David Leach Shares His Insight on Investing in Cybersecurity Firms
David Leach is a Principal and Head of Private Equity at The Chertoff Group. In this position, Mr. Leach leads The Chertoff Group’s Private Equity business, which provides growth capital to high-growth services and technology companies in the cybersecurity sector. Mr. Leach currently serves on the Board of Directors of Delta Risk and Coalfire Systems.
Prior to joining The Chertoff Group, Mr. Leach was a Managing Director at Goldman Sachs, where he worked for 13 years in the Investment Banking Division in New York and London. From 2008 to 2014, Mr. Leach was the global sector captain for Aerospace & Defense (A&D). Additionally, he was a member of the Global Industrials department and the Merger Leadership Group. Prior to Goldman Sachs, Mr. Leach worked at Japonica Partners, a boutique private equity firm in Providence, RI.
LIFARS: Could you tell us about The Chertoff Group and what your roles are at the company?
David: The Chertoff Group is a premier global advisory firm that provides risk management, business strategy, and merchant banking advisory services. We apply our insights into technology, threat, and policy to help our clients improve their resiliency, build competitive advantage, and accelerate growth.
Founded in 2009 by former Secretary of Homeland Security Michael Chertoff, our senior team includes former Cabinet-level officials, senior intelligence and national security officers, tech-industry CEOs, and experienced investment bankers from the most distinguished Wall Street firms.
I am a Principal at The Chertoff Group, and one of my roles is to lead our private equity business, which provides growth capital to companies in the cybersecurity and tech-enabled homeland security markets. Within cybersecurity, we have made significant private equity investments in two outstanding cyber services companies: Delta Risk and Coalfire Systems.
LIFARS: What were the reasons behind the partnership between the Chertoff Group and Coalfire? In other words, what made you decide to invest in Coalfire?
David: We made our initial investment in Coalfire in September 2015, when we partnered with The Carlyle Group to acquire a majority stake in the Company. Coalfire was seeking growth capital to strengthen and expand the company, as well as a strategic partner who could help improve the company’s long-term potential. We were fortunate to have the opportunity, together with Carlyle, to partner with the Coalfire management team to make that significant investment and support the company’s continued strategic growth.
Coalfire was a very successful and attractive company when we made the investment. We were especially impressed by Coalfire’s excellent management team, strong brand and market positioning, outstanding cyber services, and large installed base of loyal blue-chip customers. Following the investment in September 2015, we’ve supported the Company as Board members and strategic partners. In addition, in December 2016, we supported Coalfire’s acquisition of Veris Group, by making an additional equity investment to help finance this very exciting transaction.
LIFARS: Recently, Coalfire announced that it has acquired Veris Group and The Chertoff Group was one of the providers of equity financing for the deal. Could you tell me what this acquisition represents?
David: Coalfire completed the acquisition of Veris Group in December 2016 and was funded in part by new equity investments by affiliates of Carlyle and Chertoff Group. The strategic combination creates one of the largest providers of cyber security services in today’s market.
The strategic rationale for the transaction was driven by the strong complementary fit of the two companies. Coalfire and Veris each provides a range of high-end cybersecurity services, such as audit & compliance, vulnerability assessments, pen-testing, and cloud-migration advisory. Simultaneously, the two companies had unique capabilities, unique positioning within certain market niches and unique sets of customers. For example, Veris Group generates a majority of its revenues in the Federal sector, based on strong relationships with both Defense and Civil agencies, where Coalfire did not have any existing presence.
Similarly, the strengths of the companies’ respective management teams, employee bases and organizations are non-overlapping and indeed very complementary. We are excited by the merger of the two companies, and confident that the combined company has an outstanding future of growth, profitability and strategic expansion.
LIFARS: I believe the Chertoff Group advises technology companies on M&A transactions in the cybersecurity sector. What are the main factors you investigate when evaluating a cybersecurity company that is pursuing an M&A deal?
David: Chertoff Capital is a licensed investment bank that provides M&A advisory services to both buyers and sellers in M&A transactions. As an advisor, we focus exclusively on the global security industry, with a concentration specifically within cybersecurity. We look at cybersecurity as one of the defining generational problems of our time. Cyber-attacks are a global, political, and commercial challenge with real financial and reputational consequences. We have advised a wide range of companies that participate in M&A transactions in this sector, including large and small corporations, government contractors and commercial firms, strategic buyers and private equity firms, and technology and industrial companies.
Within cybersecurity, one of key factors is the differentiation of a company’s cyber products and services; e.g. whether the company has a proprietary and sustainable advantage in a marketplace that is very fragmented and competitive. We not only investigate the company’s technology but also the strength of its business model, including growth trajectory, path-to-market and channel partners, competitive positioning, cost structure and profitability, leadership team, customers, and employee base.
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