February 08, 2023

Bloomberg Government Quotes Joe Schmelter on Strong Federal Contracts Drawing Dealmaker Attention

2 min

On February 8, 2023, Bloomberg Government quoted Joe Schmelter regarding investors in the federal procurement market.

According to the article, investors who have a sense of the federal procurement market are keeping the contractor class in their sights.  Targeting lower-risk investment amid persistent concerns around inflation and rising interest rates makes sense to many firms. It also makes sense to the federal contractors who are looking to land a new investment or sell to larger competitors with long-term contracts.

Prime contracts are more valuable to potential buyers than subcontracts. They seed the contractor base with new companies and give those companies entrée into the market, said Schmelter. Ideally, successful new entrants can eventually start competing against the bigger players for full and open contracts.

“As long as that happens, and you’ve got smart entrepreneurs who come out of the government or engineers or former military, you’re going to really fuel M&A business,” he said.

Publicly traded prime contractors have deep pockets, with credit lines to tap—and get nailed down before interest rates go up. Rising interest rates mean that private equity firms, on the other hand, have to secure new debt to close deals.

“Mechanically, there’s no doubt that the current financing markets have hamstrung traditional private equity investors, not just because of high interest rates, but the availability of capital in general has been constrained,” Schmelter said.