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The Dealmakers

Finding Security in Consolidation

By Terrence O'Hara
Monday, August 16, 2004; Page E01

GlobalSecure Holdings Ltd., a District-based private-equity investment firm that has bought three homeland security companies in the past year, last week wrapped up raising $23.5 million. Armed with this cash, it's aggressively searching for more companies in this field.

Its advisers certainly know their way around the homeland security arena. They include former CIA director Stansfield Turner; Mark Holman, former deputy homeland security adviser to President Bush and longtime staffer for Homeland Security Secretary Tom Ridge when Ridge was governor of Pennsylvania, Howard Safir, former New York police commissioner, and former representative Richard K. Armey (R-Tex.). Former representative C. Thomas McMillen (D-Md.) is a consultant.


GlobalSecure chief executive Craig R. Bandes says many of the companies that sell homeland security products, services and technologies to state and local agencies are small and undercapitalized. (Juana Arias -- The Washington Post)

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GlobalSecure, like an aggressive venture capital firm down the road, Paladin Capital Group, has decided to place big bets on the homeland security sector.

The reason: Public and private sector spending on security, threat assessment and incident response has been skyrocketing. The Homeland Security Department said this year the government will spend $31 billion on homeland security. That's $14 billion more than estimates of pre-9/11 annual federal spending levels. Input, a Reston company that helps government contractors develop business, estimates double-digit growth for federal homeland security spending through 2009.

GlobalSecure, founded by McMillen with the help of a New York investment bank, is trying to buy companies that do that kind of work. Chief executive Craig R. Bandes, 35, said GlobalSecure wants to keep the homeland security companies as free-standing entities but link their efforts. Ultimately GlobalSecure wants to sell police, fire and public safety officials a bundled offering of products and services. He said many of the companies that sell these products, services and technologies to state and local agencies are small and undercapitalized.

GlobalSecure's initial homeland security acquisitions have been in the fire-fighter and hazardous-materials-response field. It has bought companies that make portable breathing apparatuses and respirators and provide hazardous materials response training.

The firm bought Neoterik Health Technologies Inc., a Frederick County maker of respirators and air purifiers used for, among other things, navigating the scene of a biological or chemical attack. Neoterik, like GlobalSecure's other acquisitions, is small and has a fairly limited customer base. GlobalSecure picked up Neoterik, which is more than 20 years old, for $1.5 million.

"We're also looking at acquisitions in communications interoperability, mobile communications infrastructure [and] portable shelters," Bandes said.

Bandes said the seed money for the venture came from Sky Capital Holdings Ltd., a New York investment bank. Sky chief executive Ross Mandell and McMillen, a former basketball star, started a venture capital fund in January 2003 and then created GlobalSecure in April of that year. Eleven months later, as the company's strategy evolved from operating like a merchant bank -- that is buying up stand-alone companies -- to strategically linking and overseeing them, McMillen left. He remains a consultant. Bandes, a New York native with experience in venture capital, investment banking and operating companies, became chief executive.

Sky Capital financed all of GlobalSecure's acquisitions with bridge loans until recently, said Bandes, when Sky Capital sold new equity to a group of wealthy individual and institutional investors, many of them in Europe, raising $23.5 million. Sky Capital retained an interest in GlobalSecure. Bandes said GlobalSecure also is establishing a line of credit that could help finance acquisitions, and it plans to file for a public stock offering before the second half of next year.

Bandes said he plans to engage Morgan Keegan and Co., a Memphis investment bank that has developed a specialty in homeland security, to advise the company on long-term financial issues. He's also building an executive staff and sales and distribution channels.

Paladin is also scoping out firms doing homeland security work. Recent Securities and Exchange Commission filings and sources outside the firm who have knowledge of Paladin's money-raising activities indicate the fund has been raising money recently, with the total size of the fund coming in at more than $200 million.

Michael R. Steed, co-founder of Paladin, said the fund has thus far made seven investments in companies that provide such things as information security, video surveillance software and anti-microbial products.

Paladin is more of a standard venture capital company, buying preferred, convertible stock in companies with revenue and customers. Steed said the typical portfolio company is not "early stage."

Paladin was founded in 2001 by Steed and Frank J. Hanna Jr. Steed, a former Democratic National Committee official in the 1980s, was in the 1990s the chief investment officer of Ullico Inc., the union-owned life insurance company in Washington. Steed led dozens of private investments by Ullico and its union customers, including investments in online retailer Value America Inc. and telecommunications carrier Global Crossing Ltd. He left Ullico in 1999 before those investments blew up.

Hanna, an Atlanta entrepreneur who made millions in debt collection, is a prominent financial contributor to conservative causes and to Republican congressional candidates. Steed said a mutual friend introduced them. "Our different politics has never gotten in the way of good investing," Steed said.

Paladin's first fund, in 2001, was Paladin Capital Partners Fund, which raised more than $200 million. It invests in a diversified mix of growth companies. One of its first investments was in CompuCredit Corp., a sub-prime consumer lender in Atlanta controlled by Hanna's sons, David and Frank.

Paladin's newer Homeland Security Fund had its genesis in conversations begun in 2002 between Sneed, former National Security Agency director Kenneth Minihan, and Alf Andreassen, who spent years developing defense and intelligence technologies at AT&T Corp., mostly at its old Bell Laboratories unit. The three had sat on a corporate board together for several years. Both are now principals of Paladin, along with R. James Woolsey, a former CIA director.

"The idea to create a fund came out of all our desire to do something after 9/11," Steed said. "We all sat down and decided we want to be more than air-raid wardens in the war on terrorism."

Steed has a broad definition of the kind of companies the fund is after: any firm that helps prevent, defend against, and recover from an attack. Steed added that the companies he's investing in must have "dual-use" applications. In other words, they need both government and private sector customers.

"About 85 percent of our country's critical infrastructure is in the hands of the private sector," he said, pointing out that most of the communications and power grid is owned by companies.


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