Private equity has a perception problem in the architecture, engineering and construction (AEC) world. Much of what people think they know is based on the corporate raiders who lay-off staff, close factories, and do a quick flip for a profit. While these situations make the news, this approach does not work in the AEC sector. This sector is all about human capital, and retaining employees and clients.
Most of the private equity (PE) firms active in the AEC sector work quietly in the background to partner with management, hold for longer periods, and build a win-win for investors and the firm. At a minimum, AEC firms contemplating ownership transition should consider private equity as a viable option. Here is why:
Quicker payout for retiring members and higher exit valuation. AEC firm owners typically spend a substantial portion of their career—sometimes the entirety of it—guiding and trying to build a successful firm. Such leadership usually involves sacrifices and commitments that non-owners don’t have to make (and may not even know about).
When it is time to cash out, it is only fair that these owners are compensated for the value that they helped to build. And, while both private equity firms and large strategic buyers in the AEC space typically pay market value – as opposed to a discounted and prolonged internal transition—private equity firms tend to pay selling owners more up front with fewer restrictions.
In May 2021, in a transaction coordinated by PSMJ, private equity firm Godspeed Capital announced a strategic investment in Prime Engineering, Inc. (Prime Engineering), an 80-person architecture, engineering, and surveying firm based in Atlanta. Thomas Gambino, P.E., who started the firm in his house in 1990, said the private equity investor met his target price, while also committing to protect and grow the culture of excellence and legacy that Gambino had established.
Gambino says that other factors drove the decision to choose Godspeed over several other suitors, but getting fair market value for the firm that he and the other shareholders spent 30 years building was an important consideration.
“A lot of owners of A/E businesses are not very sophisticated financially so they undervalue their business,” says Gambino. “The only way to make sure you get fair market value is to get bids from non-engineering firms. If you really study the value, take your engineering hat off, get into the financials of the business and hire a good advisor, you’re going to have better exit alternatives. At the end of the day, maximizing shareholder value and protecting our culture were the priorities.”
Better stewardship of your culture and firm legacy. Despite the desire to optimize value, many AEC owners hesitate to consummate a deal because they can’t bear to see their hard-earned firm legacy and culture vanish when absorbed into a larger entity. Private equity buyers can offer an attractive alternative to a large strategic buyer because their model creates new platforms that require the retention of key management and a legacy culture that helps ensure against employee departures
As an example, Godspeed acquired Richmond-based Austin Brockenbrough & Associates, LLC (Brockenbrough) simultaneously with Prime Engineering. Godspeed partnered with the engineering firms’ management to establish a premier, multi-discipline engineering and consulting services growth platform providing services globally to a wide range of public- and private-sector clients.
“When we started out, we really weren’t interested in private equity,” says Bruce Sadler, P.E., Managing Partner. “We were looking to merge, but not necessarily to be eaten up by a bigger firm. We wanted to retain our current culture and our independence to a certain degree. We were at this for several years, and it took a long time to get here, but we ended up realizing that private equity was the best fit for us.”
Sadler and fellow principal Bob Polino say that Godspeed was the buyer that most completely met all of the goals that they established early in the process. “We wanted someone that would value our whole firm and invest in growing all of our market segments,” says Polino, who has taken on a greater leadership role as Sadler is easing toward retirement.
“We also wanted help investing in our corporate infrastructure, in areas like marketing, IT, human resources, and recruiting,” says Polino. “We wanted a fair employment agreement with staff, with no reductions, and we wanted a strategic plan in place to scale our workforce and infrastructure to address the growth in our core markets. And even though it wasn’t the most important factor, we wanted a fair and equitable price. We had several good offers from really good companies, but when it all came together, it became easy to choose.”
Ability to offer more leadership and ownership incentives for key employees. Another advantage that private equity offers is a growth opportunity for emerging leaders. “We were interested in not only ownership transition, but also leadership transition,” says Sadler at Brockenbrough. “We have three partners slowly working their way out, all on different time frames. We’ve promoted from within for our three market sectors—Bob is already running our site department—and we already had the future leaders for the other two. There are a lot of moving chairs, and new opportunities with people moving up. We have some amazing people in the next generation, and I look forward to seeing them step up.”
