2018 Fall issue of Horizons

5.6 TEV/EBITDA Additionally, employment can be a strong indicator of industry health. Per the 2018 Associated General Contractors of America (AGC) 2018 Construction Outlook National Survey , 26% of construction firms surveyed expect to increase employee count anywhere from 11% to 25%. 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 (GCs) 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 and 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. Per 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% increase. Additionally, the 6.2 5.8 6.0 5.35 6.1 5.65

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total value of these deals increased from approximately $3.2 billion in 2016 to $7 billion in 2017 (a 118% increase). Per GF Data, the multiples of earnings before interest, taxes, depreciation and amortization (EBITDA) 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 a 5% growth from the 2010 to 2013 time frame. It is also approximately 10% higher than utility construction firms and approximately 13% higher than heavy and civil engineering construction firms. Mergers & Acquisitions If public company activity is any indicator, M&A activity will continue to thrive in 2018, specifically in the E&C space. Per FMI’s 2018 M&A Trends for Engineering and Construction Report , “more than 20% 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.”

Construction Multiple by Year

5.925

Heavy & Civil Engineering Construction

Utility System Construction

5.4

5.4

Specialty Trade Contractors

5.25

5.25

5.3

5.2

5.15

5

2006 – 2009

2010 – 2013

2014 – 2017

Source: GF Data

Fall 2018

23