Investing in Protection: A Private Equity Perspective on the Booming Market for MSSP & MDR in the UK

Introduction

In today’s digitally-driven world, cybersecurity has become a cornerstone of business operations, particularly in the UK, where organisations face increasing cyber threats and regulatory pressures. As companies of all sizes grapple with the complexities of securing their digital assets, the market for cybersecurity services – especially Managed Security Service Providers (“MSSPs”) and Managed Detection and Response (“MDR”) services – presents a compelling investment opportunity for private equity investors. This article explores the drivers behind this trend, focusing on the evolving regulatory landscape, skill shortages, growing attack surfaces, and the critical issue of supply chain cybersecurity, as well as how private equity investors can add-value beyond just capital, to cybersecurity businesses.

The Expanding Cyber Threat Landscape

The cybersecurity market in the UK is growing rapidly, driven by an increase in both the frequency and sophistication of cyberattacks. According to Cybersecurity Ventures, cybercrime is projected to cost the world economy $10.5 trillion annually by 2025, and the UK, as a highly digital economy, is particularly vulnerable. Furthermore, the cost of these attacks continues to rise, with IBM’s 2023 ‘Cost of a Data Breach Report’ indicating that the global average cost of a data breach has reached $4.45 million – and for those in highly regulated industries this can be significantly more! From high-profile data breaches to ransomware attacks, UK companies have become prime targets for cybercriminals. The proliferation of remote work, cloud computing, AI and large language model (“LLM”) applications, and Internet of Things (IoT) devices has expanded the attack surface, making it more challenging for organisations to defend themselves against cyber threats.

This growing complexity has led many businesses to outsource their cybersecurity needs to specialised providers like MSSPs and MDR services. These firms offer comprehensive, 24/7 protection, which is increasingly necessary as cyber threats become more sophisticated and harder to manage in-house.

Regulatory Drivers: The Impact of NIS and NIS2

The regulatory environment in the UK has become a significant driver of demand for cybersecurity services. The Network and Information Systems (“NIS”) Directive, implemented in 2018, marked a turning point by imposing stringent cybersecurity requirements on operators of essential services (“OES”) – those which any significant disruption to their services would provide wide-ranging impact on public safety, economic stability and national security. This captures firms operating in the energy, transport, health, water and digital infrastructure sectors. Failure to comply could result in hefty fines, which has pushed many organisations to seek external expertise to meet these standards.

NIS2, which came into effect in January 2023, expands the scope of the original directive, extending its reach to more sectors, including financial markets, food production, public administration, and chemicals. It also introduces stricter incident reporting requirements and increases penalties for non-compliance. The continually evolving regulatory landscape creates a favourable environment for cybersecurity services firms, as companies are compelled to invest in compliance and protection measures, often turning to MSSPs and MDR providers.

The Cybersecurity Skills Shortage and Outsourcing Trends

A significant challenge in the cybersecurity landscape is the acute shortage of skilled professionals. The UK faces a shortfall of around 14,000 cybersecurity professionals, according to the Department for Digital, Culture, Media and Sport (“DCMS”). This skills gap is a major driver for outsourcing cybersecurity services, as many organisations, particularly small and medium-sized enterprises (“SMEs”), struggle to build and maintain robust in-house cybersecurity teams.

MSSPs and MDR providers offer a solution by providing access to a pool of cybersecurity experts, advanced technology, and continuous monitoring at a fraction of the cost of building an internal team. This makes them an attractive option for organisations looking to enhance their cybersecurity posture without the burden of recruiting and retaining scarce talent.

This challenge is structural, with the number of skilled cybersecurity professionals entering the market falling short of the number of required to keep up with demand.

Supply Chain Cybersecurity Risks

One of the emerging challenges in cybersecurity is the risk posed by supply chains. As companies increasingly rely on third-party vendors and partners, their exposure to cyber threats extends beyond their own networks. Supply chain cyberattacks where a breach in any of the interconnected party’s systems allows attackers to access a company’s network, have become a significant concern.

Many companies are unprepared for these types of attacks, often lacking the necessary visibility into their supply chains and the tools to manage these risks effectively. NIS2 addresses this issue by imposing stricter requirements on organisations to assess and mitigate supply chain risks. This includes the need for enhanced due diligence, stronger contractual obligations for third-party vendors, and more rigorous incident reporting.

The increasing focus on supply chain cybersecurity presents another opportunity for MSSPs and MDR providers. These services can help companies manage and monitor their supply chain risks, providing the expertise and technology needed to secure not just their own networks but also those of their suppliers and partners.

Recent Cybersecurity Events and Their Implications

Recent high-profile cybersecurity incidents have underscored the critical need for robust cybersecurity procedures. The Jul-24 CrowdStrike outage, for example, highlighted the risks of relying on a single vendor for cybersecurity protection and the potential pitfalls from managing this in-house. This event has driven home the importance of diversification in cybersecurity strategies. Relying solely on one vendor or an in-house team can expose organisations to significant risks. Outsourcing to MSSPs or MDR providers can mitigate these risks by providing a more resilient cybersecurity posture. The increasing complexity of the threat landscape and the need for diversified cybersecurity solutions reinforce the value proposition of investing in MSSPs and MDR services.

Private Equity’s Role in Shaping the Cybersecurity Landscape

Private equity investors can play a crucial role in shaping the future of the cybersecurity services market. By providing capital, strategic guidance, and operational expertise, they can help MSSPs and MDR providers scale, innovate, and expand their market presence.

Whilst strong growth tailwinds support the investment thesis for any private equity investor, astute founders and management teams should be drawn to working with the private equity investors who are focused on providing more than just capital, and working tirelessly and in partnership with the investor to explore all possible avenues of value creation.

One such strategy may be through M&A-led growth strategies. The cybersecurity services market in the UK is fragmented, with many small and medium-sized providers with various capabilities and specialisms. Private equity firms can pursue a roll-up strategy, acquiring and merging smaller players to build a larger business, creating value through enhancing its customer value proposition and capturing a greater share of customer wallet through a broader offering and range of capabilities.

Investing in technology and talent is another key area where private equity can add value. By supporting cybersecurity firms in adopting cutting-edge technologies to drive efficiencies and building high-performing teams, investors can help these companies differentiate themselves in a crowded market and deliver superior value to their customers.

For those less familiar with Queen’s Park Equity (“QPE”), we are a UK-based private equity firm, built on an ethos of working in true partnership with ambitious teams, to identify and execute upon all potential growth avenues, both organically and through M&A.

Conclusion

The UK cybersecurity services market offers a compelling investment opportunity for private equity firms. Driven by regulatory pressures, skill shortages, increasing cyber threats, and the rising importance of supply chain security, the demand for MSSPs and MDR services is set to grow. These services not only address critical cybersecurity needs but also offer attractive business models characterised by recurring revenues underpinned by non-discretionary demand, limited customer churn, significant growth potential and technology-driven differentiation.

As the cybersecurity landscape continues to evolve, private equity investors have a unique opportunity to support the future of the industry. By investing in and supporting the growth of MSSPs and MDR providers, they can generate attractive returns while contributing to the overall cybersecurity resilience of UK businesses. In an era where cyber threats are a constant and growing concern, investing in cybersecurity services is not just an opportunity—it’s a strategic imperative.

The most important questions for any founders or management teams looking to take on private equity investment are: (i) what value can the investor bring to the table; (ii) how will they look to accelerate the potential growth opportunity; and (iii) how involved they will be in supporting this journey!

If you are considering taking on private equity investment for your business – please do reach out. We’d love to connect with you and share some deeper perspectives.