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Pipeline Explorer: Civil and electrical engineering, port operators seen as targets

Top North America-based engineering services companies by LTE-SB score

Company name Likely To Exit (LTE-SB) score Hold period (y) Financial sponsor
UES 29 4 Palm Beach Capital PartnersBDT Capital Partners
Qualus Power Services 28 2 New Mountain Capital
STV Group 26 4 Pritzker Organization
ESP Associates 25 5 Strength Capital Partners
QuantiTech 22 3 Sagewind Capital
LJB 22 1 Copley Equity Partners
EN Engineering 21 4 Kohlberg & Co
Resource Environmental Solutions 21 7 KKROnex Partners
TranSystems 20 2 Sentinel Capital Partners
Gordon Technologies 20 6 Pelican Energy Partners

As of 18 March 2024
Among all sponsor-backed companies with an LTE score classified with NAICS: Engineering Services. Search for these companies here.

Many long-standing independent companies in the civil and electrical engineering space received their first outside investment from private equity last year, and PE acquisitions in the sector are anticipated to continue for the rest of 2024.

Due to decaying infrastructure, ramped up government spending on infrastructure, and private equity firms trying to find “a home for capital,” civil, construction, and electrical contractors are drawing a great deal of private equity interest now, said Michael Mufson, a managing partner at advisory firm Mufson Howe Hunter.

“Some of these businesses aren’t big-margin, but they have growing backlogs and are able to produce double-digit EBITDA margins,” he said.

In September, GHK Capital Partners acquired WSB, a nearly thirty-year-old group that services transport, environmental, utility and renewable energy infrastructure, and simultaneously rolled up Oklahoma firm EST, creating a new platform that made another acquisition last month, of Florida-based AE Engineering. According to a Minnesota Business Journal report in September 2023, WSB generates around USD 120m in revenue.

In January, CIVC Partners acquired HR Green, an infrastructure design, engineering, and consulting services group for the transportation, water, municipal, broadband, and land development spaces that was founded 111 years ago. The company has an LTE score of 8.

And last summer, Mufson’s firm advised electrical contractor Kuharchik Construction when it was sold, along with fellow Pennsylvania-based contractor Wyoming Electric & Signal, to CAI Capital Partners-backed Midwestern Electric. Both firms are specialists in critical infrastructure traffic control systems. Midwestern, held by CAI since 2021, has an LTE score of 21.

Regarding multiples in the space, lower- to middle-market companies with EBITDA between USD 5m-USD 10m could fetch around 6.5x-7x EBITDA, while groups with EBITDA of USD 20m and above could receive 8x-10x, Mufson projected. The latter groups tend to have established brands within their markets and the ability to win big contracts, he said.

Targets working on utility-grade projects such as building data centers and handling low and high power grids in office buildings are particularly attractive, as are those doing sophisticated underground or tunneling work that involves complex infrastructure, such as century-old water pipes and telephone wires, he added.

Many of the construction infrastructure companies up for sale are second- or third-generation family businesses with topline revenue in the USD 100m area and a need for liquidity, said Mufson.

As far as private equity exits, Mufson said that it was hard to get deals done last year because of uncooperative credit markets and sellers unwilling to accept lower valuations. But now these firms are accepting that they’re going to get lesser valuations on “long-in-the-tooth” portfolio businesses and need to get capital back to their limited partners. In the electrical and civil engineering sector, there has been far more private equity buyers than sellers, he noted.

But these firms could conceivably build up a one-stop-shop, combining electrical and mechanical contractors with engineering firms, and then sell this platform to a major strategic or large private equity firm, he suggested.

One example of a recent private equity exit in this sector was engineering solutions provider Apex, which was sold by Sentinel Partners to Morgan Stanley Capital Partners, last January. Sentinel, a lower middle-market investment firm, retained a minority stake in Apex, which it first invested in five years ago. Sentinel continued to show interest in the segment. In 2021, Sentinel added another infra services portfolio group, TranSystems, which it acquired in 2021. TranSystems currently shows an LTE-SB score of 20.

Other long-held PE-backed groups in the sector that have yet to exit include Kohlberg-backed Ground Penetrating Radar Systems (GPRS), a provider of utility locating and concrete scanning services to various contractor and engineering firms, and Osmose Utilities Services, which provides inspection, maintenance, and restoration services to utility and telecom infrastructure. GPRS, with an LTE-SB score of 21, was sold by CIVC Partners to Kohlberg & Co. in 2020, while Osmose Utilities Services, formerly held by Kohlberg, was acquired by EQT Infrastructure in 2019.

Meanwhile, in the port operating sector, an industry banker named Maher Terminalsacquired in 2016 by Macquarie Infrastructure Partners III, as a long-held asset that could logically weigh an exit within 12-24 months. Since Maher, which has an LTE-SB score of 13, operates in the lucrative Port of New York and New Jersey, it could fetch a multiple as high as 14x-18x EBITDA, the banker said.

As examples of recent PE exits in this space, he mentioned the sale of GCT Global Container Terminals’ US assets to French logistics and shipping giant CMA CGM in August, and Macquarie’s October sale of Ceres Terminals to Blackstone Infrastructure Partners-backed marine terminal operator Carrix, after an eight-year holding period. Blackstone invested in Carrix in 2019 and boosted its stake in 2021, according to news reports; its LTE score is 29.

GCT, with an LTE score of 31, was acquired by IFM Investors and British Columbia Investment Management in 2018, with long-term investor Ontario Teachers’ Pension Plan retaining a 37.5% stake.

The Pipeline Explorer is a column discussing likely sponsor exit transactions based on Mergermarket’s Likely to Exit predictive analytics, which assign a score to sponsor-backed companies (LTE-SB). Mergermarket’s Likely To Issue VC Exit (LTI-VC) predictive analytics assigns a score to venture capital- and growth capital-backed companies. Each help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.

This version of the Explorer concerns companies operating in several infrastructure areas including civil/electrical engineering and port operations.