Private equity is often viewed as an industry that favors a particular kind of financial engineering—one that hasn’t always been good for industries where it operates, such as journalism, healthcare, and music. What may not be as well-known is that private equity investors have recently become extremely interested, and heavily invested, in the actual engineering industry itself.
Over the past decade, and especially in the past few years, many in the finance industry see architecture, engineering and construction (called AEC) as a great long-term play. The shift comes on the heels of federal legislation that has unleashed massive amounts of money for infrastructure investments, and is bolstered by the transition to a cleaner, greener economy.
“There’s a huge need from the decarbonization perspective and advancing the energy transition,” says Jeffrey Sprau, CEO of Legence, a firm focused on energy efficiency and sustainability solutions. The company, which counts private equity giant Blackstone as its financial sponsor, has been on an acquisition spree, making 21 deals to acquire engineering firms in the past three years.
The long-term, growing market for decarbonization offers a huge upside potential for investors, especially when the billions of dollars being unleashed by the Infrastructure Investment and Jobs Act, the CHIPS Act, and Inflation Reduction Act get factored into the equation. Sprau estimates these kinds of green infrastructure needs—sustainability advisory, mechanical and electrical services, and on-site renewables—comprise a $700-billion-dollar-plus market opportunity. Private equity, not surprisingly, sees the importance of the energy transition, and the built environment, and doesn’t want to be left behind.
“There’s recurring revenue in terms of mechanical systems servicing,” Sprau says. “You have the stickiness, so to speak, with a client, who can go on the journey of devising and designing and installing and servicing and financing on-site renewables. Hopefully, it’s a multi-decades relationship.”
A sleepy little industry
In a recent report on the state of the industry, consulting firm Deloitte found that from 2022 to 2023, there were 84 merger and acquisition deals from private equity investors in engineering and construction firms, totalling $4.5 billion, and data suggests investors will continue to invest in the sector. Dealmaking has significantly accelerated: Private equity dollars went from 20% of such deals in 2015 to 50% in 2023, per The Middle Market; and the number of deals leapt from 50 in 2019 to 240 in 2023, per MergerMarket.
Steve Gido, principal at Rusk O’Brien Gido + Partners, a firm that advises engineering firms on mergers, said 20% of the firms on the Engineering News-Record’s Top 500 list now have private equity investment. A decade ago, almost none did.
“I’ve been working in this space as a banker and financial advisor for 22 years, and it’s the biggest shift in ownership models I’ve seen,” Gido says. “It just took a while for the financial sponsor community to stumble on this little sleepy industry.”
This is a strategic move by private equity investors—who pool private investment to buy, overhaul, and profit from the sale of companies—to tap into the potential growth and returns offered by the engineering and construction industry, according to Kuttayan Annamalai, a Deloitte principal.
The kinds of multiyear contracts that government infrastructure spending will create offer recurring revenue, which private equity actively seeks out. Any firms that work on public infrastructure, transportation, water, roadways, EV stations, and renewables have become targets. And serving larger clients, and especially for local and municipal governments, becomes easier when firms have the money to add talent and expand their service offerings through mergers.
A city looking to repair a bridge, which can take years and require dozens of consultants, might see engaging with a single firm, instead of multiple bidders, as a means of streamlining the project. The drive to offer a one-stop-shop has led to consolidation in the industry, with firms buying and rolling up smaller firms to expand their geographic reach and ability to offer a larger suite of services.
For the leadership of these engineering firms, these investments offer the opportunity to cash out. Many older owners of these relatively smaller shops don’t have transition plans in place, says Stephen DeSimone, president and CEO of DeSimone Consulting Engineers.
“There’s a wealth transfer going on,” he says. “These owners have no way to extract the value of what they build out.”
Pump and dump problem
Salas O’Brien, a engineering and technical assistance firm, has taken on multiple private equity investments, including a significant $300 million minority investment from Blackstone in 2024. In an email response to questions, Darin Anderson, chairman and CEO, said the investments have rewarded employee owners (90% of workers hold stock), allowed the firm to acquire and merge to expand its market reach, and helped it make additional investments in data science, AI, and new technology. The company’s share price certainly likes the investments: The firm has averaged 42% annual growth over the past decade, and the stock price shot up 136% between 2022 and early 2024.
But considering private equity’s track record, it’s fair to ask: do these deals and the resulting consolidation have a negative impact on the industry? Historically speaking, companies bought by private equity are more likely to close, industries such as nursing have see declining performance since large-scale PE buyouts, and brands like Toys ‘R Us have been decimated by closures. Private equity played a key role funding Bloc Power, a firm seeking to electrify homes that’s been a darling of the building decarbonization world. Yet, according to American Prospect reporting, the company can be hazy when it comes to delivering promised benefits and cost savings.
“I think it’s pump and dump to a certain extent,” added DeSimone. “Ultimately, somebody’s gonna make money. I don’t necessarily know that it’s going to be the engineers or the shareholders.”
Will PE kill what makes engineering firms unique?
The consolidation might dilute some of the expertise that tiny, very specialized firms bring to the table, said DeSimone. When firms get acquired, and big firms get bigger and offer all manner of services, it begins a cycle. There’s disillusionment from some workers, and then the engineers who got rolled up into these bigger firms break off and start their own companies. DeSimone, whose firm has made its own acquisitions, said the specter of PE growth has pushed him to evolve his business from being a mom-and-pop. He predicts PE acquisitions will lead to a cultural shift and a dilution of focus from employees working on multiple jobs.
“For those in the industry who engage with companies owned by private equity, you’re going to notice a difference,” he adds. “The quality of the work is–it’s not going to be that you got buildings falling down, but you know, you’re not going to be as responsive to the clients.”
Others counter that since construction and engineering have long been laggards in terms of technological adoption, and tend to be fragmented, mergers and more money benefit the industry. These investments allow firms to diversify their services, giving them more financial stability, argues Deloitte’s Annamalai.
“There is no direct evidence of impact of PE investments on engineering costs/fees for clients,” he adds. “In the near term, PE investments and their focus on improving operational efficiency, and streamlining processes, can help engineering firms to reduce operating and overhead costs and pass some of these savings onto their clients.”
The most important asset of these firms is their talent; roughly two-thirds of the cost of engineering firms is labor, said Gido. Private Equity’s strategy with engineering firms differs from the more infamous and egregious PE plays, says Sprau. He said Legence acquisitions haven’t led to losses in jobs; this isn’t an example of “let’s find underperforming assets and take costs out and sort of financial engineer our way to success.” Since, for service firms like engineering, the staff is ultimately the company’s asset and revenue driver, it doesn’t make sense to cut jobs, which studies have shown tends to happen when PE acquires new firms.
“Could there be negative ramifications of this going forward?” says Gido. “Potentially, with any ownership model. But so far, I have not heard many train wreck stories of these exploding, or valuations subsiding, or people leaving en masse—not yet.”