Accela, which sells software for permitting, licensing, code enforcement and various other tasks, in September took on a “strategic growth investment” from Francisco Partners. Berkshire Partners, the Boston-based private equity firm that bought Accela in 2017, described as the largest gov tech deal up to that time, would retain an “equal equity holding,” the companies said.
As is usually the case, the exact amount of money involved was left undisclosed.
But Franciso, which manages about $45 billion worth of capital, was attracted by Accela’s reach — its technology serves more than 300 million people globally — and growth and stability — a 31 percent increase in SaaS annual recurring revenue for the 2023 fiscal year and a net customer retention rate of 117 percent.
“Accela is very much a leader in the licensing space,” Andrew Kowal, partner at Francisco, told Government Technology, adding that Accela offers a “very feature-rich” product and “great” cloud platform.
Such is a common view of gov tech by private equity, the general traits that tend to spark investment.
The involvement of private equity in gov tech is hardly brand-new. But as the industry gears up for a potentially busier 2024 — more deals and more corporate activity than in 2023 — private equity promises to come along for the ride, steering more funds into a sector deemed relatively safe from recessionary risks, a space with predictable returns and which is undergoing massive and lucrative digital transformation.
It’s all but impossible, in fact, to consider the future of gov tech without considering the role of private equity.
FERTILE LANDSCAPE
From the point of view of private equity leaders and other investment and industry experts, gov tech almost sounds like a fertile land on the brink of major, sustained development.
“Private equity activity within the gov tech sector should continue to see record levels as investors increasingly view government technology as an attractive asset and further consolidation continues to take place,” said Will Weatherford, managing partner of Weatherford Capital, a Tampa, Fla.-based private equity firm, via email.
Weatherford is a former speaker of the Florida House of Representatives, and his firm in 2023 raised $355 million for gov tech and other investments. The firm’s existing investments include OpenGov, whose cloud technology helps officials with such tasks as budgeting and citizen engagement, and SOMA Global, which helps public safety agencies handle computer-aided dispatch and other tasks.
Government cloud adoption, replacing legacy systems (often via deepening relationships with single vendors with wide-ranging platforms) and consolidation — those are among the factors driving private equity interest in gov tech, according to Weatherford and other experts. Public safety agencies, for instance — one of the industry’s main engines — “are increasingly becoming aware of their desperate need to overhaul legacy on-premise systems,” he said.
Combine all that with government’s tendency to have a “stable funding base for IT systems” and sticking with vendors for a long period of time, he said, and you have a positive proposition for private equity. Plus, federal infrastructure and COVID-19 relief money is flowing through the economy, including to public agencies seeking to upgrade their technology, providing yet another hook for private equity.
THE AMAZON EXAMPLE
The view from the gov tech side reflects that.
For instance, Accela CEO Gary Kovacs told Government Technology that the company continues to benefit from the push to “move everybody to the cloud.”
Not only that, he said, but constituents are demanding more Amazon-like speed and convenience from their state and local public agencies — an opportunity for gov tech providers and their financial backers. The company’s recently released Rapid Damage Assessment tool, meant to help officials manage disasters, is part of Accela’s Civic Platform and provides an example of a single vendor trying to meet multiple needs for its customers.
While global tech absorbs ever more private equity funding — $675 billion in 2022 compared with $100 billion in 2021, according to McKinsey, thanks in large part to software as a service — nailing down the gov tech component of that can be difficult.
A decade ago, said David Shohet, managing director and partner at MergerTech, an M&A advisory firm, about a third of the deals his firm worked on were backed by private equity. Now that stands at about 70 percent, he told Government Technology.
Jeremy Fiser, a managing director at Baird, a financial adviser to Accela and Berkshire Partners in that recent private equity deal, pointed to more than 20 gov tech deals over the last three years, more than half of which involved private equity.
He said that most of the gov tech firms sold had private equity owners, with only a “small number” being owned by founders.
“We are seeing private equity on both sides of the transactions,” he said, adding that private equity growth trends will continue in the industry.
THE GRANICUS PATH
The path that private equity can take in gov tech — and how that influences vendor growth — is illustrated by citizen engagement software provider Granicus.
