Contracting & Bankruptcy
Are Private Equity Investments
at Risk in this ‘Safe’ Sector?
BY CHARLES C. REARDON, SENIOR MANAGING DIRECTOR, ASGAARD CAPITAL &
DOUGLAS M. SCHMIDT, PARTNER, CHESSIECAP SECURITIES
Occasionally an industry cycle lasts so long that investors cannot see when they have
crested the hill, or, even worse, they
think the good times will never end.
During the Tech Bubble of the 1990s, private equity viewed with disdain companies pejoratively referred to as “beltway bandits” that conducted business with the federal government. For high-flying tech investors, these government market companies, with their low margins, low growth, and alphabet soup names like GRC, ACS, BTG, and CACI, were clearly tortoises in a decade made for hares.
A few brave private
equity firms (then called
LBO funds) like the young
Carlyle Group and Caxton-
Iseman saw some opportunities in
this plodding industry. But for the
most part, these early pioneers were
left to play alone in the sector.
That all changed in 2000. When the rest
of corporate America began slipping
into recession, the tortoise caught the
hare, and a new era of investing in
government information technology
(IT) and defense/aerospace companies
began. The U.S. government spent
massively on outsourcing in 2002
and 2003 to help blunt the recession
of 2001. The September 11 attacks had
also occurred, and soon the U.S.
was fighting a war on terror,
as well as new
battles for cyber security, which led to
even more government spending.
From 2000 to 2011, total federal spending
grew at a compound annual growth
rate (CAGR) of 6. 6 percent, outstripped
only by Defense Department spending,
which grew at an astounding CAGR
of 8. 5 percent. Meanwhile, U.S. GDP
grew at a CAGR of only 3. 9 percent, less
than half the defense spending rate.
With little to no growth in many
industry sectors in the past decade,
private equity firms were attracted to the
market of companies serving the
U.S. government like bees