Private equity keeps M&A fires burning

Some investors want to repeat past success, others drawn to stability

Private equity has provided a lift to mergers and acquisitions activities during a challenging market environment. Of the 58 government services transactions during the last four quarters, nine have been acquisitions of platform companies by private equity groups, and another nine were add-on deals to existing platforms.

Despite challenges in financing and industry concerns surrounding insourcing, transition of preference contracts, and organizational conflicts of interest, private equity remains active and competitive in the government services market.

The pace of private equity deals is remarkable given financing market conditions. The ability to leverage transactions using senior and mezzanine capital is down 30 to 40 percent from borrowing levels before the financial crisis. Moreover, the total cost of financing has increased.

So why has private equity been so active in the last year in an overall cautious environment? The simple answer is success.

Private equity has had a tremendous track record in buying, building, and then selling or taking companies public.

A number of firms are looking to repeat past successes, and new players are looking to deploy capital in an industry noted for stable and predictable cash flows, low volatility relative to the broader markets, and numerous exit alternatives.

In the mid-1990s only a handful of private equity groups had an interest in the federal services market. Now, the landscape has broadened to include new players such as Court Square Capital Partners, Metalmark Capital, Excellere Partners, and Leonard Green and Partners LP.

Management is the cornerstone of any platform, whether the management team is acquired or the private equity group brings its own team to the deal. Private equity remains an attractive option to companies with management teams looking to remain invested in the business, while retaining culture, identity and employee benefits, particularly if there is a strong acquisition growth story.

Private equity groups looking to repeat past success include GTCR Golder Rauner LLC, which sold DigitalNet to BAE Systems in 2004. GTCR is now backing a new government services platform, Six3 Systems, which recently acquired Harding Security Associates.

Similarly, CI Capital Partners (formerly, Caxton-Iseman Capital) of Anteon fame is backing its former management team, CoVant, with its initial A-T Solutions platform. Most recently, Frontenac Co. is back in the market with Salient Solutions and the former management team of SI International, which was sold to Serco in 2008.

There has been significant discussion surrounding how private equity can be successful as a minority shareholder. With the current administration’s priority of developing emerging technologies, companies with intellectual property are looking for minority partners to help expand their capabilities and build their product and service offerings. Another angle relates to how minority equity can partner with small or disadvantaged businesses to provide partial liquidity to shareholders who otherwise have limited exit alternatives.

Broadly speaking, private equity can be a solution in a wide variety of circumstances, providing creative alternatives for unique circumstances.

In an industry in which acquisitions are a strategic imperative and initial public offerings are poised for a comeback, private equity will continue to remain active because of its history of successes. With private equity looking to deploy capital into the space through new platforms or add-ons to existing businesses, it will remain a competitive alternative in the government services market.

About the Author

Jean Stack ( is the director of the aerospace, defense and government group at the investment bank Houlihan Lokey.

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