It should not be a surprise to any corporate growth professional in the National Capital region that the government contracting industry is a massive engine of regional growth and a sector rife with opportunities to turbocharge a company’s trajectory.

It does bear asking though, among the myriad acquisitions made and the multimillion dollar contracts won, what factors are driving this market’s expansion.

Is it a function of more assured defense budgets? Agencies’ IT modernization efforts? Or does it have something to do with how willing investors are to finance big transactions and raise capital?

To find out, Corporate Growth…Capital Style sat down with Peter Knickerbocker, Market Executive and Senior Vice President for Bank of America and a 20-year veteran of the government contracting sector.

In our conversation, Mr. Knickerbocker offered insight on what is powering the consolidation in the government contracting market, what is prompting new entrants to get into the field, and what trends we can expect for the rest of the year.

Here is what he had to say:

Corporate Growth…Capital Style (CGCS): Can you tell our readers a little bit about yourself and your past experience with the government contracting industry? What capabilities does Bank of America offer to companies in this field?

Peter Knickerbocker: I’ve been with Bank of America and its predecessor organizations for 27 years. I’ve lived here pretty much from high school on, and my primary office has always been in the greater DC region so I am proudly a Washington native.

I’ve worked with a number of industry icons over the course of 20 years in the industry—Jack London, George Pedersen, Joe Kampf, and Bob Coleman, to name a few—as they successfully grew their respective government contracting businesses, and my team and I continue to fly coast to coast to service our government contractor clients.

As a firm, Bank of America brings the full spectrum of financial services to bear for government contracting firms. We lead financing for growth capital and M&A for various government contractors in this region and across the country. For years, we have also provided various investment banking services to the industry, including capital raising of debt and equity, as well as M & A advisory services.

In addition to those, we also have the full complement of core treasury services that enable our clients to scale and leverage our footprint, which includes a robust mobile platform that clients can access from anywhere, anytime.

CGCS: The past few years have seen massive consolidation in the govcon industry. What has driven this consolidation and why are we seeing so many companies making these acquisitions today?

Peter Knickerbocker: There are myriad factors contributing to the consolidation that’s taking place today.

If the acquirer is a publicly traded entity, their investors are encouraging them make acquisitions. The latest example of this is Leidos’s acquisition of Dynetics. Over the course of the five days after the announcement, Leidos stock traded up approximately 7%.

Other factors driving consolidation are that sellers are acutely aware that valuations are at elevated levels and that capital is readily available to acquirers, whether they are private equity owned or a public company.

And then finally, buoyant budgets at the defense, intelligence, and civilian agencies are creating a new sense of optimism and confidence at board levels.

CGCS:What corporate growth trends do you see emerging or continuing this year in the sector? Will we continue to see consolidation and a high level of acquisitions among government contracting companies?

Peter Knickerbocker: Yes, we will continue to see prospective sellers examine opportunities through strategic alternatives. This is in part driven by the same factors that we’ve seen over the past few years: nascent entrants, who see government as a new opportunity for them to expand their total addressable market (TAM) as well as existing players looking to accelerate organic growth.

CGCS: We’re also starting to see many nontraditional govcon companies working to establish themselves inside the Beltway and sell to the government. Why are these companies looking to expand into the government marketplace?

Peter Knickerbocker: To explain why, nontraditional players can be broken into two categories.

First, there are those who had existing government contracting divisions, such as Jacobs and Parsons, that have made up less than the majority of the company’s revenue, who are expanding further into government contracting as a means to diversify and strengthen their offerings outside of legacy engineering and construction businesses.

We have then seen true nontraditional buyers such as OnAssignment, with its foray into govcon thru the acquisition of ECS Federal.

In both these cases, the impetus seems to rest with a desire to expand the TAM and  an effort to augmen valuation by growing the percentage of govcon revenue.

With these considerations, we do not see this trend abating in the near term.

CGCS: Many of the nontraditional govcon companies are in the cybersecurity and technology space. Why are they choosing now to get into this field and what will the market for these products and services look like going forward?

Peter Knickerbocker: In 2017, the government signed into law the Modernizing Government Technology Act, which encourages agencies to modernize their cybersecurity systems and leverage digital, mobile, and cloud technologies.

The resulting priorities—cybersecurity, cloud migration, and mobile adoption—represent strengths for many nontraditional companies, with AWS perhaps serving as the best example. We see these commercial players looking at huge pent-up need and believing that first mover advantage is probably important to forging relationships with agency contracting officers and end customers.

And in many instances, there is going to be a long tail to this cycle because government agencies will need to go through complex migrations of legacy systems to these new architectures.

CGCS: As we conclude here, what themes do you think we will see in the government contracting business in 2020?

Peter Knickerbocker: I think we will see two themes emerge: M&A consolidation will continue and the mission critical role played by government contractors will endure.