HW Government Technology Introduction

Harris Williams (“HW”)

  • 25+ years and more than 1,000 closed transactions 
  • 350+ professionals across eight office globally
  • 170+ closed transactions in the last 24 months
  • 10 industry groups

Focused Advisory Services

  • Mergers and acquisitions (M&A)
  • Capital raises 
  • Corporate divestitures

Consistent Recognition for Quality

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HW Technology Media & Telecom (“TMT”) Group

  • 35+ dedicated TMT professionals 
  • TMT offices include Boston, San Francisco, and London

Key TMT Themes

  • SaaS / Cloud
  • Data & Analytics
  • Digital Transformation
  • A.I. / Machine Learning

Horizontal Focus Sectors

  • Application Software
  • Cloud Managed Services and Hosting Solutions
  • Compliance Solutions
  • CRM and Marketing Automation
  • Human Capital Management
  • Infrastructure and Security Software
  • IT and Tech-Enabled Services
  • Marketing, Research, and Insights Software

Vertical Focus Sectors 

  • Architecture, Engineering, and Construction Software
  • Education Technology and Services
  • Energy Technology
  • Facilities and Real Estate Software
  • Financial Technology and Payments
  • Government Technology
  • Healthcare IT
  • Industrial and Supply Chain Technology
  • Internet and eCommerce
  • Retail Technology

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Case Study: Kalkomey

HW’s TMT Group advised Kalkomey, a portfolio company of Inverness Graham, on its sale to Cove Hill Partners.

screen_shot_2020-07-21_at_5.09.45_pm_0.pngTransaction Overview

Kalkomey is a leading provider of online recreational safety education reaching all 50 U.S. states, as well as Australia, Canada, Guam, Mexico, New Zealand, Puerto Rico, and the U.K.. The Company works hand-in-hand with governmental agencies to provide tailored online safety education courses and certifications for boating, scuba diving, hunting, snowmobiling, and off-roading.

Kalkomey’s regulatory-approved safety education courses provide official safety certifications to nearly a million students annually. The Company’s cloud-based government agency software offerings drive operational efficiencies of key workflows from licensing and registration, to certification and event management, to compliance and reporting.

Cove Hill is a long-term-oriented private equity firm focused on partnering with management teams to build market-leading technology and consumer companies. The firm manages a long-duration fund with over $1 billion of commitments from its investors and founders. Based in Boston, Cove Hill has an innovative structure that provides the flexibility to enable a patient, concentrated, and value-add approach in a small portfolio of long-term investments.

Relevant Sub-Sectors

  • Government Technology
  • Financial Technology
  • Vertical Software

Government Technology Taxonomy

Operations

Solutions focused on supporting core operational and administrative functions of government agencies

  • ERP
  • Financial Mgmt. 
  • Procurement
  • Operations
  • Content Mgmt. & Records
  • Licensing & Permits
  • Taxation & Appraisal 

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Asset and Resource Mgmt.

Solutions focused on supporting public infrastructure planning, asset management, and environmental services

  • Environmental Svcs. 
  • Parks & Recreation
  • Smart Cities & Transportation
  • Utilities
  • Asset & Resource Mgmt. 
  • Public Works

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Civic Engagement

Solutions focused on facilitating communication between government agencies and constituents

  • Communication
  • Citizen Engagement
  • Service Request Mgmt. 
  • Human Services
  • Voter Registration & Mgmt. 
  • Grant Mgmt. 

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Public Safety

Solutions focused on supporting public safety departments, courts and justice systems, and corrections

  • Law Enforcement
  • Justice & Corrections
  • Emergency Medical Response
  • Fire Safety
  • Courts Mgmt. 
  • Security & Intelligence

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Select Recent HW Govtech Transactions

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Government Technology Market Overview

The govtech market is vast and represents significant opportunity for next-generation solutions.

