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Carlyle and Warburg Pincus just invested in Neogov, an HR specialist for the public sector. Execs from the PE giants gave us the inside track on how the deal came together.

Submitted by Tech Insider on June 2, 2021 - 9:00am

Ashley Evans and Vishnu Menon side by side

Summary List Placement

Warburg Pincus and the Carlyle Group are spearheading a large investment into a firm that helps public-sector entities such as local governments hire, train, and manage their employees.

The two private-equity giants announced Tuesday they made an investment into Neogov, a software firm founded in 2000 that offers human capital management solutions for state and local governments, education, and public safety customers. Services include everything from human resources to police enforcement accreditation. 

The terms of the deal were not disclosed, but Carlyle's portion of the investment was more than $300 million, valuing Neogov at more than $1 billion, according to a person familiar with the matter. 

The investment came from Carlyle Partners VII, an $18.5 billion fund that deploys majority and strategic minority investments mainly in the US. 

While Carlyle is a new investor into Neogov, Warburg Pincus first backed the company in 2016. A representative for Warburg Pincus declined to disclose the size of the firm's most recent investment.

Ashley Evans, a Menlo Park, California-based Carlyle Group managing director who is leading the firm's efforts around Neogov said it solves a major hurdle for government entities.

"For the public sector, hiring employees is really challenging," Evans said, noting "really rigorous eligibility requirements and standards, particularly around civil service-oriented employees."

Evans and her team are looking to make it easier for Neogov to onboard new clients at the state and local levels, in addition to potentially leaning on its decades of experience lobbying for portfolio companies in Washington, D.C.

Evans, Neogov CEO Shane Evangelist, and Vishnu Menon, a managing director at Warburg Pincus, shared details with Insider on how strategic M&A and expanding Neogov's sales and marketing operations will be central to its future.

Collaboration between investment giants

"Like any great partnership, it was years in the making," Evans told Insider when asked about how the deal originally came together. 

Warburg Pincus originally connected Neogov and the Carlyle Group around a year and a half ago.

Menon, a tech investor who leads the Warburg Pincus' west coast office, said Carlyle approached the possible transaction with a fastidious interest in the nuances and intricacies of Neogov's business.

"What they did a very good job of was establishing very deep knowledge of the end markets, very deep knowledge of acquisition targets for Neogov, and build credibility with Shane, who has been a superstar for us in this investment," Menon said, referring to the company's CEO.

"They demonstrated credibility early on," he added. "It became clear that we would be hard-pressed to find a better partner for growing a business in government technology, given their franchise."

No stranger to TMT deals, Warburg has invested upwards of $22 billion in more than 340 technology companies since the firm's inception. Other software investments it's made have been in companies including Avalara, Procare Software, and Qualifacts.

Meanwhile, Carlyle's TMT investments have included deployments into companies including ZoomInfo, HireVue, and Veritas. Evans sits on the boards of those companies, and will join Neogov's board, too.

A seat at the table in Washington

Carlyle, which is based in Washington D.C., also brings another skill set to the table: its savvy for helping navigate complex public sector affairs.

The firm has deep roots in public service — cofounder David Rubenstein, for instance, spent time as a domestic policy advisor in the Jimmy Carter administration.

Frank Carlucci, former Secretary of Defense under President Reagan, went on to chair Carlyle until 2003.

"When I think about why it is that Carlyle is a good owner here, it's the fact that we have that experience in government, which is very very deep," Evans said.

"We have a network of operators who have worked with us for many years and who themselves have great relationships and reach into various aspects of the government."

In Neogov's case, the business also has growth potential among clients at the national level, namely federal agencies. In the past, Carlyle has backed tech firms like Unison and Coalfire that do work for federal government clients, meaning that it's "well-placed to support the expansion of the business into this area," Evans said.

Plus, she added, the Carlyle Group has experience supporting some portfolio companies by successfully lobbying federal government officials on Capitol Hill.

Now, Carlyle could do it again for Neogov, such as by lobbying lawmakers to gain support for federal funding for police officer accreditation, which is a key part of Neogov's business. 

"It's that knowledge of how government works, how legislation happens, how to influence and have the right relationships that I think we can bring to support this company's initiatives," Evans said. 

M&A will be a key pillar of Neogov's future growth strategy

With the latest investment closed, Evangelist is hitting the ground running with Evans, Menon, and both their teams. 

High on the priority list is sussing out acquisition targets for Neogov.

"This is the classic first 100 days — we run through the plan, we talk about additional investments that we believe the business should make, we think through strategic opportunities from an acquisition perspective," Evangelist told Insider. "At the end of those 100 days we come up with the culmination of a plan everybody gets excited about — and then we go execute."

Neogov has already had success making deals.

In late 2020, Neogov announced a deal to acquire PowerDMS, a cloud-based system focused on upgrading compliance management software for organizations in law enforcement, healthcare, and corrections.

Another area ripe for expansion is sales and marketing.

The company has penetrated its potential client market by up to 60% in California, Evangelist said, but there is opportunity in other states.

"A significant amount of what we're doing now is building out our sales organization, as well as our marketing organization, to go attack those under-penetrated markets," Evangelist said.

Warburg Pincus, for its part, is enthusiastic about the growth potential that this new investment could produce for a firm it's already spent five years helping to grow and steer.

"When we think about where our calories go," Menon said, "it's doing everything we can to enable organic growth, and bringing together the chess pieces in M&A, which will be a prominent part of the strategy going forward."

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