DC Capital to Add Sallyport through Kaseman

DC Capital has announed that through its portfolio company Kaseman, it will purchase Sallyport Global Holdings. From the press release:

"Kaseman, which operates in three primary areas: (i) engineering and professional services, (ii) specialized construction, and (iii) training, will combine its capabilities with Sallyport. Sallyport provides engineering and professional services, which includes fire protection, environmental remediation, power generation, and other support services such as base construction, base operations, and logistics. The combination of the two companies will significantly expand their market position internationally."

While this particular acquisition may offer a good fit for Kaseman, overall it's hardly a very differentiated strategy in the increasingly crowded Defense Logistics & Services sector. This will get them to the same table as ITT, KBR, Fluor, PAE, URS, DI, AECOM, IAP... and a sea of experienced foreign first-tier subs. Similar to the difficulty had by Cerberus (with IAP, now DynCorp) and Lockheed (with PAE), this is going to be a tall challenge to build the "all-encompassing solution" that Kaseman CEO Tony Grimes envisions in the press release. I wonder if there is a more innovative strategy. Sallyport has been very successful as a specialist, actually.

Former DynCorp CEO Joins Kaseman Board

Herb Lanese, former CEO of DynCorp International, has joined the board at Kaseman LLC. Kaseman, owned by DC Capital, provides engineering & technical services to U.S. Government customers.

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."

IBM Buys NISC from DC Capital

Forbes reports that IBM has purchased the National Interest Security Company (NISC) from DC Capital Partners. NISC specializes in mostly classified contracts helping intelligence organizations manage and secure data and information systems. When the deal closes during Q1 this year, DC Capital will realize $180M on its original investment of $19.6M less than 3 years ago.

The same article describes the NISC sale as particularly important win for former Veritas Capital founder Thomas Campbell, who left Veritas to found DC Capital after being squeezed out by then partner Robert McKeon. Campbell and McKeon led the 2005 buyout and subsequent IPO of DynCorp International. The former partners separated after Campbell was forced off the DynCorp board. See prior Defense Ventures article here.

Forbes Article about Veritas, DynCorp: Part II Commentary

Back to the article in Forbes discussed yesterday about Veritas founders Robert McKeon and Thomas Campbell. We’re going to skip over the discussion about the supposed origins of strife between McKeon and Campbell over the DynCorp deal and subsequent departure of the latter from DynCorp’s board. Instead we’ll focus today’s post in part on what the Forbes article fails to mention about Campbell’s new firm DC Capital Partners, which has been profiled here on this site.

In the end perhaps it will be Campbell who achieves the most from his unique investment perch within the defense industry. We have remarked previously about the difficulty of 3rd party investors – Veritas among them – to maintain persistent returns from simply doing deals. Defense is a narrow industry, after all. When deal flow is strong, or when a big deal like DynCorp comes along, returns will tend to concentrate for a specialist firm like Veritas. However, when credit tightens and deal flow contracts sharply, Veritas may struggle to compete for quality against cash rich defense firms looking to integrate struggling mid-market firms.

One way to counter such a trend may be exactly the model that Campbell has developed at DC Capital, namely the integrated platform that focuses on rolling up companies around a particular market sector. DC Capital has pursued this strategy so far with its National Interest Security Company (NISC), which the Forbes article mentions is already profitable at around $200M revenue. More than just a concept, Campbell has recruited top management talent into NISC, led by Andrew Maner, former CFO for the Department of Homeland Security.

However, the Forbes article overlooks one of the principle strengths of DC Capital in addition to its platform strategy. In 2007 DC Capital acquired a controlling interest in The Spectrum Group, a consulting group with “over 100 associates – half of which are Admirals and Generals, the remainder are former Political Appointees, former Hill staffers, Corporate officers and lobbyists, and U.S. Government officials.” This is the reason NISC can deploy a deep advisory board for NISC that includes Ambassador Henry Crumpton, General Hagee, Chuck Hagel, General Michael Hayden, Admiral Joseph Lopez… and others, as well as access to the dozens of other brand names at Spectrum.

Tomorrow we’ll do another post of Part III commentary, in which we’ll provide some direct feedback on specific points within the Forbes article, particularly about the DynCorp deal and their current outlook in general.

Forbes article about Veritas, DynCorp

The August edition of Forbes Magazine features an outstanding article about Thomas Campbell and Robert McKeon, one-time partners and founders of Veritas Capital. The article gives us a detailed timeline on the start-up of Veritas Capital Management and the subsequent acquisition in 2005 of DynCorp International.

Worth reading in its entirety, but here are some highlights:

• Neither McKeon nor Campbell had a background in defense related deals when they started Veritas in 1996 (with $175 million for its first fund). McKeon was apparently more well known at Wasserstein Perella & co for a deal with Maybelline in the cosmetics industry.
• Computer Sciences Corp. bought DynCorp for $622 million in 2003. Veritas buys it in 2005 for $850M with a $100M of equity from Veritas. A year later after going public DynCorp pays off equity sponsors with a $100M dividend. DynCorp shares are today worth over $1B, of which McKeon personally is estimated to own/control around $270M worth through his sole ownership of DIV Holding.
• The DynCorp deal almost did not happen. Although Veritas only had to put up $100M, they were limited to a $38M investment. Some support came from Northwestern Mutual Life Insurance and from various Veritas investors, but ultimately McKeon put up $48M of his own money in the deal. 

The article also covers the story of McKeon's and Campbell's eventual falling out a couple years ago, when Campbell was forced off the DynCorp board. In part II of our commentary on this article, we'll cover more details of Campbell's launch of DC Capital and some hints to Forbes writer Nathan Vardi for following up on this piece.

Look for Part II tomorrow. In the meantime bone up by checking out this site's profiles of both Veritas and DC Capital.

DC Capital Adds Senator Hagel to Board

DC Capital Partners added some bulk to its Government IT Services platform, National Interest Security Company (NISC), naming Senator Chuck Hagel to its Board of Directors. See press release here.

Their own blurb on NISC:

"Headquartered in Fairfax, Va., NISC is a leading provider of innovative information technology, information management, and management technology consulting services and solutions in support of national interest and security initiatives for the Intelligence Community; the departments of Defense, Homeland Security, and Energy; and the Federal Health Information Technology community. NISC’s expertise includes systems engineering, biometrics, document and media exploitation, systems integration, software development, enterprise architecture, cyber security, information assurance, intelligence operations, analysis support, network and critical infrastructure protection. NISC has more than 1,000 employees, of which the majority holds high-level security clearances. Additional information on NISC can be found at www.nisc-llc.com."