In 2016, Vista Equity Partners bought a majority stake in the company, with existing owner K1 Investment Management retaining a minority stake. Then, a few months later, Granicus merged with GovDelivery, also backed by Vista, after which Granicus debuted a new website and branding.
Next came what Granicus called “record sales growth, with over 400 new projects launched to new and existing customers across the United States and the United Kingdom.” The Granicus GovDelivery platform, meanwhile, managed to deliver more than 800 million digital, text and video pandemic-related messages from federal, state and local agencies.
Then, in December 2020, Granicus said that private equity firm Harvest Partners had invested in the company, and that it would “work alongside” Vista and K1. More recently, Granicus, in late 2022, said it had bought Rock Solid Technologies, another citizen engagement tech vendor and the 11th acquisition thus far by Granicus.
As CEO Mark Hynes told Government Technology, both companies, pursuing what he called a “platform integration strategy,” recognized that there existed an “incredible alignment of our missions” — comments that reflect the attractiveness of what amounts to one-stop shopping via gov tech platforms.
In another sign, perhaps, of the tightening bonds between gov tech and private equity, Tom Spengler, Granicus co-founder and the Rock Solid CEO at the time of the acquisition, joined Great Hill Partners in late 2023 as an executive in residence. The private equity firm wants to sharpen its government technology investments.
Hynes described his vision for corporate growth, which also speaks to how private equity views the space.
“Integrated platforms are what technology buyers want,” Hynes said. “It shouldn’t be incumbent on government IT buyers to have to solve the integration problem. Why shouldn’t we centralize that concept? You shouldn’t have to go to 15 vendors to have a tech leader.”
MORE PE-BACKED DEALS
For his part, Kovacs, the CEO of Accela, did not rule out acquisitions in the wake of that company’s latest deal with private equity.
In fact, private equity could set the stage for more gov tech deals in 2024, Jeff Cook, managing director of investment bank Shea and Co., told Government Technology.
Shea and Co. has advised on more than 20 gov tech deals — investments and exits — in the last five years, and in Cook’s view, a relatively slow first half of 2023 was giving way to a busier Q4, which signals more activity for 2024.
“A lot of it will be driven by private equity,” he said in November. “They have this overhang of capital they have to deploy because 2023 has been such a slow year.”
For him, Accela is among the deals in 2023 that foreshadows what’s to come in 2024, “as it gives potential sellers watching from the sidelines increased confidence of getting their own deal done, and also usually sets off consolidation activity as those new platforms look to be acquisitive,” according to a recent analysis of his. “It also signals the gradual ‘thawing out’ of private equity activity.”
OPTIMISITC MOOD
Private equity doesn’t command the best reputation among the mainstream.
Such investors, the thinking goes, are “vultures” who load down companies with debt, cut jobs and make money via fees and other methods no matter what happens to businesses. Sen. Elizabeth Warren, D-Mass., in fact, has worked to reform the private equity industry, which she says focuses on short-term profits and the stripping of company assets.
Research has found that “healthy companies acquired by private equity firms through leveraged buyouts see their probability of defaulting on loans increase tenfold,” according to one report. Another report blames nearly 600,000 retail job losses over a decade on company ownership by private equity investors and hedge funds.
There is little doubt that private equity can be disruptive. Even in the gov tech industry, where private equity remains a relatively new player, consolidations funded by such capital lead to management and job and structural changes, even if not wholesale layoffs.
“The challenge is that they are very demanding owners,” said Shohet, of MergerTech, adding that private equity tends to run lean organizations with a heavy focus on cash flow. “Sometimes that means subsequent innovation may be hampered to some extent.”
For now, though, gov tech seems all but overwhelmed with innovation — artificial intelligence, GIS, real-time video and text data for emergency dispatchers, and citizen engagement platforms, to name just a few — while the sector competes for talent and public agencies deal with IT labor shortages.
And as experts point out, private equity is poised to help gov tech providers grow “inorganically” via mergers and takeovers, and geographically as more agencies respond to demands of constituents used to the Amazon and Google way of doing things. When it comes to private equity and gov tech going into 2024, the mood seems optimistic, reflecting the general feeling about the industry as a whole.
As Cook said, if private equity is done right in the gov tech space, public agencies and the officials who buy technology shouldn’t see any big differences beyond more services and more capabilities from their vendors.
