A 2018 survey and report by Citrin Copperman shows the continued growth and development of the independent sponsor model in private equity investing. Independent sponsors are gaining popularity due to their flexibility, focus on quality of individual investment opportunities, and strong alignment with capital partners.
“YOU CAN’T PLAY PORTFOLIO THEORY WHEN YOU ARE AN INDEPENDENT SPONSOR. EVERY DEAL HAS TO STAND ON ITS OWN MERITS.”
Most significantly, in our opinion, is the continued trend of independent sponsors with backgrounds in industry. The report shows that 50% of independent sponsor principals have a background in Operations/C-Level Management, as opposed to the earlier days of sponsors coming predominately from PE and IB backgrounds.
Success of the independent sponsor model has generated increased interest and even competition from capital providers, with strong participation from family office investors, especially early in the life of the sponsor. In fact, 70% of independent sponsors in their first 2 years of operations are working with family offices and high net worth individuals. By the time they are more than 5 years in operations, many still retain family office relationships but have brought on capital from traditional PE firms (41%) and Mezz Funds (51%).
Of course, independent sponsors, like their private equity counterparts, face the challenges of competition for deals in a sustained sellers' market, as well as the pressure of sufficient deal sourcing activities at attractive valuations despite the limited internal resources for independent sponsors. Many, though, will continue to thrive by focusing closely on a specific sector where the principals have a proven track record and an established professional network.
With over 20 years of industry experience as senior operations executives, FRAMCOR makes direct investments and works as an independent sponsor for private equity investments into defense and government contractors providing critical professional services to the U.S. both domestically and overseas. See more about our investment focus here.
Triumph Group, Inc. (NYSE:TGI) has announced the sale of its Triumph Fabrications business units to aerospace and defense private equity firm Arlington Capital Partners.
“Triumph Fabrications consists of four independent companies, which operate in five locations throughout the US. These sites encompass more than 1 million square feet of factory space dedicated to the aerospace industry by supporting complex sheet metal components and assemblies for fixed wing and rotorcraft platforms… Combined, the businesses generated revenues of approximately $150 million during Triumph Group’s fiscal year ended March 31, 2018.”
An annual survey of 222 Aerospace and Defense Industry executives & experts by investment banking firm KippsDeSanto & Co shows expectations of continued strong sector growth and M&A activity.
"Our 2019 survey results suggest continued strong mergers and acquisitions activity in the aerospace, defense, and government services sectors," says Managing Director Kevin DeSanto.
Top priority areas for M&A include:
Wolf Den Associates has published its always informative Practitioner Perspectives for December 2018. Focused on the growing M&A market in federal contracting. Highlights include:
Cerberus has announced it will acquire a 70% stake in the defense unit of Navistar International (NYSE - NAV). Navistar announces quarterly earnings on Dec 18, and it will be interesting what details of the deal are offered by its Chairman and CEO Troy Clarke.
Navistar hasn't regularly broken out its military sales in its earnings statements, preferring to report total sales for its Trucks and Parts divisions by truck class. For the first 9 months ending 31 July 2018, total Truck sales were up 23% due (partly) to an "increase in military sales." This increase probably has more to do with an industry-record total orders in the quarter of 52,000 Class 8 heavy trucks, up 34% compared to last year. But its medium truck class saw an increase in orders of 18% as well.
Surely Clarke will have to outline the impact this sale has on its ongoing operations, and we should also get more details on valuation and terms than Cerberus has announced. It will also be interesting to see if this marks a trend in corporations spinning off their "non-core" defense units due to strength in that market.
KBR presented at Baird’s 2018 Government Services and Defense Conference. Highlights from their presentation include:
H.I.G. Capital has acquired Iron Bow Technologies, according to this press release from the investor. This will be H.I.G’s third government services platform.
Iron Bow delivers IT solutions to the government, industrial, and healthcare markets.
Oddly appropriate that 14 years of defense industry M&A fits on a single slide:
Renaissance Strategic Advisors updates industry M&A infographic
Experienced Federal contracting CEO Andrew Maner has led the acquisition of The Sentinel Company for NewSpring Holdings.
“In just over four years, NewSpring Holdings adds its fourth platform with Sentinel, a Washington, DC-based government services and solutions firm founded in 2005. Clients of Sentinel include agencies and industry partners in border security, national security, Department of Defense, and federal health.”
Maner previously led DC Capital backed National Interest Security Company (NISC) through its eventual sale to IBM.
Opportunities for small business contractors of all categories are growing, both in the U.S. and for OCONUS programs. In addition to international opportunities previously mentioned, some agencies with growing budgets, like Special Operations Command, historically prefer small businesses.
SOCOM will spend in excess of $3 billion with contractors in FY18… The Command’s emphasis on small business (historically a third of contracts) has led to the development of a strong lower middle market base of emerging, mission-focused solutions providers.
Aronson Capital Partners Summer 2018 Market Pulse
Despite clear growth opportunities, many retiring or transitioning owners looking to sell their small business contracting companies face limited exit opportunities for a few main reasons:
Of course, these small but highly capable mission-focused solution providers are extremely sensitive to reputation, legacy and potential disruptions to the ongoing business, given the important work they are doing in the public interest.
FRAMCOR is addressing this problem through its investment focus on designated small business professional services contractors. Learn more about our detailed strategy and investment criteria.