The collapse of scandal-ridden Enron Corp. two years ago shook the ethical foundation of American business, but it had an immediate impact on a mid-sized Pittsburgh mechanical contractor. Limbach Facility Services Inc., then owned by the energy conglomerate, suddenly found itself on the brink. It was dumped on the heap of corporate assets about to be "liquidated."

Limbach ultimately survived intact. For some $80 million, it was saved by a group of managers who refused to let go. Their financial white knight was a family-owned equity investor with plenty of cash and enough confidence that the contractor ultimately could return the financial favor to its backer.

Chastened by past investments in failed dot-coms and telecommunications ventures, equity investors now are prowling the more stable, if less exciting, ranks of construction. "Now that the hype is out of Internet firms, they’re looking at engineering and construction," says Paul Zofnass, president of EFCG Inc., a New York City-based industry financial management consultant. "Our industry is not growing at 20 to 30%, but it’s still growing."

Despite prior investment losses and the bearish stock market, these investors still have lots of money to spend, with some funds running into the billions of dollars, experts say. They get their money from banks, insurance firms, pension funds, foundations, university endowments and wealthy families and seek opportunities to help firms emerge from troubled corporate marriages, go private or just strike out in new strategic directions–with a nice return on investment clearly in mind.

Construction is one of the last frontiers for equity investors. — KEVIN MITCHELL, FMI CORP., DENVER

"They look for fragmented industries and small privately owned firms," says Kevin Mitchell, a managing director at management firm FMI Corp., Denver, who has headed its capital placement program since 1998. Construction is "one of the last frontiers," he says. While traditional acquisitions still play a major role, FMI believes equity investors have majority or large stakes in almost 100 E&C firms. Experts say the push in infrastructure spending, strong government contracting and niches such as privatization and design-build may draw more to the industry.

The investment is far from altruistic. Equity investors want to see a return on their money when it comes time to exit the deal, usually in three to five years, and sometimes do not understand the construction industry’s complex practices. While most investors claim to stay out of a firm’s day-to-day management, some hold a majority stake as high as 80% and can dominate the board of directors. They also can require construction investments to adhere to strict financial management and reporting rules.

Even so, an equity investor can be a lifeline when managers want to change corporate destinies, or are forced to. Sources say managers of Earth Tech Inc., Long Beach, Calif., had commitments from two major equity investor firms to buy the beleaguered engineering firm back from its scandal-plagued parent, Tyco Corp. The deal reportedly had Tyco’s initial blessing but then was halted. The Tyco upheaval was a factor in the departure earlier this year of Earth Tech Chairwoman Diane C. Creel and has also pushed other executives out the door.

On Sept. 10, The Benham Cos. Inc., an Oklahoma City engineering and construction firm, announced a $17.5-million buyout deal that would end an increasingly rocky relationship with its parent, U.K.-based W.S. Atkins plc. The British engineering firm bought Benham in early 2000, with the intent of expanding market share in North America. The firm later bought and still owns Atlanta-based construction manager Hanscomb Faithful & Gould.

BUYOUT CEO Benham wanted firm to grow in design-build jobs. (Photo courtesy of the Benham Cos. Inc.)

Benham, a profitable mid-sized firm with a long history, did not seek the acquisition but could not resist linking with a larger global parent that could fuel growth into new but more capital-intensive markets such as design-build. "Atkins had articulated a vision for the business in North America that sounded pretty exciting," says Lance Benham, president and CEO.

But cracks developed two years into the marriage, with changes in the executive suite that seemed to affect Atkins’ commitment. "We weren’t the beneficiary of more investment by Atkins," says Benham. Cultural differences also became more pronounced, including company name changes that confused employees and clients alike. In particular, the U.K. parent did not share Benham’s zeal for capital-intensive niches such as privatized military housing. "Atkins was reluctant to get started down that trail," says Bill Payne, a partner in Bluffview Capital LP, a Dallas investment banking firm that advised Benham on its financial options.

Equity Investors in Construction Sectors
Type of Company	# of Investments
Architecture & Engineering	7
Electrical Contracting	6
Environmental Services	14
Facilities Maintenance	5
Construction Services	12
Heavy Civil Construction	4
Heavy Equipment—Rental	4
Industrial Construction	15
Mechanical / HVAC	6
SPECIALTY/CONTACTORS
Fire / Security	5
Marine	2
Roofing	3
Scaffolding	2
Telecom / Cable	14
TOTAL	99
Source: Fails Management Institute

A management buyout was seen as one fast solution but time was short to amass sufficient cash. Benham "needed to partner with someone financially sophisticated," says Payne. With Bluffview as matchmaker, Benham linked with three equity firms, all Oklahoma-based. They were attracted by Benham management’s willingness to invest, attractive multiples and a desire to help a local firm recover local ownership. "It was a significant contribution by management, not just by one guy, and it’s a stable business," says Rainey Williams, president of one investor, Teton Capital Partners. Management now has a 55% stake, with the rest in investors’ hands. In a statement, Atkins says the deal will "enable greater focus on our core businesses" but declines further comment.

Lance Benham says the investors "have a role in approval of some operations, but they don’t claim to be experts in our decisionmaking process." He says the new structure will allow the firm to pursue work "aggressively," but laments "the amazing amount of management attention that has been consumed in this process. It’s been a distraction."

Shifting market winds, in some cases at gale force, also have pushed these new financial partnerships. The deregulation of the energy sector in the 1990s spurred many utilities and independent power developers to acquire energy contracting capabilities. Then the market fell out, and independent power producers lost favor with Wall Street. Exelon Corp., Chicago, was one of them.

