Aronson Capital Partners, a leading middle-market investment bank that works to meet the M&A and financial advisory needs of middle market companies in the highly fragmented aerospace, defense, and government services industries, releases a quarterly report analyzing the investment trends impacting their market.
With so much of the National Capital region’s economy tied to services and products sold into the federal government, this report is an excellent window into how the region’s economy is fairing, and how the larger trends and issues – such as federal budget uncertainty, elections and sequestration – are impacting the area’s business community.
Ultimately, when the government is spending money, commercial-focused, B2B businesses will often see that stable, consistent market as a way to increase sales and diversify their customer base and look to acquire or invest in companies that service this market. While larger government-focused entities will look at small, medium and emerging growth companies with innovative technologies as a way to expand their portfolios and increase sales by driving up the number and type of products and services they sell into the government.
Earlier this month, Aronson released their Q1 2016 report, and the numbers seem promising.
According to the report, investment in companies that sell services into the government is back on the rise, after a few years of budget uncertainty and sequestration had cooled things off. As per the report:
The relative budget stability and clarity has driven a renewed interest in government services acquisition targets by commercially focused information technology, consulting, and engineering buyers. Meanwhile, private equity firms have recently demonstrated confidence in this market by making new federal platform investments and bolt-on acquisitions for their commercially focused existing platforms. These buyers were previously on the sidelines for the past few years given the federal sector’s growth challenges and uncertainty.
The numbers, year-over-year, are illustrated in the following chart:
You can see numbers peaking in the years after 9/11 and the subsequent increase in government spending. You can then see the impact that economic challenges, budget uncertainty and sequestration had on investment, followed by 2015, which saw some of the largest investment in the space in almost a decade. And 2016 is shaping up to be in line with 2015.
What’s even more interesting than the interest and investment in companies servicing the defense, aerospace and government services industries is where that investment is coming from. According to the report, “While the traditional buyers of federal government services targets (e.g., CACI, ManTech, Boeing) will still drive the majority of the public buyer activity, a new wave of strategic buyers has emerged over the past 12 months.”