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In recent years , the US private equity community has increasingly focused on construction services , particularly targeting middle-market , regional construction companies . Interest has been especially strong in commercial electrical contracting and civil construction sectors serving infrastructure , transportation , data centers , manufacturing , and clean energy . These companies have demonstrated an ability to create stable cash flows and build on an already growing backlog . With PE sponsors sitting on an estimated $ 1 trillion in dry powder ( i . e ., capital committed but not yet deployed ), they are actively seeking opportunities among construction services candidates . This is an opportune time for private company owners who are seeking a liquidity event to learn more and start planning .
The fundamentals for an industry consolidation are inherent in the construction services sector . It is a highly fragmented industry with many participants available for acquisition , backed by strong demand from both a growing economy and government programs such as the Infrastructure Investment and Jobs Act ($ 1.2 trillion ), the American Rescue Plan ($ 360 billion ), the CHIPS and Science Act ($ 52 billion ), and the Inflation Reduction Act ($ 369 billion ), for a combined additional $ 1.9 trillion in spending .
Industry insights
The final variable to address in creating a strong M & A market is the cost of funds and the availability of credit in the debt markets . Debt is critical to achieving the returns needed in a PE sponsor ’ s investment . Typically , half of the financing comes from debt , with the PE sponsor writing a check for the balance . As the Federal Reserve reduces interest rates in the coming quarters , lower rates will enable more cash flow to support higher levels of debt , allowing buyers to potentially pay higher valuations . These higher valuations , in turn , will motivate business owners to pursue liquidity events , maximizing the reward for a lifetime of hard and smart work .
The valuation of companies in an M & A transaction is a complex process driven by multiple factors . Typically , larger construction companies command higher valuations of EBITDA , while smaller companies receive considerably lower purchase prices . This is due to the ability to leverage better with larger companies , i . e ., how much debt can be placed on the company ’ s balance sheet - larger companies have greater leverage potential . Credit statistics maintained by SPP Capital , a leading private debt investment bank , illustrate this point : in September , the credit markets were underwriting companies with less than $ 5 million in EBITDA at a range of 2.5x – 4.0x EBITDA total debt coverage , compared to companies with $ 10 million in EBITDA at 3.5x – 5.5x EBITDA , and companies with at the upper end of the market ; $ 40 million in EBITDA at 5x – 6x EBITDA . For example , a $ 5 million EBITDA business would be able to raise roughly 3.0x while at $ 40 million in EBITDA 5x to 6x . If we assume a 50 / 50 debt equity funding , the $ 5 million will fetch a 6x multiple and the $ 40 million would be valued at 12x – that ’ s the arithmetic .
In summary , the combination of favorable economic conditions has created a strong M & A market . For baby boomer owners seeking liquidity events as they near retirement , the time to act seems ideal . ■
For a list of the sources used in this article , please contact the editor .
Michael Mufson www . mhhco . com
Michael Mufson is the Managing Partner of Mufson Howe Hunter , a leading name in investment banking specializing in M & A advisory , private capital raising , and corporate finance services for nearly two decades . With a strong focus on the middle market , the firm has successfully completed over 600 transactions . Headquartered in Philadelphia with an office in Washington , D . C ., Mufson Howe Hunter is known for its deep industry knowledge and client-centric approach .
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