Engineering is booming. Private Equity wants in.

Tall skyscrapers, sprawling housing estates and bustling shopping malls have long attracted private equity investors who can see, touch and tour tangible, income-producing assets.

Now, those same investors are increasingly seeing value in the typically invisible engineering firms behind the projects. That’s largely because of the flood of federal funds pouring into infrastructure and construction projects, with some engineering firms saying they’re getting takeover offers almost weekly.

What that will do to the industry is a matter of debate, with some seeing consolidation as a necessary fuel for growth, while others worry about shrinking competition.

“We get approached two or three times a month,” Stephen DeSimone said of the private-equity interest at his Manhattan-based firm, DeSimone Consulting Engineers. “It used to be once a year, maybe twice a year. They used to be pretty discreet. Now they just leave voicemails.”

Private equity investors spent $4.5 billion on acquisitions in the engineering and construction industry last year. This year is shaping up to be the fourth consecutive year with more than 400 mergers and acquisitions in the architecture, engineering and environmental sector, and 41% of all deals this year were backed by private equity investors, according to consulting firm Morrissey Goodale.

The rapid M&A activity could provide relief to engineering firms that are desperate for a cash injection, looking to expand significantly or in need of new management. But some warn of a danger in all this increased activity, citing a potential loss of craft specialization and an increasingly monopolistic industry that could chill competition.

DeSimone said his company isn’t interested in selling, especially to private equity, although it wants to grow. DeSimone has made five acquisitions in the past three years, he said.

But private equity firms have found plenty of buying opportunities in architecture, engineering and construction this year. Examples include Blackstone buying a small stake in Salas O’Brien and Miami-based HIG Capital acquiring Albany-based CHA Consulting, an engineering, design, consulting and program management firm. Both deals occurred in January.

DeSimone said acquisitions can be beneficial for companies where a leader is ready to retire and there are no plans for a successor, as well as for smaller companies that need quick cash in a difficult economy.

This creates a doubly beneficial opportunity for commercial real estate firms looking to expand the scope of their in-house services.

In February, CBRE Group agreed to buy J&J Worldwide Services, a provider of facilities maintenance and engineering services to the federal government. CBRE CEO Bob Sulentic said the move is consistent with CBRE’s strategy to expand its technical services capabilities and increase revenue and secular growth.

Colliers in June agreed to acquire Canadian engineering, environmental and inspection firm Englobe Corp. for $475 million. It was the company’s second acquisition of an engineering firm in four years, which CEO Jay Hennick said “will accelerate our future growth and provide better services to our clients and more opportunities for our professionals.”

According to Morrissey Goodale, there were 240 M&A deals in the AE industry in the U.S. through the end of June this year, almost exactly matching the level of deals during the same period last year. Last year, there were 443 deals in total, down from a record 484 in 2022 but still significantly more than in previous years.

Activity in the broader M&A market peaked in 2021 and fell sharply into 2023, largely due to high inflation and interest rates. However, the architecture and engineering sector has proven more resilient, with AE deal activity in 2021 double that of almost all years prior to 2018, Morrissey Goodale data shows.

According to Morrissey Goodale, federal funding combined with the nation’s aging infrastructure has fueled an increase in investment in the industry, and that growth has also been driven by the need to expand staffing and cope with “demand resulting from an unprecedented backlog of projects.”

“The federal government has committed about a trillion dollars to infrastructure over five years,” DeSimone said. “I think that probably accelerated the number of inquiries.”

The CHIPS Act, signed into law in 2022, earmarks $52.7 billion for U.S. semiconductor research, development and manufacturing, while the Infrastructure Investment and Jobs Act of 2021 allocates $1.2 trillion to help improve roads, bridges, water systems, broadband internet, ports and airports.

Windward Engineers & Consultants, which has seven offices across the U.S. and will open more soon, wants to expand to meet the growing needs of its clients, said Windward President Jason Booth. It hasn’t received many takeover offers, but plans to jump on the buyer’s side soon, he said.

“It’s very difficult to grow organically through hiring,” Booth said. “If I tried to build a presence in Chicago, it would cost me a ton of money in hiring fees, and there would be a lot of question marks about whether the team could produce anything.”

He added that existing engineering firms have an established history and reputation, which makes them worth investing in.

Increased consolidation in the industry allows companies to improve operational efficiencies and leverage best practices from both companies, as well as increase economies of scale and expand service delivery capabilities, Morrissey Goodale said. However, rapid mergers and acquisitions come with potential downsides in the form of reduced competition, as well as negative pricing and service quality implications, the consulting firm added.

DeSimone would not consider private equity financing because engineering is a highly specialized industry and private equity firms do not have the expertise.

“It’s potentially damaging because private equity firms will prioritize profits over relationships and quality,” DeSimone said. “But I also think it will be helpful (to the engineering industry) because companies that realize the threat will be forced to really raise their game.”

Not everyone in the industry agrees, though. Booth said he’s okay with private equity’s presence in engineering, adding that he doesn’t begrudge anyone the chance to compete.

“There’s consolidation and more power to them,” he said. “They understand what we’re trying to think about, which is, ‘How can we grow to meet our customers’ needs?’”

DeSimone cautioned that businesses like his are dependent on people and relationships, adding that “the ability to pick up the phone and talk to the owner is important to a lot of our development clients.”

But anyone who looks at an empty checkbook and gets a lifeline will take it, he said.

CHA Consulting was acquired by HIG this year but has been backed by private equity since 2008, said CHA Chief Executive Jim Stephenson. The HIG deal was the third time CHA had been acquired, but this round definitely attracted the most suitors.

“In the beginning, in 2008, there were very few private equity firms buying into A&E,” Stephenson said. “As you go into the last decade, and particularly the last five years … you see the number of private equity-backed firms really start to grow.”

When the banker put out probes for CHA’s latest acquisition, more than 40 companies expressed interest, he said. More than 10 companies were willing to go through due diligence to learn more about making a formal offer, he said.

While HIG was the best fit for CHA’s needs, there were several good options to choose from, Stephenson said. He added that CHA was interested in private equity because it helped it focus on growth.

“There’s always this saying, ‘Private equity will tear the business apart, really focus on costs and trim the fat,’” he said. “But that’s not their business model at all.”

The best firms support and drive growth, identify potential in the business and attract and retain the best talent, Stephenson said. Private equity requires firms to be comfortable with a variety of pressures, which can be challenging, he said.

“You’re going to move at a certain pace,” Stephenson said. “Private equity investors will always tell you there’s no time horizon (for when they get out). It’s about, ‘Have we all agreed that we’ve met the metrics, the growth targets, the value targets and is the market in a good position to think about recapitalization?’”

Engineering is a people industry, so the last thing a private equity investor wants is to keep laying people off and replacing them with new hires, he added.

“From the outside looking in, it’s like, ‘Oh, private equity has come in. This is going to be a disaster,'” Stephenson said.

But private equity firms have learned to better create value and partner with companies to achieve great results, he added.

“The old days of really cutting costs, squeezing every penny and then finding a way to sell is not a strategy I’m used to,” Stephenson said.