Rapidly acquiring small, founder-led defense and security companies then putting them under a hyper-growing platform investment proved to be a successful bet for NewSpring Capital, a Randor, Pennsylvania-headquartered private equity firm that in late November exited Avantus Federal for $590 million to QinetiQ US.
With nine acquisitions from 2018 to 2022, NewSpring grew Avantus’ headcount from less than 20 to approximately 1,200 employees. The average acquisition multiple was approximately 6.5x EBITDA and at exit, it earned 17.2x EBITDA.
“We found great companies that were doing one specific thing for the end customer, and we wove them together into one company that could provide complete solutions to the end customers in our market,” said Skip Maner, NewSpring’s general partner.
Avantus, based in McLean and Reston, Virginia, offers a suite of services within the defense and security sectors focused on cyber technologies and operations, data and software, digital engineering and integration, intelligence analysis and operations, space domain capabilities and advisory services, among others.
Using the analogy of an hourglass, Maner said the industry has a lot of big-name investors and many small companies but very few in the middle. The strategy for NewSpring was to create a force in the middle-market space.
Maner said most smaller and founder-led companies’ desire to grow is stymied by their inability to invest in the most advanced systems. “When we employ technology and world-class management on a combined larger company, it really creates great organic growth,” he said.
The first acquisition Avantus made under NewSpring was Sentinel in September 2018. It then added E3 Federal, Oasis, Data Works, Operational Intelligence, Lucid Perspectives, Mission Tech, Occam’s Razor Technology and finally, in May this year, Far Ridge Engagements.
Investing in national security was an exciting journey for NewSpring. “That’s an important endeavor,” Maner said. “Having a mission like that really helps attract employees that want to not only have a job but a job that matters for the national security of our country.”
Most founder-led companies in this sector are started by former government employees or ex-military who are not necessarily business builders, Maner said.
“They are really good at what they do but oftentimes they hit a ceiling,” he said, adding, “they get their company to a certain size but they really can’t grow any further. We saw a lot of companies like that in our search and it presented us with lots of very interesting acquisition opportunities.”
Even as the Avantus exit proved successful for NewSpring, Maner said founders who rolled over their equity in the Avantus platform had bumper harvests too, something that he said was rare in private equity.
The success is also rooted in the fact that investing in the security sector, where the US government is the largest customer, is regarded as a stable investment with predictable financial returns, he said.
“The US government’s budget continues to grow and we were in the sectors of the budget that are growing much faster than other sectors,” said Maner. He also hailed the type of contracts that the US government uses, as they buttress revenue visibility.
Even though some private equity players say that gaps between the buy and ask are making exits difficult, NewSpring didn’t face that challenge with QinetiQ US.
“QinetiQ Group ended up being a great partner for us,” Maner said. “They distinguished themselves early in the process by valuing us very much where we thought it would be so we actually had a pretty quick process because they understood the value of what we had built.”
QinetiQ US is a subsidiary of QinetiQ Group, a global defense and security company, and provides technologically advanced services and products to the US Department of Defense and national security agencies. Its US corporate headquarters are in Lorton, Virginia.