This report details some of the biggest trends and movements regarding M&A activity in the AEC industry as of the end of Q1, 2023.
Zweig Group tracks every M&A transaction that takes place in the AEC industry and reports on them on a weekly basis. This process allows us to stay up to date with the latest M&A trends in the AEC industry and report our findings to you. This report will detail some of the biggest trends and movements regarding M&A activity in the AEC industry as of the end of Q1, 2023.
As of March 31, 2023 there have been 173 closed transactions in the industry, which is a 21 percent increase over the 143 transactions that closed as of Q1 last year. Following the same trajectory that was laid out in 2022, M&A activity in 2023 has been predominantly driven by an increased need for engineering and environmental professionals to combat the growing need for public infrastructure revitalization and an increased focus on ESG standards.
Of the 61 single discipline engineering firms that have been acquired so far this year, the majority of them (71 percent) were civil engineering firms, followed by structural engineering (16 percent), and MEP engineering firms (13 percent). Of the 173 transactions that have taken place so far this year, 38 percent of sellers have completed projects in the commercial/retail sector. This is followed by municipal works at 23 percent, higher education at 23 percent, residential at 21 percent, and public infrastructure at 21 percent.
The abundance of transactions that have been completed in which the seller provided services in the commercial/retail sector may make it seem as though commercial/retail focused firms are the most sought after by buyers in the industry, but I don’t believe this to be true. From what we are seeing at Zweig Group, the most sought-after sector expertise is in water/wastewater, public infrastructure (including transportation), power/energy, and K-12/higher education design firms. There are a slew of buyers who are looking to acquire to bolster their capabilities or expand into these sectors, but potential sellers who are operating in these sectors often have healthier financials, driving the purchase price up even before you take into consideration the increased buyer competition that comes with greater demand. This has made deal making harder for buyers looking to make plays in these sectors. However, the growth of the commercial/retail sector is anticipated to decelerate in the near future as interest rates increase and news outlets warn of a potential upcoming recession. Many baby boomer generation firm owners don’t have enough runway to wait out a potential recession before selling, so buyers are finding more advantageous deal making conditions within the commercial sector.
Of the 173 Q1 closings, 123 took place in the United States, with the location of seller headquarters being the states that are receiving the largest amounts of funding from the IIJA Infrastructure Bill. These were also the most active states for buyers and sellers in FYE 2022. Anecdotally, I’ve also come across a large number of buyers who are interested in establishing or growing their presence in Arizona, Colorado, New York, Georgia, and the Carolinas, though some of these markets are smaller ponds with fewer fish for buyers to search out.
So far in 2023, private equity groups have been a part of 38 percent of the deals that have been reported, showing a much larger proportion of the total than all of 2022 where private equity groups represented 16 percent of total deal volume. For the sake of our data set, the buyer was considered to be private equity if it was the private equity group itself or a private equity backed platform company. We’ve seen a large amount of smaller, presumably tuck-in acquisitions, so far in 2023 which has pushed the median FTE count for sellers down to 15 employees. The median FTE count for sellers through 2022 was 27.
In 2023 so far, the most acquisitive U.S. buyers by number of acquisitions are RMA Group and NV5, each with four acquisitions completed in the first quarter. There were quite a few U.S. firms that were close behind with three acquisitions in the first quarter, including The HFW Companies, IMEG, Salas O’Brien, and Verdantas. The most acquisitive international buyer by number of acquisitions was RSK Group with nine acquisitions throughout the U.K. and Denmark totaling roughly 750 new employees, followed by EGIS with four acquisitions around the globe totaling roughly 900 new employees.
In conclusion, Q1 has been a highly active one with 173 closed AEC transactions and a large uptick in the amount of buying activity from private equity firms. The states that are most active in terms of M&A activity are those that are receiving the largest amount of financial support via the IIJA bill, and the median FTE size of selling firms has decreased to 15 FTE as smaller firms begin to adopt M&A as a growth strategy and platform companies fill in gaps with tuck-in acquisitions. Despite rising interest rates and what some believe to be a shaky economic outlook, buyers are still very active and M&A activity remains strong.
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