U.S. Government Technology at a Glance

At over 35% of GDP, government represents the largest segment of the U.S. economy

  • 90,000+ State and Local Government Entities1
  • 22M+ Total U.S. Government Employees2
  • 450,000+ IT Systems Across State and Local Government3
  • $1.5T+ Citizen Payments to State and Local Government
  • $750B+ Federal Grants for State and Local IT Initiatives4
  • $95B+ Total Annual Federal IT Budget5

U.S. Government Technology Spending6

$ in Billions USD

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Industry Observations

  • Demand for modern government software and technology offerings continues to increase as Federal, state, and local leaders look to upgrade legacy systems to improve efficiency, contain costs, and seamlessly deliver services to their constituents
  • Cloud-based software in particular continues to gain momentum in the public sector, driven by a combination of legislative action and mounting strategic imperatives, compelling government officials to adopt solutions that can be configured for workflows and provide greater interoperability across agencies
  • Development of customized technology solutions continues to present challenges as government officials grapple with expensive and complex maintenance of legacy systems that are ill-equipped to meet current technology needs
  • COVID-19 has accelerated the shift to digital government services and the speed at which agencies are moving technology to cloud environments, resulting in a ripple effect on the demand for solutions that enhance civic engagement, security, transparency, and operational efficiency

Market Observations 

  • The govtech market continues to attract strong interest from financial sponsors and strategic acquirers eager to invest in next-generation software solutions capable of modernizing government operations and services
  • Consolidation of software vendors persists given the level of fragmentation across the industry and the amount of specialized point solutions operating across government verticals, many of which lack meaningful scale
  • With the backing of leading financial sponsors, several diversified platforms have emerged to take on incumbents, creating greater competition and drive for innovation across the govtech landscape
  • Digitization of government services has become an increasingly attractive segment in light of the current macroeconomic climate given the need for minimizing in-person contact, imperative for cost reduction in response to potential budget constraints, and the breadth of citizen- and business-to-government transactions

State of Government Modernization

Politicians, IT leaders, and citizens are eager for government agencies to deliver modern digital solutions that improve government operations and digital service delivery.

Modernization is Underway, But Significant Runway Lies Ahead…

Less than a quarter of all U.S. government technology systems have been modernized, leaving significant opportunity for adoption of cloud-based software

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... And Cloud Adoption is Accelerating

  • COVID-19 has exposed government’s need to improve technology infrastructure to better serve employees, citizens, and businesses
  • The silver lining to the ongoing pandemic is the widespread recognition that investment in modern, cloud-based software solutions is paramount to adapting to an increasingly digital environment

“We’ve seen more innovation in the past two months than we’ve seen in the past two years in government… it’s not that [government agencies] weren’t moving, but sometimes you have to move faster for a reason. We’ve seen leadership stepping up and saying ‘we have to create the right systems’”

Teresa Carlson, VP of AWS Worldwide Public Sector

Top Priorities for State CIOs7

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Govtech Industry Tailwinds

Government entities are increasingly seeking cloud-based platforms that can be deployed across agencies to replace disparate legacy systems, minimize organizational silos, and reduce operating costs.

Migration to the Cloud

  • Government entities continue to transition away from legacy on-premise technology systems to unified cloud-based platforms that can be leveraged across Federal, state, and local agencies and configured—not customized—for government department workflows
  • Since the establishment of the Federal Risk and Authorization Management Program (FedRAMP), government cloud adoption has increased exponentially, yet less than 5% of government agencies operate entirely in the cloud and nearly 30% have not taken any action8

Modernization of Operational Workflows

  • U.S. government agencies are forecasted to spend nearly $125B on software and IT services by 2023F—with an emphasis on adopting software that improves operational efficiency—as new legislation, consumer demand for digital services, and cost-saving initiatives accelerate modernization
  • Next-generation technologies like Robotic Process Automation (RPA) have tremendous potential to transform government operations; for example, RPA has been estimated to save 1.3 billion hours on manual tasks if deployed across all U.S. government agencies

Digitization of the Government Experience

  • The current macroeconomic conditions highlight the need for government agencies to remotely deliver services to citizens and businesses that meet the standards and offer similar digital experiences in other industries
  • Digitization of government payments has become a strategic imperative and represents high-impact cost savings; for example, the IRS estimates that the cost of an online transaction can be as low as $0.20, compared to $42 for a payment processed over the phone and $57 by check

