The $900 Billion State and Local Government Opportunity

The $900 Billion State and Local Government Opportunity

By: David Barrosse

April 24, 2022 — One of the fastest-growing areas at Capstone is working with companies that sell to state and local governments (SLGs). Covid recovery funds, municipal financing, and the $1 trillion infrastructure bill passed by Congress earlier this year, created a perfect storm of funding for SLGs. The need is also enormous.

Capstone is lucky to have two experienced leaders heading up our work for companies that focus on providing goods and services to SLGs: Matt Wiederrecht and Elena McGovern. Matt is a Capstone veteran who has been our point person on municipal bonds, state and local budgets, and a host of other special situations. Elena leads the Capstone private markets team, which has overall responsibility for the quality of our private equity regulatory due diligence product. Elena and her team have also focused intensely on federal, state, and local procurement issues.

What follows is an interview conducted with Matt and Elena about this important trend.

Why is government procurement a hot trend right now?

MW: Governments are flush with cash right now because of the federal spending in the wake of Covid. Much of that money has to be spent quickly – in the next couple of years.

EM: Matt is exactly right. Capstone predicts that SLG spending will grow by $900 billion between 2022 and 2027. This translates into unprecedented investment opportunities at all levels of government and creates openings for businesses across multiple sectors to build or deepen their public customer bases, both in terms of the goods and services that governments want to invest in and tools to help them manage the funds associated with requirements such as grants management, budgeting, expense reporting, and the like.

What are the greatest opportunities we see for business?

EM: The government’s “back office” is being transformed. The COVID-19 pandemic has forced everything from government workers to citizen engagement online, catalyzing a major growth area. Several services that SLGs used to require an in-person visit for are moving irreversibly virtual. SLGs had to figure it out in real-time over the last two years, but moving beyond the pandemic, opportunities to enable governments to be more strategic in their ability to provide public services via more efficient systems and platforms is going to be a big opportunity.

MW: Because of the dynamic Elena is describing, SaaS players and other IT solutions will be a major area of growth. The other opportunity is consolidation within the fragmented Govtech sector. Govtech companies tend to focus on narrow applications and services, and we believe the industry is ripe for consolidation so SLGs can deal with a one-stop-shop.

What are the capital markets companies most impacted?

MW: Tyler Technologies (TYL) is a leader in this space and ideally situated to ride the coming wave.

What private market sectors are benefitting the most?

EM: One underappreciated area is companies that facilitate public sector procurement, especially at the state and local level. One example is cooperative purchasing entities, such as OMNIA Partners. Civic engagement software platforms such as Granicus are another example. And finally, SaaS platforms that focus on the needs of public sector entities. Outside of tech and IT, the broader infrastructure space is set to grow, as well as companies that provide solutions for jurisdictions looking to increase their resiliency to climate change.

How does Capstone help our clients?    

MW: No business can have a public procurement strategy without having a very sophisticated understanding of how, when, and why governments at all levels spend money. We really understand SLG budgets, having worked on the topic for the better part of a decade. We also have substantial experience tracking federal spending (Covid stimulus, FEMA funding, Infrastructure, Investment and Jobs Act (IIJA), etc.) through agencies down to the SLG level and how this funding can be compounded with SLG budgets.

EM: Government budgets are inherently political documents, as they are the manifestation of priorities and intentions by policymakers. Capstone works with clients looking to build or grow their public sector customer base by giving them a line of sight through the public procurement process starting at that foundational level—and casting light on the next few years of budgetary processes and priorities—all the way through helping them understand the operations of particular agencies and offices. We are adept at drawing that line from the policy down through the flow of money to the eventual procurement agent with a direct application of our analysis to the particular product and service that a client is focused on.

What has our experience been to date?

EM: It is no surprise that since the beginning of the COVID-19 pandemic, Capstone has been very busy working with a diverse set of clients looking to understand and take advantage of federal stimulus funding. We’ve spent a lot of time in the IT/SaaS space, but also on more direct procurement channels and large infrastructure projects. Our work for a global elevator company, in particular, highlighted billions of dollars of investment opportunities in the airports and mass transit space through a bespoke analysis of the IIJA and how that money was going to be deployed by localities and transit agencies, giving our client a multi-quarter leg up on the competition. Beyond the pandemic, we are also experts at FEMA and emergency/disaster response, which due to the unfortunate impacts of climate change, will be a continuously expanding area of policy and regulatory attention and procurement needs.

MW: Also, no two states are the same. A sentiment I have heard many times is, “if you’ve looked at one state, you’ve looked at one state.” So there really is no substitute for state-by-state analysis.

Why is Capstone uniquely situated to help?

EM: This type of work is what Capstone does best. We take big, complex policy issues and draw a straight line down to a particular sector, business, or product. Capstone makes predictions for a living, and predicting how that policy translates into shovels in the ground is our bread and butter. It also is what makes us incredibly unique. And we do this not only on the due diligence side of things for our private equity clients, but for companies as well. We’re building go-to-market strategies for large companies with the driving force of policy and regulation at their core, giving our clients differentiated ways to seize opportunity and win.

Elena McGovern

Read more about Elena

Elena leads Capstone’s private markets team. Learn more about how her team helps private equity investors navigate policy and regulatory issues here.

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