2024 Year in Review

Includes defense, intelligence, and federal civilian contractors as well as providers of diversified government services related to IT and consulting services that help support mission critical, core operational, and administrative functions of government agencies.

On August 23, the U.S. Small Business Administration (SBA) proposed a new rule regarding small businesses that make disqualifying size / status recertifications. The rule has significant implications for small business M&A and the ability of small businesses to continue performing on certain set-aside work after a disqualifying recertification.

On December 17, the SBA made its final ruling, which included the following changes to become effective January 16, 2025: new minority controls for investors in 8(a), woman-owned, and service-disabled veteran-owned small business (SDVOSBs) that allow minority investors to block “extraordinary” decisions related to equity ownership, dissolution, bankruptcy, and M&A; and changes to recertification rules that would make small businesses that recertify as “Other Than Small” ineligible to receive future Task Orders (TOs) or have option years exercised on multiple-award set-aside contracts (including GSA Schedule contracts). The changes include an exception for recertifications after small-to-small M&A and would not go into effect until January 17, 2026, one year after the effective date for the other rule changes.

The Biden administration recently notified Congress of an $8 billion weapons package for Israel which will be the largest the U.S. government has authorized since the $20 billion weapons package shortly after the beginning of the conflict with Hamas in 2023. The package will consist of thousands of bombs, missiles, and artillery shells, and precision munitions. $6.75 billion is allocated to fund two different precision kits, small diameter bombs and 2,000-pound bombs.

On December 23, 2024, President Biden signed the FY 2025 National Defense Authorization Act (NDAA) into law. This authorized $895.2 billion in funding for the Department of Defense and Department of Energy national security programs, a $9 billion increase over 2024.

The Department of Defense’s fiscal year 2025 budget offers significant insights for government contractors seeking to align with the department’s priorities. $143.2 billion will be allocated to research, development, test, and evaluation, with the purpose of enhancing innovation, modernization, technology advancements, and strengthening U.S. National Security.

The S&P 500 soared 24% in 2024, fueled by enthusiasm for Artificial intelligence and the tech sector. The “Magnificent Seven” stocks drove over 50% of the S&P 500’s returns with NVIDIA and Tesla’s stock price rising 171% and 63%, respectively.

In September, the Fed cut interest rates by 50 basis points, marking the first rate cut since the onset of the COVID pandemic and the massive fiscal stimulus that followed. The Fed followed its aggressive first move with two further 25 basis point rate cuts in November and December.

With the result of the presidential election in early November, the Government Contractors index dropped precipitously amid fears of curtailed government spending and the Department of Government Efficiency (DOGE) initiative.

2024 DGI M&A Activity rebounded to levels in line with 2020 and 2021 after a slow 2023 by transaction count. CACI International (NYSE: CACI) was one of a handful of strategic acquirers that completed multiple transactions in 2024, completing two in October with a combined enterprise value (EV) of ~$1.6B. Arlington Capital Partners (ACP) and Godspeed Capital led financial buyers with 9 transactions completed in 2024, the former having announced the $4.4B EV sale of its BlueHalo platform to Aerovironment in November.

Comprised of firms that provide solutions, components, and services to the commercial, industrial, municipal, and agriculture markets. This sector is less volatile and will see fewer ebbs and flows as the market fluctuates.

The American Water Works Associate, Association of Metropolitan Water Agencies, along with representative organizations from U.S. manufacturing and chemical industries filed a petition against the EPA’s ruling which seeks to limit the presence of PFAS in drinking water. The petition alleges that the Administration significantly underestimates the cost of with regulatory compliance on industry groups that will be required to install new treatment processes to meet the EPA’s 2029 deadline.

In late April, President Biden signed a national security memorandum to strengthen the resiliency of U.S. critical infrastructure. The memorandum grants the DHS oversight of critical infrastructure and requires it to periodically submit National Risk Management plans to summarize key findings. The memorandum was passed after the NSA, FBI, CISA, and TSA discovered that the Chinese-backed hacker group, known as “Volt Typhoon”, infiltrated aviation, maritime, pipeline, sewage, and water organizations.

According to Financial Times, the vast data center network in Northern Virginia consumed over 1.85 billion gallons of water in 2023, up 64% from 1.13 billion gallons in 2019. The sustainability of this increase in demand has called into question whether the use of water-cooling technology is viable in data centers. With an additional 12 data center applications pending, investment in sustainable water usage is likely to follow.

U.S. municipal bond issuances hit a five-year low in 2023 as continued high interest rates deterred utilities from borrowing to finance capital expenditure or refinancing existing debt. While lower municipal debt offerings is usually seen as a leading indicator of reduced capital expenditures by municipalities, the combination of available funds from the Bipartisan Infrastructure Law and the large amount of refinancing that occurred during the pandemic due to cheap capital, means that many municipalities are well capitalized and deferring new debt offering until interest rates fall. Falling interest rates throughout 2024 led to a significant increase in municipal bond issuances as localities looked to raise new capital and refinance their existing debt. New municipal bond issuances as of November 2024 reached $507B, an almost 32% increase from the previous 12-month period.

In September, a federal judge ordered the EPA to further regulate fluoride in drinking water due to the potential risk overexposure poses to the intellectual development of children. The EPA is conducting risk assessments on current practices – presently, 75% of Americans have fluoride added to their drinking water.

TMG’s Infrastructure index, comprised largely of construction companies, was the standout of 2024. The index was led by Primoris Services Corporation and Emcor, which both saw share prices double in the last twelve months. Growth was largely due to rising revenue from Primoris and Emcor’s respective focuses on the energy and data center markets, two industries experiencing significant growth.

TMG’s remaining indices (Water Utilities, System Solutions, and Components) lagged the S&P. One standout, Water Utilities, ended the year down over 7% due to continued inflation which makes the relatively steady dividend yields of utilities less attractive, especially compared to the increasingly tech driven S&P 500.

2024 saw a continued decline in M&A activity across the infrastructure sector due largely to the persistent higher interest rate environment compared to previous years. The industry is heavily reliant on debt to finance the construction costs of projects that may not yield revenue for a number of years, creating an additional cost that has reduced investors’ interest in the industry.