The secret wants and needs of leading design firms and PE/FO

This year will see record levels of recapitalization among the ENR Top 500

By Morrissey Goodale July 25, 2022
Courtesy: CFE Media & Technology

Last week, The Mannik & Smith Group (MSG) (Maumee, OH) (ENR #320) announced their strategic partnership with Trilon Group (Denver, CO), which is backed by Alpine Investors (San Francisco, CA), a “people-driven private equity firm.”

In doing so, MSG became the 39th ENR Top 500 Design Firm to announce an outside recapitalization event (defined as either a sale to a strategic buyer or a recapitalization by private equity (PE) or family office (FO)—or for the purposes of this article “PE/FO”) since January 2021. (See Figure 1)

Figure 1. Courtesy: Morrissey Goodale

In any given year prior to the pandemic, maybe 10 of the ENR Top 500 firms would recapitalize externally. That all changed in 2021 when 26 of the top design firms chose this strategic option. Year-to-date, we’ve already seen 13 top designers make the same strategic decision. And Word on the Street is aware of at least 20 such transactions in advanced stages right now. (About half of those will fall apart at the altar.) This year will see record levels of recapitalization among the ENR Top 500. What’s really interesting about this trend is that 32 of the 39 recapitalizations (86%) involve PE/FO capital.

We are often asked why this is happening, why a growing number of the industry’s top designers are swapping out their traditional employee-ownership or ESOP capitalization model in favor of one that involves outside PE/FO. Well, it’s all down to the secret wants and needs of leading design firms.

  1. Can’t get there from here: In the press release from the MSG/Trilon combination, MSG CEO Dean Niese says, “Over the past year, our leadership team carefully considered many options and partners that could help us accelerate our strategic plan.” The key phrase here is “accelerate our strategic plan.” Better than one-third of the top designers that made the choice to recapitalize with PE/FO since January 2021 did so because they were unable to achieve their strategic growth goals fast enough with their existing capital model. They had it all. Record financial performance? Check. Confidence about leadership and ownership transition? Check. Robust and growing backlog with great clients? Check. High-performing, optimistic leadership teams? Check. However, they could not grow fast enough. Specifically, they were unable to grow through acquisitions. Why? Well, ironically because they couldn’t compete with the pricing or terms offered by PE/FO industry players. So, they chose to recapitalize with PE/FO to allow them to reach their goals. Put these firms squarely in the “wants” camp for PE/FO.
  2. Faded glory: Another one-third of these 32 designers chose PE/FO because of what I like to call “brand/operations asymmetry.” These are firms that have a strong brand in the industry. This brand might result from a portfolio of work that includes iconic projects. Or possibly they’re known for being industry leaders in a particular technical niche or project type. But they’ve lost their way operationally. Their brand would suggest they should be generating 20%-plus profit annually. But some combination of leadership dysfunction, management incompetence, or operational inefficiencies has driven profitability to single digits, putting the firm’s future viability in peril. In these cases, PE/FO has essentially “saved” the firm and presents the opportunity for everyone involved to better leverage the power of the brand. These firms needed a PE/FO solution to repair the business and match their bottom lines with their brand potentials.
  3. After the love is gone: The rest of these firms chose PE/FO because they’d either forgotten how to—or no longer wanted to—grow. They were super-profitable, “cash machines” even. But they’d seen anemic or flat growth before and through the pandemic. These typically were firms where the founders had stuck around way too long. There was no leadership transition plan in place (the best candidates had been driven off or had chosen to leave). These firms needed PE/FO to buy out “the old guard” and inject new life into the firm.
  4. Two roads diverged in a yellow wood: But why did these 32 firms elect a PE/FO solution to their challenges and not a sale to a strategic acquirer? There are likely two reasons. The first is that most “pure” recapitalizations by PE/FO allow the recapitalized firm to keep its brand name as a platform to build around going forward. This is super-appealing to leadership teams. The second is that since before the pandemic, PE/FO buyers have been presenting very attractive deal terms and conditions to ENR 500 firms and as a result have been “winning” more often than losing out on those firms that they target for acquisition.


Morrissey Goodale is a CFE Media content partner.

Original content can be found at Morrissey Goodale.