach has a clear/on-point/no bullsh*t view of the issues faced by IT organizations. He brings leading-edge technical knowledge, business acumen, and a deep network from 25 years spent deep in the industry.

He currently leads AI, Trust, and Security Reliability and Resilience Engineering at Google. His global teams look after the most critical low-level security components that underpin all of Google’s infrastructure, Google's Cloud Security products (GCP) and Gemini AI. Before Google, Nico was the CTO and VP of Engineering at Forcepoint where he led the development of FP's first SASE/SSE offering. He holds over a dozen patents in the security and networking space.

We met in London when I was covering Networking and Cybersecurity; I have enjoyed our exchanges on the industry, and I am super excited we can partner.

Highlights of the Month

• A lot to read on exits and state of the ecosystem; the main take-away being that there is a 20 year backlog for European exits. It is going to remain a buyer’s market for us.

  • “The Big Book of VC - Q2 2024” shows global venture-backed exits reached $75bn in 1H24. Looking at Europe specifically, exits have averaged EUR23bn a year in the last 10-15y. Pitchbook published its Q224 European VC Valuations Report and there is EUR420-430bn of Unicorn value, implying a 15-20y backlog.

  • On M&A, the BCG M&A Sentiment Tracker picked up for Technology but remained low overall.

  • And IPO proceeds reached $23bn in the US YTD.

  • Downrounds hit a decade-high in 1H24 but remain well below GFC and 2000s levels

• For those of you who want an intro to the secondary market, “Are the returns of secondaries funds too good to be true?” lists seven reasons to explain the inefficiency we exploit: 1) mismatch of supply and demand, 2) information asymmetry, 3) high transaction costs and complexity, 4) limited arbitrage, 5) barriers to entry, 6) liquidity issues and 7) regulatory restrictions. We could not have put it better!

Chart of the Month: Cybersecurity Valuations Focus on Growth and Margin

Charting the Exits: How Much Should We Care About Profitability & Growth?

In its simplest form, the buyer performs the following operation: “Fundamental Metric” x “Valuation Ratio”. Much effort goes into the first part of the equation. It is a mistake, in our view, to ignore the second part. In this section, we explain how we approach the valuation ratio.

The Cybersecurity scatterplot shows publicly listed cybersecurity assets pricing, which depends on growth and profitability. The scatterplot is upward slopping, the higher the growth, the higher the multiple. Besides, for the same level growth, investors tend to pay more for more profitable assets. For assets growing sales 5-10%, green dots are above blue dots. For companies growing above 10%, blue dots are above orange dots. The “Fundamental Metric” influences the “Valuation Metric”.

We uncover the relationship by regressing the “Valuation Metric” on “Fundamental Metrics”. In this case, each growth percentage point (ppt) translates into 0.4 turns in multiple, growing 10% more ads 4 turns. EBITDA margin has a larger influence; 1% of EBITDA margin is worth 7 turns. Market participants currently care a lot about margins.

The relationship is not constant, a valuation multiple being nothing else than a shortcut for a DCF. EBITDA and Revenue growth say something about Free Cash Flow; but nothing about WACC, which reflects market participants risk appetite and impacts the coefficients. Forming a basic view of what the world will look like in three to four years matters. We are not macro-investors; our view mitigates risks rather than drives alpha. We think investors will de-emphasize margins from current levels; we expect lower risk-free rates 3-4y from now, and more risk appetite. Traders price a 200bps reduction by this time next year.

Finally, we consider the illiquidity premium, which refers to the excess return investors receive for holding investments that are less liquid compared to stocks and bonds. It compensates investors for tying up their capital for longer periods. We use 2-5% as a benchmark, based on empirical studies (see here, here and here for background).

Wrapping it up, our exit valuation framework incorporates 1) the fundamentals at exit, 2) the weight investors give to these fundamentals, 3) the illiquidity premium.

Platformization Shaping Late-Stage Cybersecurity Investments

The three largest independent publicly listed cybersecurity companies - Crowdstrike, Palo Alto Networks and Fortinet -, have all articulated a strategy focused on “Platformization”. They aim to provide customers with the broadest set of solutions, taking wallet share away from independent vendors. Microsoft, perhaps the only true platform with its E3/E5 offerings, sells “good enough security”. And Google selectively adds capabilities though internal developments and acquisitions (Wiz or Mandiant).

Cybersecurity is a “Whack-A-Mole” market. It is the only vertical we invest in featuring an economically motivated demand driver – the hacker. As new attack vectors appear, and older ones get de-emphasized, Chief Information Security Officers (CISOs) expand, and then rationalize their vendor list. Forces pushing against too much consolidation are 1) fear of vendor lock-in, 2) lack of integration between the elements of a platform, and 3) lack of innovation.

Beyond this structural trend, a cyclical one is acting as a booster. With IT budgets constrained or diverted to AI projects, Chief Information Officers and CISOs focus on reducing cost and complexity. They do so by consolidating the stack onto a few large vendors, who offer discounts to seal the deal. This was clearly communicated by Nikesh Arora (Palo Alto Networks’ CEO) in the February earnings call two quarters ago, when he talked about facilitating “platformization”:

“We expect a typical customer entering into a platformization transaction will not pay us for our technology for a period of time. As these programs ramp over the next year, we expect a change to our billings and revenue growth for the next 12 to 18 months”

When approaching our cybersecurity investments, we think about what that means for the asset. Can it be acquired? By whom? If not, can it become a consolidator? How? Can it be attractive to a PE owner looking to consolidate a few point solutions?

That’s all for this iteration of the newsletter.

Thank you for your support. If you have a question, remarks, ask, please reach out!

Warm regards,

Alban Cousin, Partner, Opportuna

Contact Us
Have questions or want to learn more? Reach out to us at [email protected] or book a call here.