Servicing the public sector: what investors need to know
Companies who service the public sector directly or indirectly are attractive to investors because of the revenue visibility and potential access to exclusive procurement frameworks. However, there are risks associated with investing in businesses that serve the public sphere, as funding cuts could threaten the business model.
How can investors understand and qualify these risks?
Sizing public sector spend
Navigating the market (dynamics, size, opportunity, growth) can be difficult as targets can be impacted by public sector spending directly, or indirectly. The investor needs to identify all the funding streams that drive spend on the target’s services and map any framework agreements relevant to it. Funding typically comes through two channels:
- Directly through frameworks, such as NHS funding (e.g., managed services frameworks); or through independent organisations that receive public money and then spend it through the same process (utilities, such as water companies).
- Large private companies (usually listed) that receive government funding on major projects (infrastructure, rail, roads, defence, etc) who subcontract to other, smaller, players; these are likely to be PE targets, and they will be exposed to a broader supply chain.
Quantify the return on investing in frameworks
A framework is a “short list” of approved providers of a product or service, usually run by a public or publicly sponsored organisation. Tenders are posted to a framework by participating organisations (customers), and can be bid on by businesses (e.g. target company) that are on the framework agreement.
The face value and the duration of the work is usually indicative, and tenders often have a built-in extension mechanism. However, the total value of services/products delivered by the end can be greater than the originally advertised face value. Access to framework agreements can be off putting with a drawn-out process to meet a long list of requirements and stiff competition. On the framework, however, a provider only competes with a handful of other shortlisted players.
Under the current legislation from 2015 regulating access to frameworks, if providers drop off a framework (e.g., they stop trading, get disqualified, etc.) the remaining provider(s) are the only ones through which services can be purchased. The advantage for providers on the framework is they continue to be insulated from providers outside the framework. However, the Procurement Bill, which recently had its second reading parliament proposes a more dynamic system where providers leaving a framework can be replaced. This is likely to change the competitive dynamics going forward and is something that should be closely watched.
Mapping out relevant framework agreements for a given company or sector is a very valuable way of assessing the market and competitive opportunities. This should include historical vs expected spend, a timeline of upcoming spending periods/events, and the capabilities required to get on frameworks.
Armstrong has helped several clients map out public sector spend across different sectors including environmental services, water utilities infrastructure, primary and secondary education, major defence programs, as well as translation & interpreting services for the NHS, local councils, police and the court system.
Please get in touch if you’d like to discuss opportunities in servicing the public sector.
Jack Hibbs, Engagement Manager
+44 7883 296 346
Federico Romanelli, Senior Consultant
+44 7908 906 907