Private Equity Interest in Government Contractors

I attended an interesting seminar this week on Private Equity investment in Federal contractors. For those of you who don’t live in DC, Federal contractors are the “town industry” around here.

There were speakers from three private equity funds: one invests in larger firms where the owner/founder is looking for an exit, one specializes in taking partial equity positions in minority business (i.e., those who take advantage of Government provisions setting aside some contracts for small and small-disadvantaged businesses), and other puts in a little equity and fills up the rest with debt (kind of the leveraged buyout model).

While each speaker had their own perspective, they agreed on a number of things:

  • The investment market for Federal contractors is heating up again following some recovery from the 2008 financial meltdown
  • Many PE funds are not fully invested, and are interested in deals because they only have a limited amount of time to invest their funds before those funds are dissolved and the proceeds redistributed to the investors
  • Both of the above factors are making the market a bit “frothy”
  • Commercial bankers are very interested in lending money as part of deals and are lending much larger multiples of EBITDA (a.k.a. the bottom line), making the panelists wonder whether another bubble is in the works

Part of the allure of government contractors is the fact that they have a reliable customer and cash flow, one of the panelists said. Deals are also being driven by big prime contractors trying to solve organizational conflicts of interest.

Private Equity groups are paying particular attention to cybersecurity, intel, and data analytics companies, whose contract prospects are likely to remain strong even with all the action on Capitol Hill to cut government funding.


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