June 22, 2020


  • In November 2008 during the height (depths?) of the Great Recession Engineering News Record (ENR) asked me to write about how I thought the A/E and environmental industry would be impacted. I made two bold predictions in my article Viewpoint: Recession-Driven Changes Coming.
  • The first was completely wrong. I predicted that there would be a massive federal infrastructure stimulus plan that would usher in a golden era for our industry. (Note to Congress— please get it right this time around.)
  • The second was closer to the mark. I said that our industry would see a surge of interest from Private Equity (PE) – a group of investors that was sure to emerge as a post-recession winner given greater regulation after the financial markets meltdown.
  • And that’s what happened. From 2009 through Feb 2020, PE recapitalizations and acquisitions grew from 5%* of all industry M&A transactions to 25%. Over the decade following the Great Recession, PE increasingly became a preferred capitalization strategy for many ENR Top 500 firms (9% of the ENR Top 100 have PE investments).
  • And here’s where it gets REALLY interesting. Since COVID hit in March, PE acquisitions and recapitalizations have jumped to a stunning 35% of all industry M&A transactions. PE is steadily becoming the preferred equity model for many successful A/E and environmental firms. We’re about to see a step function increase in PE investments in our industry, much like after the Great Recession.
  • Why is PE interested in the A/E industry? Reason 1: In general A/E and environmental firms underperform in terms of sustainable return on equity and return on assets. PE investors see a great opportunity to improve performance and generate greater returns. Reason 2: We are a highly fragmented industry – providing PE investors with multiple opportunities to grow through acquisitions and thus scale their investments to reach higher multiples when they exit the business. Reason 3: We’re an essential, mature industry (reaffirmed through this COVID crisis) – so we are a great place to invest.
  • In our recent livestream U.S. A/E M&A Symposium I predicted that PE would account for 35% of transactions in our industry by the end of 2022. I believe now that likely underestimates where we will be, and we could see PE accounting for 50% of all M&A by the end of 2022.
  • Family offices provide an alternative to private equity. Indeed, many of the new investors in our industry ARE family offices. What’s the difference? Mainly a family office does not raise capital from outside investors. Thus, they may have a longer investment timeline than PE, which is often three to seven years.
  • Why are design firms using PE and family offices to recapitalize? PE and family office recapitalizations and acquisitions tend to deliver more cash and guaranteed consideration to sellers than employee-owned or ESOP acquirers. This is great in the good times. It’s even better for sellers in the down markets. Cash is king.
  • Why will there be a surge of PE deals over the next three years? Recessionary environments favor skilled, well-capitalized acquirers – such as PE firms and family offices. Their business is making good investments both in good times and bad. On the other hand, employee-owned firms will be relatively less acquisitive over the next three years as they will face capitalization challenges from depressed profits and stalled internal ownership transition plans. This imbalance creates the landscape for PE to grow in our industry. And PE’s interest is not confined to the ENR 500 – there are many smaller funds that are looking at smaller design firms to invest in.
  • Skeptical that PE is a viable capitalization model for our industry? Well, ask yourself, were you skeptical that your entire workforce could work remotely so successfully? PE is not for every firm or situation, but it will continue to grow in popularity as our industry is remade during and after this public health and economic crisis.
  • Overall, industry consolidation continues to slow in 2020. Year-over-year the pace of industry M&A is now down 16% and we expect it to bottom out down 25% before rebounding.

*All M&A statistics are from the Morrissey Goodale M&A Research Department.

If you have questions about this week’s “Word on the Street” or if you need help navigating the New Reality call or email Mick Morrissey @ 508.380.1868 or [email protected].

To see last week’s report click here>.


Covid-19 Proving to be a Stubborn Virus

Several states are seeing a spike in Coronavirus cases.  According to numerous national and regional news outlets, below is an update on some of the hardest-hit states:

Two weeks ago Friday, Florida entered phase 2 of Gov. Ron DeSantis’ reopening plan.  But on Thursday, the state saw 3,207 new cases— its second-largest jump in new Covid-19 cases since the pandemic began. On Friday, new cases totaled nearly 4,000 and the weekend brought over 7,500 more.

Arizona health officials reported over 5,700 cases over the weekend. New cases have risen rapidly and some hospitals are nearing capacity. The state reported a record-number of patients in ICU beds on Thursday, accounting for 84% of the state’s capacity. Gov. Doug Ducey addressed the recent surge last week and announced new policies that allow local officials to require that residents wear masks in public and in businesses.

Last week California saw record new coronavirus cases multiple times. The California Department of Public Health reported 4,075 new positive tests on Saturday. The seven day average of daily cases is at a new high. Gov. Gavin Newsom has issued a mandatory mask order for the entire state.

Since Texas announced Phase 2 of reopening a month ago and a few weeks after starting phase 3, the state’s number of Coronavirus cases has climbed steadily to over 110,000 as the state reported more than 3,800 new cases on Sunday. Hospitalizations are also hitting record numbers. These trends along with civil unrest have slowed the timeline for employees returning to their offices.

Source for COVID 19 case charts: New York Times

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