The construction industry can offer private equity (PE) companies unique investment opportunities, whether that be residential, commercial, infrastructure, renewable energy generation or a myriad of other sub-sectors. While investment in this particular space is still small compared to the overall size of the PE sector, acquisition activity is noticeably on the rise.
We’re seeing some aggressive growth strategies – as many as 40 to 60 acquisitions a year in some cases – when it comes to construction dealmaking, and that activity principally concentrates on contractors. PE firms are buying a contractor, specialty or otherwise, and then quickly adding on additional contractors to create a super-regional or national specialty contractor. For example, a Northeast-based HVAC contractor that employs several hundred workers across a region might buy other HVAC contractors in that same region, then progress to buying contractors in surrounding states, ultimately creating a rather large regional contractor.
What makes the construction space so appealing for investors? Two interesting scenarios can play out:
Rapid growth is exciting for a PE firm and its investors but can result in several concerns from a risk perspective, namely:
It’s important to look at future program structure as the deal pipeline in the construction sector grows. Most likely, at some point PE firms will have to take on a little insurance risk themselves. As they grow and losses become more predictable, carriers will likely want PE firms to take on more risk through a deductible. Posting collateral can be a bit of a surprise and concern, but risk retention may be an expectation to a certain point because there are few carriers who feel comfortable writing large, guaranteed cost deals. A good broker should educate and make sure PE firms are aware that the insurance program may need to change and risk retained as they outgrow guaranteed cost and execute a growth strategy.
Very early on, PE firms should think about their communication plans to their carrier to ensure the carrier is comfortable underwriting the new, bigger company. Firms should even think more broadly about how the carrier can do some of the lifting to help integrate the expanding portfolio with risk control services or claims services. Not taking these steps can create big issues for firms and workers. We have seen some instances where claims come in and are denied because they are not covered by the policy – simply because the new carrier was not alerted to the acquisition.
Brokers and carriers can help pave the way for seamless deals by giving PE firms a checklist of information that is needed every time an acquisition is made. There are three main points to achieve with this checklist:
We have seen a steep curve in deals in the construction space. No one wants insurance to hold up those deals, so with a little strategic foresight, planning and communication, growth can happen quickly and smoothly.
Learn more about how we help private equity firms manage their unique risk needs here.
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