Government information technology (IT) service providers have been reaping the benefits of the government's ongoing transition to cloud computing, particularly at the federal level. In the first half of 2023, the U.S. government allocated $1.7 billion in IT services contracts, marking a 6.3% increase year-over-year compared to the previous year's $1.6 billion, according to USASPENDING. Federal IT contract awards have been directed towards maintaining existing capabilities and establishing infrastructure for new IT systems. The U.S. intelligence community has been leading the charge in embracing cloud computing, advanced data analytics, and modernization efforts.
Although major intelligence community IT contracts tend to be awarded to large public companies, middle-market players with innovative capabilities have seized opportunities to meet the demand for specialized services and disruptive software systems. For instance, System High, a provider of IT protection solutions and a portfolio company of Enlightenment Capital, secured a $50 million contract in July 2023 to handle the controlled destruction and disposal of classified IT systems for an undisclosed member of the U.S. intelligence community, as reported on System High's website. These instances illustrate that while the broader U.S. government continues its IT modernization efforts, the intelligence community is anticipated to drive investment in national security IT through contracts and strategic collaborations with nimble and innovative contractors, thereby fostering a vibrant merger and acquisition (M&A) landscape for middle-market players. ESF Equity, LP has maintained its activity in the Government IT Services sector, with ongoing deals encompassing software development, E-procurement, identity management, and IT modernization.