Multiple priorities drive investments across the defense market Peter Dazeley

Increases to both global threats and the national debt create a complex business environment.

In 2022, the theme at Baird’s annual government and defense conference was that the nation was living in a bipolar world where the focus was on near-peer threats.

But that is not the case today, according to Jean Stack, managing director of the investment bank’s government practice.

“This year we are talking about a multipolar world, with priorities all over the globe,” she said Wednesday to open the event in Tysons Corner, Virginia.

Near-peer threats are still a priority with the continuing war in Ukraine and China’s moves to exert its influence in the Pacific region and elsewhere in the world. But terrorism has re-emerged as a threat at the same time, Stack said.

The Moody’s Investors Service downgrade of U.S. debt and the growing debt crisis in general all are a second major challenge.

“Ten cents of every tax dollar now go to pay the interest on the national debt,” she said.

On a happier note, international alliances have strengthened.

“AUKUS is a big deal,” Stack said in reference to the alliance formed by Australia, the U.K. and the U.S.

Those countries are working together to address security in the Indo-Pacific region, which is where China is.

“First it was with nuclear submarines but now it has moved onto collaboration from a technology perspective as well,” she said.

The potential for a government shutdown and continuing resolutions aren’t a large concern for government contactors who are used to operating with looming shutdowns and CRs.

“But the bigger implication is that it speaks to the broader economic environment and the public markets who look at it as dysfunction of our political system,” Stack said.

She told attendees the 2024 election will be a non-issue for the first half of the year. but will heat up as a market issue after the third quarter.

“Folks don’t really focus on the impact the election is going to have until we get closer,” she said.

Stack said that merger-and-acquisition activity is rebounding in the government market, but the transaction sizes have been smaller up until Bain Capital’s announcement of its plan to acquire Guidehouse.

For the 2020-2022 timeframe, there were approximately $10.8 billion in government services transactions based on announced value. So far in 2023, that number has been $300 million.

In particular, 2021 was a high-volume year for M&A activity with 138 transactions. Stack said the activity dropped to 99 in 2022, but so far 2023 has seen 107 transactions.

But many of the publicly-traded companies have stayed on the sidelines. Stack said their focus has been on reducing debts, improving margins and strengthening their balance sheets.

Private equity firms continue to be active and were involved in over 60% of the activity. Venture capital groups are very active as well.

“We’ve seen a three-fold increase in venture capital investing in this industry over the last three years,” she said. “We expect it to double again by 2027.”

A recent example she cited was the latest capital raise by Shield AI. The company added $200 million in new capital, pushing its valuation to $2.7 billion.

Washington Technology has also reported on how large companies such as Lockheed Martin, Booz Allen Hamilton and RTX have their own venture capital funds for investing in promising companies. A most recent example of that is the Lockheed venture arm’s investment in HawkEye 360.