The firm decided last year to shed its contracting group, Infrasource Inc., Norristown, Pa., and hired Merrill Lynch to to find new owners, says David R. Helwig, president of the Infrasource unit and soon-to-be CEO. He says the firm had several offers but found a $280-million deal from two equity investors "the most attractive package." The deal for most of the Infrasource units announced last summer could be completed imminently pending regulatory approval, says Helwig (ENR 7/7 p. 19).

There will be a different level of focus on our business. Now we'll be center stage. — DAVID HELWIG, PRESIDENT, INFRASOURCE INC

Management "enthusiasm" to be part of the buyout deal also was a draw for the investors, says Helwig. Managers will own about 15% of the firm. He says the deal will remove layers of corporate bureaucracy for Infrasource. "For sure, there will be a difference in the level of focus on our business," he says. "Now we’ll be center stage." New ownership also pleases the firm’s power clients. "Some of our customer base are enthusiastic that we will no longer be a subsidiary of a utility they’re competing with," Helwig says.

The freedom to bid work unencumbered by a parent also pleases Limbach now. The company was owned by giant conglomerates–Enron since 1998, and water services giant Vivendi for 12 years before that.

Limbach Chairman Stephen Wurzel admits that the firm enjoyed the parent firms’ cash outlays and better employee benefits. But with Enron in particular, Limbach was also tied to servicing the energy giant’s customers.

That all came crashing down in late 2001 with Enron’s bankruptcy. "On Dec. 1, Bank of America swept our bank accounts and our surety refused to issue bonds," he says. "Our culture changed overnight. We had to focus everyone on billings and collections, a whole aspect of business that smaller firms do every-day, unless you’re owned by a big conglomerate."

Moving quickly, almost desperately, to avoid liquidation of the 100-year-old contractor, executives hooked up with FdG Associates, a family-owned equity firm in New York City that helped 50 managers finance the buyback from Enron. They now have about a 30% stake in the new entity, Limbach Facility Services LLC. "Our key investment criteria was the firm’s reputation over the last 100 years," says Mark S. Hauser, FdG’s managing director. "We called many of their clients. We do a thorough due diligence on all our businesses and how they’re perceived." FdG’s investments range from an online vitamin business to a wine industry root stock supplier. It claims to have $205 million in its equity fund.

FdG was impressed with the company and its executives but less so with its financial management and controls. Getting rid of the Enron-appointed chief financial officer was the easy part. "We’ve hammered home the notion of thinking as an owner, not as an employee," says Hauser. "We don’t focus on revenue at any cost. Management has responded."

Hauser is chairman of the firm but claims FdG’s majority role "is illusory." While he has the power to make management decisions, "if you fire the CEO, who will run the company?" he asks. "At the end of the day, it’s a partnership."

Wurzel says that while the economy has impacted the firm’s business, it still expects revenue of $500 million this year. "We will be profitable," he says. "Whether you’re big or small, you have to manage cash or you’ll fail. We’re just happy we survived the whole thing."

Hauser says it is too soon to project the firm’s return on investment since the investor is in it for the long haul. "We assume a five-year plan in all our investments," he says. "We’re looking for a 25 to 30% [compound annual] return, and we don’t see Limbach as any different."

FALLOUT Limbach was caught in the Enron Mess. (Image courtesy of LImbach)

Equity investors’ longer-term business outlook was some comfort to ENSR Corp. The Acton, Mass., environmental consulting firm linked with Wingate Partners, Dallas, in 2000 after its parent, German water utility RWE, sought to divest its U.S. businesses. ENSR’s bottom line suffered in the last two years because of market softness but new President and CEO Bob Weber believes the investors will tough it out. "They still believe that this investment, at the time they liquidate it, will meet their rate of return," he says. "It’s different from the days of dot-coms and telecom firms."

With the cost of money becoming more expensive, equity investing will be more prudent, experts say. The construction landscape is already littered with the bones of consolidators and telecom contractors that didn’t pan out. "Investment firms have, in some cases, overleveraged their investments to get returns," says FMI’s Mitchell. "Industry consolidation isn’t done, but now it will be more methodical. You won’t see buyers going from one firm to 30 in two years."

Incentivizing top managers and other employees through expanded company ownership also appeals to equity investors. American Capital Strategies Ltd., Bethesda, Md., provided financial muscle to employees of the former Roy F. Weston Inc., West Chester, Pa., to successfully take the company private in 2001. The $66-million buyout from the Weston family gave the equity firm a 60% stake.

American Capital Managing Director David E. Steinglass says broader ownership is critical to boost rewards and loyalty for any firm’s best producers, a group he terms "seller-doers." He says such incentives are even more important in service businesses like engineering and construction. "In a manufacturing business, the vast majority of people don’t care if the firm succeeds or fails," says Steinglass. "That’s not true in E&C, and that’s what makes investing in this sector attractive."

Steinglass says the generally weaker margins and trading multiples in the construction sector leave lots of room for improvement and investment growth. The equity firm has already realized its reward from its partnership with the now-renamed Weston Solutions Inc. This past June, American Capital completed a recapitalization that enabled Weston employees to buy out the investor’s stake.

American Capital says it netted proceeds of nearly $25 million and a "realized gain" of $23.5 million. The firm adds that its gains over the life of the investment translate to a 68% compounded annual return, far exceeding the usual 20 to 30%. "The investment has been a terrific success," says Steinglass. "The value is putting equity in the hands of people who can make a difference."