Q&A: KKR's Herald Chen On Why Private Equity Sees The Channel As A 'Great Value Proposition'
Private Money Goes Into The Channel
Last December, KKR & Co. announced its intent to acquire Optiv Security, a blockbuster deal reportedly worth $2 billion. The deal by KKR – the second-largest private equity firm in the world according to the 2016 Private Equity International 300 – was a sign of a major buy-in by private equity into the channel, the latest in a growing tide of deals in recent years. In an interview with CRN, Herald Chen, co-head of the technology, media and telecommunications team at KKR, laid out why he thinks the opportunity is greater than ever for an investment in a solution provider company like Optiv, and what value private equity in turn can bring to the partner market.
For more on private equity and the channel, read CRN's February cover story 'Private Equity Power Play.'
Why did you decide to invest in Optiv?
In general, in tech investing at KKR we are always looking for opportunities leveraging some industry thesis or theme or technology trend that we have been looking at over a long period of time. Obviously, cybersecurity has been one of those. … Our goal on the investing side: We think you make the best returns by growing the businesses. You buy companies at the right price with the right teams and the right platform and then take those and leverage the assets that KKR can bring to the table alongside all the things the company brings along and really create some special opportunities and investments for our investors. That's really what we found when we ran into Optiv. … It's an awesome team. We really said there's an opportunity here to build one of the most valuable security companies to their customers.
KKR also invests in security vendors -- is this a different investment than that? Is it a better type of investment?
This is a space we know extremely well. … What was different for us with Optiv was the fact that the solutions and the threats are changing so quickly that we think our customers and an intervening partner is super helpful. … Optiv deals with thousands of vendors every day. Being in that spot gives them the advantage and opportunity to help develop these companies from a partner standpoint, help them develop their technology, help them develop their road map, help them choose who the right customers are for them to go after. That's a huge opportunity for the vendors. On the other side for the customers, they're all dealing with firefighting: How do I solve this problem?... Customers need the help to solve that. We want to be in the position to help solve that.
Do you see the channel, the VAR and distribution channel, being a better investment than in years past?
We have a lot of companies that use the channel extensively so we have always understood it as a great value proposition for the right companies at the right stage and in the right market. In terms of Optiv, we definitely viewed [that as a good investment] because the technologies are changing so quickly and because the customers need so much help that this was a really interesting place for us to make a direct investment into a channel business. … The value-add in this case is high and I think if we do it right it will only likely go up.
When you buy a company like Optiv, what sort of value do you bring to the table?
When we invest in a company, we have to have a very clear view of what we will do in the business. … We don't think you generate great returns by just investing in a company and just letting it run by itself or letting it do what it's been doing. … KKR obviously has the capital and dollars we can invest. … Our distinct alignment was two things. First, a vision where the company can go and continue to build upon its strong position in selling technologies and continue to develop that and really deliver solutions to customers. … [Second,] we were pretty confident in our strategic thought in the category and more importantly our ability to execute that plan [to grow internationally] with this team. We are in great alignment. … This was a unique confluence of great team, great platform, great sector, alignment of strategy. We think jointly our ability to execute that strategy, we have a high degree of confidence.
Do you plan to make further investments in the channel?
We will be busy with this one, for sure. We do view it as a platform. Security is a big enough world -- and a complex one and a dynamic one -- where we really need to spend our time on it. We will put a lot of resources in it. But, it's certainly not a sector we're afraid of. We think we understand it pretty well. If we found any opportunities with the right valuations and right strategies and right opportunities to grow, we certainly would lean in as we did here [with Optiv].
Do you expect to see more private equity jumping into the channel, whether it's KKR or someone else?
I don't think it's that specific. A lot of people are a lot more comfortable with the need for value-added players and everyone is trying to be more focused on what they are good at in their core and then outsource to the people who are good at other things. The amount of private equity in the world is an enormous number. Fewer companies are going public -- they are still going public, but there are fewer of them. When you take those two things, I can certainly see there being more activity with private equity in the channel.