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FROM THE FOUNDER
I have always felt our industry was undervalued and have mentioned it several times in these pages over the years – and evidently, I was right. Private equity firms that used to have no interest in AEC firms are now putting their money into companies in our industry. Private equity firms that used to have no interest in AEC are now putting their money into companies in our industry. Why private equity is investing in AEC
For those of you who don’t know the difference in venture capital versus private equity, venture capital firms invest in start-up companies. Private equity, on the other hand, invests in growing, established companies – and ones they think they can build through investment of additional capital and management expertise. Why would private equity be interested in investing in firms in this business? I can tell you why: 1. AEC firms generate a high return on invested capital. The typical firm in our business – if well- managed – can generate a 50 percent or higher annual return on equity. Some do even better than that. Now before you say, “Wait a minute – we only make a 15 percent profit. Nobody makes 50 percent,” read again. I said return on equity. How can that be? Let’s take the example of a company that does $10 million a year in net service revenue and makes a 15 percent profit of
$1.5 million. If their book value or owner’s equity is $3 million or less (which it will be if they do a halfway decent job of billing and collecting their accounts receivable), they generated a 50 percent or higher return on equity. The calculation for return on equity is $1.5 million divided by $3 million. A 50 percent return on equity is hard for many industries to achieve, and the private equity people know that. 2. AEC firms have trusted relationships with their clients that could be leveraged to sell something else. Because architects and engineers have a reputation for being highly ethical, our clients trust us. That trust could turn into opportunities to sell other, non-traditional services to those same clients. Insurance, risk management, management consulting, software as a service – I could go on. But if
Mark Zweig
See MARK ZWEIG , page 12
THE ZWEIG LETTER NOVEMBER 7, 2022, ISSUE 1464
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