Entries in Veritas (7)
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:
There are a couple of good articles out there on the sale of DynCorp International to Cerberus Capital Management. One from Forbes outlines the deal's financial gain for deal originator and Veritas founder Robert McKeon, who picks up around $320M+ in the end (after a $47M investment back in 2005, which he immediately recovered through a dividend). The other, from The Street, discusses the bigger picture, including deal details that price the shares at a 49% premium to the market price just before the deal was announced. It also mentions the difficulty DynCorp had as a public stock, with a controversial business and a couple incidents that may have weighed down the share price (not to mention those "pesky regulatory filings").
The Forbes article also implies that Veritas' success with this deal has drawn Cerberus into the sector. Insiders know better, that Cerberus has been trying to do a high-level acquisition in this space for several years, backing IAP's acquisition spree en route to its (unsuccessful) bid on LOGCAP, as well as some aborted attempts in the security services sector.
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 continues its positive coverage of DynCorp International with an article providing a basic overview of their position on the LOGCAP IV contract and recent award of the Afghanistan-South task orders on that contract.
"DynCorp has emerged as one of the big winners of the wars in Iraq and Afghanistan, which now generate 53% of DynCorp's $3.1 billion of annual revenue. The company's revenue grew 45% last year thanks to a 51%-owned joint venture that has a multiyear $4.6 billion contract to supply 9,100 linguists to translate for U.S. soldiers in Iraq."
Certainly, DynCorp is doing quite well and finds themselves in a strong position in Afghanistan with a strong partner in CH2MHill. At the same time, the southern task orders will be a highly challenging environment to work in, on some high visibility construction projects. Overall the boom years for LOGCAP have temporarily passed, so investors should look another phase ahead to see how DynCorp can continue its diversification across the Defense & Government Services sector with this latest win.
Also mentioned in the article is the recent announcement that KBR will not protest either of the Afghanistan awards, even though one of its bids was lower than its winning competitor. KBR discussed this further during their Q209 earnings call, for which you can find a transcript here. Pages 2-3 discuss their stark prospects for Government Services (more commentary to come on that).
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.
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.