New $60M Funding Round Has Interface Security Systems in Growth Mode
Interface CEO Michael Shaw explains why the managed security specialist is bullish on 2021 and well positioned to serve new business models.
Interface Security Systems is entering 2021 with a fresh influx of equity and a much stronger balance sheet, which will allow the company to invest in and grow its managed services business at a rapid pace, CEO Michael Shaw expressed to SSI during an exclusive interview.
On Tuesday, the Earth City, Mo.-based company announced the completion of a $60 million equity financing transaction led by its current sponsors SunTx Capital Partners and Prudential Capital Partners. Shaw said the company is focused on organic growth, mainly targeting distributed enterprise, large national account types of businesses.
“We are bundling our services, which include Internet, voice over IP and various forms of remote video monitoring. This becomes a very productive package for retailers and people in the restaurant business, as well as customers across multiple sectors, that find combining network, voice, security and video into one bundled managed service as something that is very unique,” he said.
In 2012, Interface acquired Westec Intelligent Surveillance, then a leading provider of interactive monitored video solutions and virtual business management tools. Interface has substantially invested in and further developed the Westec platform, which continues to power the company’s two-way interactive video and audio services.
“Part of the innovation and development that is taking place is to expand the capabilities that we have built into that platform — most recently and in response to the COVID-19 demands, particularly with lone workers in facilities,” Shaw said. “We expanded those services to include risk management for individuals where we could actually have a device on a person that when needed can seek support from our monitoring center with that same video and interactive audio capabilities that we have for the premise.”
‘Very Complicated Structure’
To complete the new round of investment, Interface entered into a stalking horse bid agreement conducted under Section 363 of the U.S. bankruptcy code. Section 363 is oftentimes used by distressed companies for its streamlined sales process as an alternative to a normal bankruptcy proceeding under Chapter 11. But Shaw stresses that selling the business was never in the plans. Instead, Section 363 simply provided the means to smooth out the company’s “very, very complicated structure” in order to accomplish the new funding round, he said.
Interface Security Systems is the operating company that Shaw formed in 1996, which was subsequently acquired by SunTx Capital Partners in 2001. Through the years the company has gone through several capitalizations, resulting in multiple holding companies that evolved overtime to accommodate the different capital events.
All the while, Interface Security Systems LLC continued to be the operating company owned by SunTx as the controlling shareholder. In 2018, Prudential Capital Partners joined as an equity sponsor with SunTx. The company’s lenders are Capital One and MSD Capital, the private investment firm that exclusively manages the assets of Michael Dell and his family.
Although SunTx and Prudential were eager to recapitalize the company at the end of 2020, certain “restrictive covenants” in one of the legacy indentures and with one of the holding companies would first need to be resolved.
“[Section 363] is part of the bankruptcy code, so it unfortunately has that moniker. But it was a restructuring consensual among the companies, investors and lenders,” Shaw said. “Effectively what happened is the operating company, which was the only asset held by the holding companies, was technically sold into a new holdco and purchased by SunTx and Prudential.”
‘Pent Up Demand’
With economic recovery from the pandemic projected later this year, Interface is preparing to serve new business models that are expected to support remote working, curbside delivery, smarter supply chain management, among others. All of which will require networking, enhanced security and business analytics solutions.
“We really think as we get through this pandemic — and hopefully sooner rather than later — that we are going to see a lot of pent up demand for more innovation and technology to support changing business models that are the result of the pandemic. So we’re very excited,” Shaw said.
The company had entered 2020 with heaps of optimism as well, having bolstered its C suite by promoting its chief revenue officer, Brent Duncan, to president and COO, and hiring Sunita Mani as vice president of marketing to assist in revamping the company’s go-to-market strategy. All the momentum came to a sudden halt when the economy began shutting down. The company experienced a significant decrease in engagement activity and more or less “rode out the second quarter,” Shaw said.
However, business picked up in Q3 and despite the challenges posed by COVID-19 the company reported a 250% year-over-year growth in new customer acquisitions.
“There is still some uncertainty right now in the U.S. with this relapse with the pandemic. We have seen slowdown of engagements in the fourth quarter from our opportunity go-to-market team,” Shaw said. “We are hopeful the vaccination program can accelerate and we will start to see some renewed activity and in the second quarter.”
Shaw and his team anticipate that once organizations gain clarity on what’s happening with the pandemic, the green flag come will come out and the race to implement re-envisioned business models will be on as the economy revs up.
One example Shaw described is for brick-and-mortar retailers to offer a “buy online, pick up in store” option to compete more effectively with online competition. The concept creates great opportunity for a managed services provider because it changes how retailers think about their networks and how they think about that pick-up in the store. There will necessarily be infrastructure in place in order to make sure when the customer arrives for their purchased goods, the business is prepared to efficiently respond.
“We’re seeing already a tremendous amount of interest in what’s happening in the video world. We believe cameras are going to serve many different purposes than what we’ve historically seen them serve in terms of providing business analytics and other information,” Shaw said. “So as we look at our balance of business in terms of delivering networks, delivering intrusion alarm and remote video, we probably see more activity on the video side now than those other two technologies.”
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