Consumerization of Government

  • As web-based and mobile technology has rapidly improved and pervaded nearly all industries, government is playing “catch-up” to reinforce connectivity to and trust with the citizens and businesses they serve
  • Constituents not only expect but now require highly personal and contextual digital experiences across from government, catalyzing demand for intelligent, cloud-based technology capable of delivering relevant and timely information and services

Utilization of Data and Analytics

  • Governments collect and have access to massive amounts of data, but existing legacy solutions are unable to quickly and accurately analyze information and glean real-time insight, hindering decision-making and magnifying operational inefficiencies
  • Predictive analytics and AI can dramatically improve government effectiveness by enabling agencies to be proactive—as opposed to reactive—to reduce crime, enforce food and safety regulation, monitor inspection compliance, and prepare for natural disasters, among other initiatives

Key Themes

  • Digital Citizen Identity
  • Data-Driven Decisions
  • Unified Engagement
  • Modern Architecture
  • Interoperability
  • Cybersecurity
  • Digital Workforce

Recent Insights: Current Demand Drivers in Govtech

Recent social and economic events are all having a dramatic impact on the way government operates.

COVID-19 Shines Spotlight on Government Technology Shortcomings

  • The rapid influx of citizens seeking information and government services online over the past several months has exposed the inability of many agencies to support a dramatic shift to digital service delivery models
  • With jobless claims reaching historic levels and over 30 million Americans on unemployment benefits as a result of the COVID-19 pandemic, public benefit administration websites have been overwhelmed and many have crashed due to the spike in activity
  • While such a dramatic increase in government website traffic may not have been predictable, it reinforces the fact that government technology is decades behind other industries in some cases and agencies are overdue for modernization
  • State Unemployment Websites Crash as COVID-19 Shines Light on Government Technology Failures

Government Website Traffic Skyrocketing9

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Govtech Verticals Attracting Significant Attention in Current Environment

Operations & Workflow Mgmt.

Transition to remote work environments, digital collaboration, and efficient resource utilization

Communication & Engagement

Emphasis on real-time information sharing, shift to digital interactions, and access to services

Voter Registration & Mgmt.

Concerns over election security, importance of voter inclusion, and demand for digital voting solutions

Courts & Criminal Justice

Law enforcement reform, critical need for public safety, and growing backlog of court cases

Recent News and Insights

Government Employment Stable After Two Months of Losses

  • Source: govtech.com
  • Key Themes: Government Workforce
  • Link to Article: Here

Key Takeaways and Insights

  • The global COVID-19 pandemic has had a material impact on nearly every industry, including the public sector, particularly at the local government level where non-education related employment has decreased by over 7% year-over-year through June 30, 2020
  • More recently, public sector employment has stabilized, but the reduction in the labor force has two important implications for the future government technology; first, government agencies are now more pressed to “do more with less,” a reality that has been looming within government, but has been accelerated by the impact of COVID-19; and second, as government agencies downsize, they have the opportunity to realign skills with modern technology infrastructure and applications

Lawmakers Push State IT Funding

  • Source: fcw.com
  • Key Themes: IT Modernization
  • Link to Article: Here

Key Takeaways and Insights

  • While budget constraints are quickly becoming a realty for many state and local government entities, there is widespread recognition that the path to more efficient and cost-effective government is through adoption of technology, and—perhaps more importantly—mounting bipartisan support for investment
  • In a letter from lawmakers to leaders of the House of Representatives, Democrats and Republicans urged legislators to dedicate stimulus funds to technology infrastructure expenditures, the rationale being that enabling digital service and benefit delivery is just as important as the economic relief itself

Private Equity-Backed Tech Companies Help Governments Combat Coronavirus

  • Source: penews.com
  • Key Themes: IT Modernization
  • Link to Article: Here

Key Takeaways and Insights

  • In the wake of technology turmoil caused by COVID-19, private sector technology companies, many of which are backed by private equity firms, have stepped in to help government technology departments quickly improve their systems to achieve digital business continuity
  • The increase in private- and public-sector collaboration and dramatic adoption of new cloud-based technologies will likely serve as a pivotal moment in govtech as state, local, and Federal officials get a crash course in the benefits of modern IT infrastructure and software

Recent Market Activity

Private equity and strategic acquirers are accelerating their investment pace as they seek to create next-generation government software and payments platforms capable of serving diverse agencies.

