Madison Dearborn eyes US government

The firm will work with former US officials to invest in federal government technology service companies, a $300bn industry.

Madison Dearborn Partners is focusing on a very specific kind of consumer: the US government.

The firm has partnered with specialist investor CoVant Management to invest in technology companies servicing the US federal government in areas including information technology, cyber security and intelligence.

The partnership will pursue control investments through a specialty vehicle called CoVant Technologies II, investing capital primarily from Madison Dearborn. CoVant Management, which invests in national defense, homeland security, information technology and government technology services, will act as the management team for CoVant Technologies II. CoVant was founded by former executives of government technology services company Anteon International, which was sold to General Dynamics for $2.2 billion in 2006.

The board of CoVant Technologies II includes a number of executives who are former US government officials, including former US Secretary of Defense William Perry, former Chairman of the Joint Chiefs of Staff Hugh Shelton and former commanding general of the US Army Material Command Paul Kern.

A $300 billion industry, federal government technology services is projected to experience flat growth in the near term but has specific segments with very high growth rates, according to a source with knowledge of the sector. IT security servicing the federal government, for example, is expected to grow at double-digit growth rates during the next five years, the source said. Other businesses in the space that have historically traded at 10x EBITDA multiples are currently trading at 5.9x EBITDA.

Still, the growth in certain sub-sectors is contrasted by an expected shrinking of other segments due to factors including future government budget cuts.

Madison Dearborn has previously invested in federal government technology services businesses such as satellite services company Intelsat, which it sold in 2008 for about $1.2 billion. The firm has also invested in companies whose primary customers are government entities, including dredging services provider Great Lakes Dredge & Dock.

Madison Dearborn invests in the consumer, financial services, healthcare and telecom, media and technology services sectors and is currently investing its sixth fund that closed on $4.1 billion in 2010.