Government Collections Sector Evolving into Full Service Market

For those of you who saw the insideARM.com daily news yesterday, you may have noticed the headline article that discussed Gila Corp’s recent acquisition by a private equity firm ("ARM Firm Gila Corp. Acquired by Private Equity Group," Aug. 4). I read this announcement with great interest, as the transaction reflects a trend that I have seen unfolding over the past year.

We typically see a significant increase in buyer interest within the ARM government sector during the first year or so after the selected debt collection vendors begin to receive accounts from a new Department of Education contract. Well, we are still in the midst of this time period for the current contract, as I’m sure most if not all of the vendors can attest. So we’ve seen that interest.

But over the past several months we have also experienced a growing number of strategic and financial buyers who are actively seeking ARM companies with local and state government clients. Why? For several reasons:

• The government market is large and growing – there is currently close to $200 billion of outstanding government receivables at all levels (not including government sponsored student loans originated through guarantors or IRS debt)

• The internal government collection operations are less sophisticated – Outsourcing is producing better and faster liquidation results in many instances

• A growing number of local and state governments need to find additional ways to reduce their budgets – Reducing staff by outsourcing functions such as receivables management is becoming a necessity, not an option

• Acquiring a platform is faster than building one organically, and offers the buyer instant market credibility

There is another reason why certain strategic and financial buyers are excited about acquiring a government receivables management company. They, like me, see the early signs of a revenue cycle management industry forming within this market, a trend that is likely to evolve similarly to the revenue cycle management industry within the healthcare sector.

In the healthcare sector, it began with hospitals and large physician groups outsourcing specific functions (patient eligibility, billing, claims management, etc.), but over time it evolved into contractors managing the entire receivables management process for their clients. This evolution was necessary because of a need among certain healthcare companies to reduce their internal costs in order to survive, a trend we see unfolding with certain government entities as well. 

The formation of a revenue cycle management industry within the government sector is being driven by one simple reality: the acceleration of the federal deficit has significantly reduced the amount of funding available for state governments, which in turn has impacted the funding available for local governments. As a result, many local and state government entities have been required to substantially reduce their budgets, forcing some of them to cut their staff and find other cheaper solutions for their needs.

We are already aware of certain government contractors performing as master servicers for some of their government clients, and it is only a matter of time before these and other service providers end up managing the entire receivables management process. I believe this is a necessary step for certain government entities, and one that offers tremendous opportunities for those companies who have the knowledge and ability to more efficiently manage these operations. 

Mark Russell manages M&A transactions for Kaulkin Ginsberg. To confidentially discuss your business interests, please contact Mark Russell at 240-499-3804, or by email.