The past year was solid, with market momentum accelerating and the forces that portend heightened activity coming into place. In contrast to 2022 and 2023, this past year had high deal volumes (the second most active year on record), a large number of deals, valuations that are edging up on the highs from 2021 and an increasingly active universe of strategic platforms and private equity firms, which resulted in a healthy mix of capital raises, strategic acquisitions, large-scale private equity recapitalizations and everything in between.
Behind these trends were high-quality, well-performing businesses deciding to access the capital markets with a growing sense that the overall macroeconomic climate, interest rates and inflation were providing a level of stability the market had not seen in more than two years — it just felt like a better market to pursue a transaction, and those that did so were largely rewarded for it with great outcomes and valuations. We also saw a balance of transactions across all gov tech sectors in administration and safety, underscoring the digital transformation that is pervading every corner of the market.
2024 RETROSPECTIVE
A review of my major 2024 predictions is a useful way to analyze the past year:
- Prediction No. 1 — Transaction volume exceeds 2022 and 2023, but falls short of 2021 (5/5): This prediction was on point, with 2024 finishing at just more than $9 billion in deal value. Q1 through Q3 were incredibly strong, but what was not anticipated was the magnitude of the Q4 slowdown in terms of announced transactions — however, while Q4 saw fewer completed deals, it was rich in activity that laid the groundwork for deals that will happen in 2025.
- Prediction No. 2 — Private equity involved in 80 percent of transactions (5/5): Unsurprisingly, private equity played a role in almost every deal that happened over the past year and a quick review of this year’s deals suggests that more than 80 percent involved private equity. We count “private equity” deals as a few different flavors — new “platform” deals where a private equity firm buys a gov tech business and continues to operate it as a stand-alone business (e.g., CloudPermit’s acquisition by The Riverside Company), a large strategic buyer that is owned by private equity buys another business (e.g., Accela’s acquisition of OpenCounter) or a gov tech company raising fresh capital to accelerate growth. The vast majority of deals in 2024 fall into one of these buckets.
- Prediction No. 3 — More clarity and consistency around valuation (5/5): One of the major trends in 2024 that set the foundation for 2025 was the valuation environment. In 2022 and 2023, deals were more episodic and there simply were not enough data points to provide clarity on how “the market” was valuing gov tech businesses — the data was all over the place. This was exacerbated by whipsawing public market valuations for software companies broadly. That changed in 2024 — there were a large number of deals, both large and small, and an analysis of valuation multiples revealed that valuations were in a much tighter range and highly correlated to key financial metrics like revenue growth, Rule of 40, net revenue retention and gross margin.
- Prediction No. 4 — More midsize deals (3/5): The term “midsized” deals refers to $100 million-$500 million enterprise value deals, which historically have been the bread and butter of the gov tech market. While there were more deals in this size range compared to the past few years, the “barbells” of sub-$100 million and $500 million-plus deals were still pronounced. We expect this to change in the year ahead.
2025 OUTLOOK AND PREDICTIONS
2025 is going to build on the trends established in 2024 in a meaningful way. Our business (advising gov tech businesses on M&A or capital raise transactions) tends to be a leading indicator for future activity, and our work in the latter part of 2024 suggests that we could be poised for a record year, with a number of major pieces coming into place that typically create the ideal conditions for heightened gov tech activity — almost all of which were present during the last period of rapid activity in 2021.
- Driver No. 1: Gov tech businesses have performed. First and foremost, gov tech businesses have performed well in the last four years. In contrast to their peers in other sectors, gov tech businesses have remained insulated from the fluctuations in the broader technology markets and have largely seen stable-to-increasing growth rates over the last few years. The market hit an inflection point in growth following the post-COVID-19 digital transformation imperative and has not slowed down since.
- Driver No. 2: Private equity consolidated gov tech in 2019-2021, and we are coming toward the natural exit horizon. The average hold period for a private equity investment is in the range of four to five years, after which pursuing an “exit” or liquidity event becomes an objective. Private equity was extremely active four to five years ago, resulting in a large crop of gov tech businesses that are candidates for exit.
- Driver No. 3: Private equity needs to return capital and deploy capital. Private equity firms are in the business of both investing capital and returning it through the sale of their portfolio companies. In the past three years, activity levels were very low, resulting in a current environment where, one, private equity firms are compelled to find ways to return capital to investors by selling well-performing businesses (see point No. 1 above), and two, they are generally behind on deploying capital. As we emerge from a few turbulent years, private equity has sought more stable industries — and top of mind is gov tech.
- Driver No. 4: Buyer interest is at record levels. To the point above, we have seen more private equity buyers than ever pursuing a thesis in gov tech. In practice, this means private equity firms are investing significant time in understanding the gov tech market, building conviction about its durability and meeting with companies to identify the most attractive investment opportunities. For strategic buyers, they are back in the market in a meaningful way. We view strategics in two buckets — large private equity-backed businesses that are continually looking for acquisitions like Granicus or CivicPlus, or publicly traded strategics like Tyler or Motorola Solutions. Both buckets have significantly ramped up their mergers and acquisitions activity in the past year.
- Driver No. 5: Valuation multiples are growing and highly correlated to key financial metrics. Any seller assumes the risk of the unknown regarding how their business will be valued, and nothing is worse than the effort and distraction of a sale process that results in an answer that is below expectations. What mitigates that risk is clarity around valuations, and clarity is rooted in a large number of deals and data points where valuation multiples are correlated to key financial metrics. See point No. 3 above — that has largely come into place in the last year, providing clarity and the associated confidence to pursue a transaction knowing what the answer is likely to be.
- Driver No. 6: Market activity starts a “flywheel.” In 2021, we saw a cascading effect from the large volume of activity in the early part of the year, which catalyzed even more activity in the subsequent quarters (e.g., Granicus receiving an investment from Harvest, then subsequently acquiring Bang The Table, OpenCities and GovQA). Large gov tech businesses that raised capital looked down market to find attractive M&A opportunities, private equity firms that missed out on the initial activity began to ask themselves “who else is out there” and started to pursue those businesses aggressively.
Accordingly, some 2025 predictions:
- 2025 sets the new record year in gov tech
- Record valuations are established
- Private equity continues to drive 80 percent-plus of activity
- Deal counts are balanced among sub-$100 million, $100 million-$500 million and $500 million-plus enterprise value deals
- Transformational acquisitions happen (e.g., two $1 billion-plus valued businesses merge)
- Volume in public administration outweighs public safety, reversing the trend of public safety being a more active market