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Active Government Technology Consolidators

Govtech providers continue to consolidate the highly fragmented industry to establish platforms of scale.

Most Active Govtech Consolidators

Since 2015, the six most active govtech consolidators have acquired over 60 companies

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Drivers of Consolidation

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Select Govtech Transactions

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Carlyle’s Acquisition of Unison

  • Unison is a provider of procurement and contract management software to Federal government agencies and government contractors that leverages machine learning and robotic process automation (RPA) to improve efficiency and compliance
  • The Company’s cloud-based solutions enable more than 200,000 users in Federal agencies, major DoD programs, and leading contractors to efficiently navigate the complex rules and regulations mandated by the Federal government for procurement, grants, and contracts
  • Carlyle previously owned Unison, formerly known as Compusearch from 2005 to 2011, and will support the existing management team in investing in continued product development to expand Unison’s reach, as well as support inorganic growth initiatives
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Omnigo’s Acquisition of QueTel

  • QueTel is a provider of a back-office law enforcement automation software platform for digital and physical evidence, forensic request processing, impounded vehicle management, training, and certification
  • The Company serves over 2,000 customers in 20 different countries and enables them to secure their organizations’ property, control operational costs, and ensure the safety of the general public
  • The acquisition will allow Omnigo and QueTel to expand their portfolio of public safety and security tools to enhance community safety and help law enforcement manage costs and meet compliance requirements
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Francisco Partners’ Acquisition of Smith Technologies (nka RedSail Technologies)

  • Smith Technologies is a provider of operations software solutions for pharmacies (QS/1, Integra, and Powerline), as well as property tax management, billing, and accounting software for local governments (PUBLIQ Software)
  • The Company’s govtech offering, PUBLIQ Software, provides citizen-facing utility billing and payment processing solutions and operational software for financial and property tax management, that help public sector agencies digitize and improve civic engagement
  • Francisco’s carve-out of Smith Technologies from J M Smith Corporation will help the Company accelerate its growth and market leadership by focusing on product investments that address governments’ critical needs
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Thomson Reuters’ Acquisition of Pondera Solutions

  • Pondera Solutions is a leading provider of fraud detection software designed to identify and combat waste and abuse in large government programs by marrying and analyzing program-specific data with third-party information
  • Founded in 2011, the Company serves both the Federal and state government agencies and helps collect hundreds of millions of dollars in improper payments through its advanced analytics platform, while also improving public sector processes
  • Through this acquisition, Thomson Reuters will enhance its product offering in risk, fraud, and compliance and deliver a highly differentiated suite of tools to government customers to reduce fraud
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Audax Group’s Acquisition of Kofile

  • Kofile is one of the largest providers of information management and access systems solutions for local government in the U.S., helping 2,700+ agencies modernize records management across a variety of departments
  • The Company was founded in 2009 and serves more than 50% of counties with over one million residents, including 75% of the country’s fastest-growing counties
  • Audax Group’s acquisition of Kofile will help the Company continue to enhance its existing digital government solution offering and accelerate growth through the development and acquisition of public sector technology offerings

Govtech Landscape Overview

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Relative Public Equity Performance

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Comparable Public Company Operating Metrics9

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Comparable Public Company Valuation Metrics9

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Notable Recent Transactions9,10

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Case Study: PayIt

Business Summary and Transaction Overview

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  • PayIt is a leading provider of next generation integrated digital government software and payment solutions
  • PayIt improves the way citizens interact with government by providing a modern, mobile technology platform designed to simplify the maze of government agencies and provide users with an intuitive, contextual experience
  • The Company received a strategic investment from Insight Partners on March 28, 2019

 

