Private Equity Activity Rising in Government Services M&A
Private equity has consistently been an active player in the government and defense services space, but has recently raised the eyebrows of other industry participants and strategic buyers alike with increasing deal announcements over the past few months, including very high profile transactions, such as SRA, GTEC, and EIG. One needs to look no further than the credit markets as a driving force behind the increased activity, as credit has eased of late for larger assets with earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of $10 million plus. For private equity firms looking to achieve a targeted return on investment in the 20–30% range, the opportunity to commit less equity and source more debt to a given transaction, combined with lower interest rates on that debt, has motivated more aggressive valuations without a meaningful sacrifice of returns.
Financial sponsors (or private equity backed companies) have accounted for nearly 35% of announced YTD 2011 transactions, up from approximately 25% in 2009 and 2010, and less than the 20% in 2007 and 2008. As of late, these leveraged transactions have approached, and in some instances exceeded, 50/50 debt-to-equity structures. Providence Equity’s recent acquisition of SRA International highlights the increasing aggressiveness of private equity firms and the lending community, with Citibank and Bank of America committed to raise debt financing of 9.2x EBITDA (8.0x forward).
While deal activity for private equity firms has picked up considerably, the anticipation moving forward is for an even greater uptick. Financial sponsors have accumulated a considerable amount of investment capital in recent years and are constantly searching for opportunities to invest it. Additionally, given industry consolidation over the past decade, there is a population of proven operational executives looking to team with private equity to acquire and build the next platform. Examples of such a strategy include GTCR’s partnership with former ManTech President and COO, Bob Coleman, to create Six3 Systems, J.H. Whitney’s recent partnership with former Stanley operator Chris Torti and Jorge Scientific, and Ares Management’s new platform Sotera Defense Solutions (formerly Global Defense Technology & Systems), to name a few.
The bottom line is that in an industry where the competitive landscape constantly evolves, private equity firms seem increasingly in favor as potential acquirers given their recent ability to offer the upsides of a leveraged buy-and-build strategy with the certainty of a more compelling valuation upfront.