PErspective in Government Contracting

May 2017

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A feature examining the role of private equity in the government contracting space.

Following the inauguration of President Trump, Washington D.C. has been abuzz with a flurry of proposed regulatory changes, many impacting the government contracting industry. As the new administration settles into office and cabinet positions are filled, opportunities abound for private equity in the government contracting space. Additionally, an emboldened Department of Defense (DOD), rising valuations on government services and defense companies, and low-to-moderate interest rates all hint to a strong and sustained market for government contractors.

A major catalyst for the improved outlook in this sector is that the president has repeatedly stated defense as a priority in the next four years. This has been reaffirmed by calls to end the defense sequester and a proposed increase in military spending. Mirroring that call to action, in January, Senate Armed Services Committee Chairman Senator John McCain called for a $54 billion increase to the 2018 DOD base budget. The additional budget will cover the cost of increased defense personnel and equipment as well as strengthened defense systems.

While this proposal is being put through Congress, the president has simultaneously called for a hiring freeze on nonmilitary and nonessential federal workers. Following that announcement, David Cox, president of the American Federation of Government Work Employees, warned that federal agencies could increase contract work to cover the gaps created by the freeze, despite the fact that the executive order forbids it. This, he argued, would result in little to no budget savings.

According to Washington Technology, government contracting company valuations are surging along post-election with sector valuations averaging 11x forward EBITDA, well above the longer-term averages of around 8x EBITDA. In addition to those promising valuations, healthy debt markets will likely contribute to increased deal activity. In addition, large financial and strategic buyers from 2016 are expected to remain active in 2017.

Future PErspectives: What’s Next for Government Contracting Investors

The president’s dual focus on physically expanding the military through ship, aircraft and tank construction, while reining in federal employment numbers and costs, could provide significant opportunities for government contractors in the year ahead. That said, it is important to take a measured approach when evaluating sector opportunities until plans to increase spending are approved and details for covering the costs come into clearer focus.

Sources: NBC, Washington Technology, EZGovOpps

Return to BDO Knows Government Contracting Newsletter - Spring 2017