Douglas T. Lake, Jr., Founder and Managing Partner of Godspeed Capital, says that a major focus of his firm’s investment strategy is to foster leadership transition. “There’s a point in time when owners desire liquidity and a seamless transition of ownership. Typically, the younger generation of management doesn’t have the capacity or experience to execute a management buyout. This is when private equity can perform as a positive catalyst,” says Lake, who has a nearly 20-year private equity career as an investor in Government & Engineering Services firms between his time at DC Capital Partners and Veritas Capital prior to founding Godspeed Capital in 2020. “At Godspeed we value management equity participation in any capacity, as we want management to ‘think like owners’ while aligning incentives towards the execution of the long-term strategic plan.”
Because PE deals are usually recapitalizations—meaning that a percentage of the firm’s equity is “rolled over” (i.e., retained by some or all of the selling shareholders)—employees can continue to hold ownership in the combined entity. When the private equity firm is ready to cash out its investment, which is usually in a five- to seven-year window, employees can conceivably purchase the firm back. Other options include selling to a strategic buyer or recapitalizing with a different private equity firm. “Godspeed’s expertise and experience in building AEC businesses offers founders and management a growth-oriented playbook that can deliver a more meaningful future realization opportunity,” says Lake.
The investment in Prime Engineering and Brockenbrough is Godspeed Capital’s first AEC platform, which both firms regard as a positive. “We had several good offers—from private equity and strategic buyers—but when our partners met face-to-face, we all felt more comfortable with Godspeed,” says Polino. “We had a lot of faith in the team because they had experience in our industry. We also liked that we were their first acquisition as part of their vision to build an AEC platform as part of an organic and acquisition growth strategy.”
Greater access to capital and management expertise. As it relates to future growth and prosperity, the primary advantage that a private equity firm brings to an AEC firm is the flexibility that a substantial amount of capital provides. With nearly 4,000 U.S. private equity firms holding approximately $2 trillion in available capital—“dry powder” is the industry term—AEC firms desiring to make strategic investments can readily receive the capital they need to pursue ambitious goals that can pay off big down the line.
Lake says that reinvesting in the recapitalized firm’s strategic initiatives is imperative to driving long-term equity value creation. “If you invest in your people, culture, technology, and corporate infrastructure to enhance your support of your customers, while engaging your people with high-quality work and career advancement opportunities, you optimize the potential for growth and margin improvement over the long-term,” he says. “There is great potential for generating EBITDA growth in smaller companies. The Godspeed Team believes in taking a patient approach. In order to position a platform for step function growth over the next five years, we may take EBITDA margins sideways or even slightly down by reinvesting the cash flow back into the business while taking a longer-term view. The short-term investment impact offers the potential for stronger long-term performance.”
Despite positives, caution is warranted
Concerns about private equity’s role in AEC ownership transition may be exaggerated, but they are not entirely without merit. Investors expecting to spin off an AEC firm in less than five years are likely to be disappointed, for example. “Our time horizon is five to seven years,” says Lake. “We have the capacity with our investor base and current investment program to focus long term. This is important because the metrics we focus on—bid and proposal activity, headcount growth, utilization, EBITDA growth, and backlog—require investments in new business development, recruiting, technology, and other corporate infrastructure to drive outperformance over the long term.”
Other valid concerns include holding at-risk rolled equity that you no longer control, disruption of the firm’s culture with too strong a focus on profit growth and through additional acquisitions, and reduced ownership transition opportunity when compared with an internal transition.
As always, with regard to evaluating any potential suitor in an ownership transition scenario, thorough due diligence is critical. And while deal fatigue can become a real factor in a prolonged process, owners should avoid settling for a flawed deal just because they spent time, money and emotional energy pursuing it.
“It’s stating the obvious, but cultural fit is really important,” says Polino. “We went down different paths with different firms, and when we realized the cultural fit wasn’t right, we ended the process. It was painful to start over again, but who you’re working with is pretty important. We felt comfortable with Godspeed, culture-wise. We liked them and, six months into it, we still like them.”
