Seemingly overnight, dealmaking has stalled and valuations have fallen in a sector PE has been piling into in recent years. Investors are crossing their fingers that the government-caused disruption is short-lived.
The Department of Government Efficiency and several other federal agencies have abruptly canceled a series of contracts, upending a government services sector dominated by PE.
DOGE maintains that its recent actions are necessary to improve efficiency and cut wasteful spending, but the fallout is clear: what was once a stable and attractive investment sector has become a high-risk proposition. At least temporarily.
“Valuations have definitely come down,” says Brown, Gibbons & Lang Managing Director Meghan Welch, a longtime aerospace and defense specialist. “A lot of processes have been stopped, paused or broken and there are fewer assets that are viewed as safe. A lot of buyers have put pencils down because they just want to see where things shake out”
A silver lining: many defense programs and government service contracts remained untouched by the DOGE cost-cutting campaign.
“Not every sector is implicated,” says Winston & Strawn Partner Elizabeth Leavy. “But it’s clear things have changed and there’s additional risk.”
PE’s stake in government services and defense contracting has surged in recent years, growing from a handful of firms like Carlyle (Nasdaq: CG), Veritas and Arlington Capital Partners to more than 100 firms holding at least one asset.
Investment bank KippsDeSanto & Co., which specializes in government services, counts roughly 75 PE-owned platform companies in the sector and estimates two-thirds of all companies in the space have PE investments.
Until recently, new PE entrants in the space were competing with established shops and driving up multiples paid for stable, consistent revenue-generating businesses holding long contracas. Government services companies were changing hands even in a muted overall M&A market.
But now, the government services sector has seized up amid DOGE’s contract-canceling campaign and other cuts throughout the federal government. The widespread government layoffs have also hamstrung the industry, slowing the contracting process.
Some firms that were on the verge of closing M&A deals have seen buyers pull out, citing concerns about revenue predictability.
Still others desiring to sell are now being counseled to wait, especially since some of the biggest strategic buyers in the space have experienced deep stock price drops. That includes Booz Allen Hamilton (NYSE: BAH), CACI International (NYSE: CACI), Leidos Holdings (NYSE: LDOS) and Science Applications International Corporation (Nasdaq: SAIC).
“It has had a very material effect on the industry,” says KippsDeSanto Managing Director Kate Troendle.
Vista Equity Partners and Harvest Partners, for instance, were reportedly preparing their jointly held government software company Granicus for sale at a valuation of $4 billion. Then, DOGE recently canceled a Granicus contract with the Department of Housing and Urban Development for a $574,000 savings.
Neither PE firm responded to requests for comment on whether DOGE’s actions have affected the sales process.
Nonetheless, Troendle and other analysts say they are hopeful the M&A freeze is temporary. The federal government remains badly in need of technological upgrades and cybersecurity protections across the board, for instance.
“The industry believes that at the end of the day that this could all be a net positive,” Troendle says. “But the big question, of course, is when will the uncertainty ease?”
