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There is no doubt that construction activity in the mergers, acquisition and private equity space is more prevalent throughout most of the country than has been seen in many years. This prevalence is a positive trend for the industry as it increases opportunities for growth and offers more options with succession planning for construction business owners.

As the result of a growing population in metropolitan areas and aging infrastructure, construction spending in the U.S. continues to rise.

According to Baker Tilly Capital, LLC’s Engineering and Construction M&A Update: H2-2017, construction spending totaled $648.8 billion in the second half of 2017, which is a 12 percent increase from the first half of 2017 and a 2 percent increase from the second half of 2016. Overall, since the first quarter of 2012 through 2017, construction spending has steadily increased.

Baker Tilly’s report also indicates that the American Institute of Architects (AIA) is estimating 4 percent in growth for non-residential construction spending during 2018 and 2019. The AIA’s forecast cited natural disasters, tax reform, infrastructure focused legislature and business confidence levels as reasons for growth in the engineering and construction (E&C) arena.

Based on increased spending and forecasted growth, it should not be a surprise that private equity and M&A activity is alive and well in the construction industry.

Private Equity

Historically, private equity firms have not been heavily interested in the construction industry. General contractors rarely garner private equity interest primarily because their project-based work does not generate a recurring revenue stream. However, the private equity market has become more interested in construction firms that specialize in certain niche areas, such as infrastructure, HVAC or electrical.

Private equity interest in subcontractors is supported by time and material maintenance contracts, which consist of recurring revenue streams with long-term customers. Predictive revenue streams such as these long-term maintenance contracts are more attractive to outside buyers.

The increased volume of deals and higher enterprise values in the construction marketplace today are getting the attention of more private equity groups throughout the country.

According to Pitchbook, the number of deals closed in the E&C space increased from 48 to 65 from 2016 to 2017, which represents an approximate 35 percent increase. Additionally, the total value of these deals increased from approximately $3.2 billion in 2016 to $7 billion in 2017 (a 118 percent increase).

According to GF Data, the multiples of earnings before interest, taxes, depreciation and amortization to total enterprise value (TEV) for infrastructure and other specialty contracting E&C firms has continued to rise, nearing the peaks during the 2006 to 2009 time range.

Specifically, specialty trade contractors are seeing multiples near six times, which is approximately 5 percent growth from the 2010 to 2013 time frame. It is also approximately 10 percent higher than utility construction firms and approximately 13 percent higher than heavy and civil engineering construction firms.

Mergers and Acquisitions

If public company activity is any indicator, M&A activity will continue to thrive in 2018, specifically in the E&C space. According to FMI’s 2018 M&A Trends for Engineering and Construction Report, “more than 20 percent of all M&A activity in the engineering and construction industry in 2017 had a public company buyer, which is the highest level since 2011.”

Given the world’s growing population and aging roads and bridges, the need for construction firms with a focus on infrastructure continues to grow. FMI’s report also indicated, “the world will need to spend $94 trillion on infrastructure by 2040 to meet demand.” Based on this forecast demand, M&A activity should continue to increase in the infrastructure niche.

General contractors have not historically been attractive acquisition targets in the M&A environment. However, as they are looking to diversify their revenue streams and integrate business lines, the acquisition of a specialty contractor could make sense.

Similar to the cyclical nature of the construction industry, it is not expected that the increased activity will continue in perpetuity. However, the M&A and private equity space offer new avenues for construction firms to divest, diversify and grow. These opportunities should continue to be an attractive option while the economy is strong.

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