ABOUT THE AUTHOR
Karl Wohler is a Sell-side M&A Advisor for PSMJ Resources, Inc., the leading publishing, executive education, and advisory group devoted completely to improving the business performance of A/E/C organizations worldwide. Karl has a BS in Chemical Engineering from the University of Massachusetts and an MBA from Babson College.
Related Stories
| Aug 11, 2010
AIA Course: Historic Masonry — Restoration and Renovation
Historic restoration and preservation efforts are accelerating throughout the U.S., thanks in part to available tax credits, awards programs, and green building trends. While these projects entail many different building components and systems, façade restoration—as the public face of these older structures—is a key focus. Earn 1.0 AIA learning unit by taking this free course from Building Design+Construction.
| Aug 11, 2010
AIA Course: Enclosure strategies for better buildings
Sustainability and energy efficiency depend not only on the overall design but also on the building's enclosure system. Whether it's via better air-infiltration control, thermal insulation, and moisture control, or more advanced strategies such as active façades with automated shading and venting or novel enclosure types such as double walls, Building Teams are delivering more efficient, better performing, and healthier building enclosures.
| Aug 11, 2010
Glass Wall Systems Open Up Closed Spaces
Sectioning off large open spaces without making everything feel closed off was the challenge faced by two very different projects—one an upscale food market in Napa Valley, the other a corporate office in Southern California. Movable glass wall systems proved to be the solution in both projects.
| Aug 11, 2010
High School in a Hurry
One of the more compelling arguments for charter schools is their theoretical ability to streamline decision making. Eliminate all those layers of bureaucratic fat that clog the arteries of most public school systems, the argument goes, and decisions can be made to flow much more smoothly, even when it comes to designing and building a major school project.
| Aug 11, 2010
Right-Sizing Healthcare
Over the past 30 years or so, the healthcare industry has quietly super-sized its healthcare facilities. Since 1980, ORs have bulked up in size by 53%, acute-care patient rooms by 77%. The slow creep went unlabeled until recently, when consultant H. Scot Latimer applied the super-sizing moniker to hospitals, inpatient rooms, operating rooms, and other treatment and administrative spaces.
| Aug 11, 2010
Silver Award: Pere Marquette Depot Bay City, Mich.
For 38 years, the Pere Marquette Depot sat boarded up, broken down, and fire damaged. The Prairie-style building, with its distinctive orange iron-brick walls, was once the elegant Bay City, Mich., train station. The facility, which opened in 1904, served the Flint and Pere Marquette Railroad Company when the area was the epicenter of lumber processing for the shipbuilding and kit homebuilding ...
| Aug 11, 2010
Special Recognition: Durrant Group Headquarters, Dubuque, Iowa
Architecture firm Durrant Group used the redesign of its $3.7 million headquarters building as a way to showcase the firm's creativity, design talent, and technical expertise as well as to create a laboratory for experimentation and education. The Dubuque, Iowa, firm's stated desire was to set a high sustainability standard for both itself and its clients by recycling a 22,890-sf downtown buil...
| Aug 11, 2010
Hilton President Hotel
Once an elegant and fashionably trendy locale, the Presidential Hotel played host to the 1928 Republican National Convention where Herbert Hoover was nominated for President, and acted as a hot spot for Kansas City Jazz in the '30s and '40s. The hotel was eventually abandoned in 1984, at which point it became a haven for vagabonds and pigeons, collecting animal waste and incurring significant s...
| Aug 11, 2010
Bowing to Tradition
As the home to Harvard's Hasty Pudding Theatricals—the oldest theatrical company in the nation—12 Holyoke Street had its share of opening nights. In April 2002, however, the Faculty of Arts and Sciences decided the 1888 Georgian Revival building no longer met the needs of the company and hired Boston-based architect Leers Weinzapfel Associates to design a more contemporary facility.
| Aug 11, 2010
AIA course: MEP Technologies For Eco-Effective Buildings
Sustainable building trends are gaining steam, even in the current economic downturn. More than five billion square feet of commercial space has either been certified by the U.S. Green Building Council under its Leadership in Energy and Environmental Design program or is registered with LEED. It is projected that the green building market's dollar value could more than double by 2013, to as muc...