Perhaps you – like us – have been all too curious about the not-so-subtle investments private equity has made into U.S. Government contracting. First of all, this is nothing new. Private equities have been buying and selling large businesses for many years. No, we’re not working towards Master of the Obvious (MOTO) award.
However, the involvement of private equity in mid-tier companies may not be something you’ve paid attention to very much. Note that we have focused on more mature, mid-tier acquisitions in this blog. Why? Simply stated, most M&A news seems to center on (1) mega-deals such as GDIT acquiring CSRA and (2) acquiring the perennially “cool” technology start-ups. Organizations such as In-Q-Tel come to mind as we think about acquisitions or investments in the “next big thing.”
What happened to the love for the solid mid-tier players? Just because they may lack the sizzle of categories #1 and #2 doesn’t mean they’re a non-factor.
Let’s sample some investments and quiet acquisitions that have flown under the radar. Note this is NOT intended to be a 100% comprehensive list of moves made.
- Trowbridge & Trowbridge – Enlightenment Capital acquired mid-tier IT services provider Trowbridge & Trowbridge in April 2019.
- Octo Consulting – This was an investment in the business as opposed to taking over the business. Arlington Capital Partners invested in Octo Consulting in April 2019. Octo Consulting is a mid-tier with solid growth prospects and Arlington Capital Partners appears to be investing to help enhance Octo Consulting’s opportunity to compete against increasingly challenging competitors.
- System High Corporation – In January 2019, Enlightenment Capital made an investment in System High Corporation doing security engineering, intelligence and cybersecurity work.
- EverWatch – Enlightenment Capital formed EverWatch out of multiple other acquisitions in October 2018. This acquisition was formed to pursue work in the IC. Note that was not an investment in a business, but actively owning and controlling a business (albeit one they created).
- Iron Bow Technologies – H.I.G. Capital assumed a majority stake in Value Added Reseller (VAR) Iron Bow Technologies in September 2018.
- LinQuest – CoVant Management and Madison Dearborn Partners teamed up to acquire mid-tier space domain engineering firm LinQuest in May 2018.
- Integrity Applications, Inc. (now Centauri) – Arlington Capital Partners invested in the business in February 2018. Centauri works on engineering and software development for IC and DoD.
- Whitney, Bradley & Brown (WBB) – In November 2017, H.I.G. Capital acquired specialty SETA services company WBB.
- Cadmus – Enlightenment Capital invested in Cadmus Group in September 2017 to support organic and M&A based growth plans. Note that a year earlier, Cadmus acquired Obsidian Analysis.
- NCI – Acquired in total by H.I.G. Capital in July 2017, this added IT and SETA to H.I.G. Capital’s portfolio. Since the acquisition in 2017, NCI has been quietly adding boutique data analysis/machine learning/AI capabilities.
- Telos – In February 2017, Enlightenment Capital invested in cybersecurity firm Telos. This was supposedly to enhance product/service expansion.
Understanding that this is merely a sample of activity, what did we learn?
Who are the customers in this sample?
While we cannot fully confirm activities with members of the Intelligence Community (IC), a company’s customer base is a factor in many of the above investments. Let’s work on the unclassified spending over the period of FY2014 through June 2019.
Yes, DoD is the ever present and sought after target customer. However, HHS is high in the mixture with the VA, DoJ and DHS not far behind. Don’t just fixate on DoD.
Let’s move on to see what overall services and products these investments are delivering: .
We seem to default to the wonderful world of Information Technology as the holy grail. The broader Product and Service Code (PSC, 4-character codes) category of R4 (such as R425 for systems engineering) family captures SETA, SE&I and other “white collar” work quite nicely. The 70XX PSC category, which is all about IT products, further adds to this investment trend (although this is somewhat skewed by Iron Bow). If you add the D3 category for IT services and 70 category for IT products, IT wins again.
But despite IT dominating the top of the graph, non-IT professional services is still an attractive market. We can look at the AD and AC categories (R&D for defense systems) as part of non-IT professional services market, and arguably high-end. The 58 category (communications and detection equipment) and 65 category (medical and dental hardware) have also been attractive to investors.
- Don’t assume the entire world revolves around sexy start-ups and mega deals
- IT is not (entirely) the center of the GOVCON universe
- DoD is highly attractive (and the biggest spender), but FEDCIV warrants attention still to date
- Don’t assume you that DoD and IT rule the investment world…but it is clearly a driver
- Investments may simply be solid performers generating a solid, but potentially unexciting return…there is nothing wrong with a steady investment!
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