Stuck in the Middle of GovCon: An Analysis of Private Equity Involvement on the Middle Tier

Tuesday, October 19, 2021

From 2000 – 2020, private equity transactions involving mid-tier/mid-size firms make up 44% of all private equity acquisitions in the federal contracting space; and 45% just over the last 5 years. GovCon Private Equity Group (PEG) activity has increased drastically in the last decade, and significantly in the period from 2019 to the present with over 75% increased interest in merger and acquisition (M&A) activity.

The majority of this activity has been with smaller platforms since the valuation of the assets is materially higher in comparison with median platform evaluations which have shown little change in the profile mix. The diagram below shows that PEG activity is acting in a way of being a strategic buyer for tuck-in deals because the differential valuation for the platforms in comparison to the tuck-ins has narrowed significantly in the past year.

To explore four selected questions, The Pulse has identified a selection of subject matter experts in the field:

  1. Bob Kipps | KippsDeSanto & Co.: Bob Kipps founded KippsDeSanto & Co. in 2007 and has grown the M&A firm to be the largest investment bank exclusively focused on the Aerospace / Defense and Government Services sector. KippsDeSanto advises on ~ 20 industry M&A transactions per year.  Over the years, Bob has worked with some of the most successful industry firms both advising them on their strategy as they grew and assisting them with their eventual sale.
  1. Kristjan Kornmayer | The Chertoff Group: Kristjan Kornmayer is a Senior Director at the Chertoff Group and leads the Merchant Bank’s Buy-side Practice, which provides services such as M&A strategy development, target screening, and full buy-side diligence analysis to financial and strategic buyers. He also supports Chertoff’s investment banking and private equity activities, conducted through its wholly-owned subsidiary Chertoff Capital.
  1. Richard Philips | Crossroads Capital: Richard Phillips is the Senior Partner of Crossroads Capital, LLC. He founded this boutique M&A advisory to better serve companies in the middle market with actionable, data-driven intelligence to make better strategic decisions. He is a seasoned dealmaker and accomplished financial analyst with over 20 years of corporate finance, consulting, and investment banking experience. For the past several years, Government Contracting, Defense, IT Services, and Life Sciences have been sectors of focus.
  1. Kevin Robbins | Blue Delta: Kevin is a co-founder of Blue Delta Capital Partners, a growth capital firm that is focused on the U.S. Federal Government Services marketplace, particularly on technology-enabled solutions and services companies. Mr. Robbins has been actively involved in all of Blue Delta’s investments, including Metis Solutions (acquired by PAE), IST Research (acquired by The Carlyle Group), The Tauri Group (acquired by LMI), and KTSi (acquired by Scitor).
  1. Austin Libowitz | Independent Investor: Austin Libowitz is an independent investor and advisor in the defense, government, and technology sectors. Previously, at Veritas Capital, Austin invested in businesses and partnered with management teams to drive strategic and operational initiatives in the government and technology markets. Additionally, Austin has supported/advised Enlightenment Capital and leading companies in the industry.

The questions include:

  1. What type (i.e. PSC [Service, Product, Research & Development (R&D)]) and size (based on a number of employees) are federal government contracting companies attracting private equity interest?
  2. Do federal government contracting companies become objectively more “successful” (profitable and/or notable) within 5 years of receiving private equity backing?
  3. Are mid-tier/mid-size companies less likely to close their doors if they have private equity investment?
  4. Will trends show a “trickle-down effect” of private equity interest in smaller companies?

The theory of natural selection says, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”. In the future of federal government contracting, will that theory change to “only the ones that can adapt to be funded will survive?”

An abbreviated version of this article, “Stuck in the Middle of GovCon: An Analysis of Private Equity Involvement on the Middle Tier”, was published in Professional Services Council’s Service Contractor Magazine – Fall 2021.

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