The all-pervasive nature of private equity
Morrissey Goodale outlines the impact of private equity on design and environmental engineering firms
If you’ve been feeling like there’s a lot more private equity in the architectural engineering (AE) industry, you’d be correct. The numbers confirm it. Design and environmental firms have been trading in their employee capitalization models for private equity at a record clip. But it’s more pervasive than just stats. “Private equity”—the concept—is the elephant in the room when it comes to decision-making about corporate matters, strategy, and culture all across the industry.
Statistics
There are now 114 private equity-backed “platforms” in the AE industry. That’s up from 50 just 5 years ago. Of the 163 M&A transactions this year, a record 44% have included a private equity-backed acquirer or recapitalization by a financial sponsor. Of the 69 ENR Top 500 firms that have been acquired or recapitalized since 2020, 85% have involved private equity. In 2016, just 4 of the top 100 firms in the industry were capitalized by private equity. Today, it’s 21. The “smart money” (private equity, family offices) is head over heels in love with our industry and is piling in faster than ever.
Corporate conundrums
The rapid influx of private equity has caught the attention of leadership teams of employee-owned and publicly traded firms. And they have incorporated it into an important part of their corporate and governance discussions. In boardrooms across the country, the topic of private equity is now either a semi-regular or standing agenda item. As they watch their peers recapitalize with equity out of Miami, New York, Chicago, Los Angeles, and Toronto, leadership teams want to know if this model could work for them. Stoked by rumors of valuations at nose-bleed altitudes, internal board members of a certain age with sizable ownership stakes are advocating for a fulsome examination of the financial-sponsor option—often for personal, rather than corporate, reasons. This is particularly challenging from a cultural perspective for employee-owned boards that assumed their commitment to employee ownership was universal and iron-clad. Concerned that internal leadership and ownership transition is a bridge too far—and finding a sale to a brand-name strategic as unappealing—more and more boards are selecting the apparent blank canvas, open checkbook, and ability to retain their brand name of a private equity recapitalization. So, while a representative from private equity may not be sitting in the boardroom, the topic itself is now front and center.
Strategy upended
More than a few “sleepy,” historically slow-growth ENR 500 brands have been recapitalized by private equity over the past four years. Newly pumped up with outside capital and professional M&A management, they are now growing rapidly through acquisitions. And this dynamic is working its way into the strategic planning of employee-owned firms. Ever more frequently, they are finding themselves getting outspent for acquisitions and talent by these newly rejuvenated brands. They are experiencing fiercer competition for market share. And in many cases, they are finding their traditional “home” markets—which they had considered “safe”—now under assault. More and more, strategy and strategic planning is taking into account these new market dynamics and compelling teams to find new ways to reveal and deploy relative competitive advantages. (Word to the wise—a VRIO analysis is a great way for leadership to objectively assess their internal capabilities and innate competitive advantages. And before you ask, it stands for Value, Rarity, Imitability, and Organization.)
Living rent-free in the competition’s headspace
Whenever we undertake strategy engagements, we like to conduct some good old-fashioned, one-on-one confidential interviews with firm leaders, managers, and employees. (Sure, we could do this with AI—and we have experimented with that—but nothing beats a real conversation for getting candid responses that can result in meaningful change for the client.) We like to ask a variety of questions during these interviews. Some are about the present, others about the future. Many focus on positives and suggested improvements. We also ask questions like “What’s your greatest concern?” or “What’s your greatest fear?” or “Fast forward 10 years and your firm has failed, what does failure look like and why did it fail?” (I know it seems like that escalated fast from the first two questions to the third, but that’s the way we roll.) What is remarkable is that when we ask those three questions of our employee-owned clients, one of the top responses is ALWAYS some variation of “selling to private equity.” We NEVER hear this response when we ask these questions in our work with our publicly traded or private equity-backed clients. Private equity somehow has gotten into the psyche of employee-owned firms as the bete noire de jour.
So yes, private equity is pervading seemingly all aspects of the industry. Not only is it having a meaningful impact on the capital composition of the design and environmental industry, but it’s also influencing industry-wide corporate, strategy, and cultural aspects.
M&A best practices award application window open until May 17: Applications continue to roll in for this year’s M&A Best Practices Award, which will be presented at the Western States M&A and Business Symposium at the luxe Wynn Hotel in Las Vegas, June 12-14. If you’d like your firm to be considered for the award and the industry recognition that comes with it, we invite you to complete the simple application form here. The application should take no more than 20 to 30 minutes to complete. The award recipient will be notified in early June.
Original content can be found at Morrissey Goodale.
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