Private equity's growing role in the federal market

Every now and then someone says something that at first sounds like a joke and at least a little sarcastic. But then then as you listen, you realize they weren’t being flippant. They were actually making a keen observation.

That happened to me this morning as I listened to one of our panels at the WT Power Breakfast on mergers and acquisitions.

Senior Staff Writer Ross Wilkers was moderating a panel that included Karen Trowbridge, former CEO and current chairman of Trowbridge & Trowbridge; and John Hynes, CEO of Applied Insight. Both companies are backed by private equity groups and represent a trend we are seeing of increased activity by them to build middle-tier platforms.

The third panelist was Kevin DeSanto, co-founder and managing director of the investment bank KippsDeSanto.

DeSanto drew laughs when he said: “Everyone in the market should be grateful for private equity.”

Obviously an investment banker and two executives of private equity backed firms would be appreciative of private equity. But DeSanto wasn’t done making his point.

For the last two years, the market has seen about 90 deals a year close and 40 percent of those involve private equity as a buyer or seller.

“Of the 90 deals, 20 had more than $100 million in purchase price or revenue,” DeSanto said. Of those 20, nine involved private equity and of eight of those nine were sales to large prime contractors.

“The private equity model works to create assets that are interesting to those folks,” he said.

Fifteen years ago, you didn’t see that level of interest in the government market. Private equity deals were “more of a one-off,” DeSanto said.

But in the past year more than 15 new private equity backed platforms were created. And private equity backed companies make an average of a deal a year, he said.

The private equity firms have had to learn how the federal market works.

“They need to understand the pace,” Hynes said. “Other markets the cycle is much faster.”

“There is a real rhythm and cadence to this market,” DeSanto said. And private equity is a “very formidable part of what we are doing today and we will be doing for years to come.”

For more on the role of private equity, listen to our Project 38 podcast with Bob Lohfeld Jr. and why he sold his company to a private equity firm.