Key Value Drivers

  • Best-in-class software solution with sleek design and differentiated chat-based user experience capable of displacing multiple solutions across government services with a single, unified platform
  • Compelling customer growth and rapidly expanding user adoption, demonstrating the value proposition to both the government and the public
  • Accelerating growth in a highly attractive, underpenetrated market segment overdue for software solutions that drive efficiencies and improve public engagement
  • Robust and growing sales pipeline across diverse market segments, providing significant visibility into future growth
  • Attractive opportunity to augment growth through expansion into new government adjacencies and continued product development

screen_shot_2020-07-21_at_6.15.29_pm.pngProcess Notes

  • PayIt garnered significant interest from a targeted group of strategic and financial buyers across the govtech landscape
  • The Company received numerous compelling offers, with several parties differentiating themselves on value
  • Opportunity for scalability, revenue growth opportunities, and market tailwinds drove a premium outcome for PayIt

Case Study: nCourt and Government Brands

Business Summary and Transaction Overview

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  • nCourt connects government entities and the public through an integrated SaaS civic engagement and payments platform
  • The Company’s solutions improve the operational efficiencies and revenue generation capacity of government entities by streamlining payments and reporting through intuitive web and mobile applications
  • The Company was acquired by Providence Strategic Growth and Greater Sum Ventures as the platform for Government Brands

Key Value Drivers

  • Differentiated, multi-tenant SaaS platform with compelling value proposition for both sides of the government transaction
  • Large addressable market underpinned by favorable industry tailwinds as payments move online and governments become more digitally focused
  • Impressive unit economics and cohort performance with 102% net revenue retention, and accelerating recurring revenue with high visibility
  • Compelling growth trajectory with several recent key customer wins in attractive adjacent markets
  • Attractive opportunity to consolidate fragmented court and judicial software ecosystem and pursue strategic acquisitions to expand its solution offering

screen_shot_2020-07-21_at_6.18.12_pm.pngProcess Notes

  • HW commenced work in late November and began contacting a targeted group of buyers in early December
  • After receiving several compelling offers, shareholders proceeded with Providence Strategic Growth and Greater Sum Ventures
  • HW conducted an expedited diligence process, signing the transaction three weeks after granting exclusivity

HW Insights | Government Technology: The Sleeping Giant Stirs

HW’s TMT team shares its views on the increasingly active govtech sector in a recent article, highlighting the attractiveness of the integrated software and payments opportunities in the segment.

Sector Observations

Government agencies are under increasing pressure to modernize their IT systems, especially those serving today’s digital consumers. That’s opening up a $100B+ opportunity for technology vendors, and for the strategic buyers and financial investors that understand the space.

In this article, Managing Director Tyler Dewing, Director Scott Reinig, and Vice President Mike Quealy of the Harris Williams Technology, Media & Telecom (TMT) Group explain the key drivers of this shift and reveal one specific area creating noteworthy growth opportunities.

Recent HW Govtech Transactions

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Article Excerpt

“Modernizing payments is a quick win for both government agencies and technology vendors,” says Dewing. “For agencies, it delivers an almost instant and significant operational efficiency boost for employees and service improvement for the general public—without requiring a big-budget purchase. For vendors, it creates an attractive revenue model and enables those with a broad suite of solutions to get a foot in the door.”

M&A Advisor of Choice for Leading TMT Companies

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1. Census of Governments

2. US Bureau of Labor Statistics

3. Tyler Technologies

4. GovTech Navigator

5. Whitehouse.gov

6. Gartner

7. National Association of State CIOs

8. Government Business Council

9. Analytics.usa.gov

10. CapIQ

11. Pitchbook

 

The information and views contained in this report were prepared by Harris Williams LLC (“Harris Williams”). It is not a research report, as such term is defined by applicable law and regulations, and is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities or financial instruments or to participate in any particular trading strategy. The information contained herein is believed by Harris Williams to be reliable but Harris Williams makes no representation as to the accuracy or completeness of such information. Harris Williams and/or its affiliates may be market makers or specialists in, act as advisers or lenders to, have positions in and effect transactions in securities of companies mentioned herein and also may provide, may have provided, or may seek to provide investment banking services for those companies. In addition, Harris Williams and/or its affiliates or their respective officers, directors and employees may hold long or short positions in the securities, options thereon or other related financial products of companies discussed herein. Opinions, estimates and projections in this report constitute Harris Williams’ judgment and are subject to change without notice. The securities and financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. Also, past performance is not necessarily indicative of future results. No part of this material may be copied or duplicated in any form or by any means, or redistributed, without Harris Williams’ prior written consent. 

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