Report on State of Defense & Government Private Equity

Aronson Capital Partners has published a short report on the state of Government focused private equity. While broad market buyout volume declined 35% during 2009, the pace of deals is increasing in the Government Services sector. In fact, “Over the past twelve months, private equity groups have invested in 27 companies with a significant federal services presence, compared to just eleven over the prior period.”

Highlights include a continued focus on deployment of a platform model for sector-targeted investment strategies, namely in the areas of cyber-security and intelligence (i.e. NISC, Harding Security Associates). In the past year, PE investors have created 13 new Government Services platforms. However, of these only 3 came from traditional Defense/Government investors like Veritas and GTCR. New entrants include firms like Relativity Capital (MHF Services), Harrison Street Capital (MCR LLC), and Global Equity Capital (Halifax Corp.), among others.

Finally, the report ends with a tidy summary of exactly why we think the Defense & Government Services market is such an attractive area of private equity investment:

"Due in part to preferential contract award requirements, constantly shifting mission requirements, agency fiefdoms, and disparate geographic needs, among many other factors, there are literally thousands of government contractors with annual revenues less than $100M. These firms typically employ management teams with a certain set of industry relationships and service capabilities, comprised of some combination of former contractors, retired federal management personnel, or military veterans-turned-entrepreneurs. By adding professional management with industry leading best practices, formalized business development processes, sound investments in infrastructure with a positive ROI, and corporate finance expertise, sponsors are able to accelerate a small to mid-sized contractor’s growth and drive it to the next level."

Aronson article on Defense Private Equity

Philip McMann from Aronson Capital Partners has posted an article about the increasingly important role of private equity firms in the Defense and Government Technology Services market. I feel like citing the entire thing, but just go read it for yourself. He highlights the creation of Anteon by Caxton-Iseman as a textbook case in the successful marrying of the strategic investor to a platform growth strategy in action (led in that case famously by Joseph Kampf). Probably the bottom line is a passage describing the profile of a successful private equity transaction in this sector as the following:

In contemplating this form of transaction careful consideration should be given to the attributes of the company. Private equity investors are attracted to companies as target platform acquisitions that have the sufficient size, management talent, and infrastructure to support the critical mass necessary to achieve arbitrage available through increased scale.