Ep. 2: Private Equity in AEC: A Growing Trend

𝗜𝘀 𝗽𝗿𝗶𝘃𝗮𝘁𝗲 𝗲𝗾𝘂𝗶𝘁𝘆 𝘁𝗵𝗲 𝗿𝗶𝗴𝗵𝘁 𝗳𝗶𝘁 𝗳𝗼𝗿 𝘆𝗼𝘂𝗿 𝗔𝗘𝗖 𝗳𝗶𝗿𝗺? The architecture, engineering, and construction (AEC) industry is experiencing a surge of private equity (PE) investment. Jeff Adams, CPA, CMAA, and Ira Starr, Long Point Capital, explore how PE can fuel your firm's growth. 

In this episode, Ira and Jeff explore the typical investment model, how to position your firm for PE (platform vs. add-on strategy), and the key benefits and considerations. Learn how to leverage PE to access capital, strategic expertise, and achieve your growth goals. Tune in and unlock the potential of private equity for your AEC firm!

Transcript

[Intro]: Welcome to AEC Unscripted: M&A Edition, your go-to podcast for unfiltered conversations and expert analysis, brought to you by Stambaugh Ness.

[Opening Credits]

Jeff Adams: Welcome to AE Unscripted. I'm your host, Jeff Adams, the Director of Mergers and Acquisitions at Stambaugh Ness. Private equity has been around for over a century, but it began picking up steam in the latter half of the 20th century. Now, here in the 21st century, we've seen PE take a strong interest in the AEC industry. Today, we're going to be exploring the world of private equity and its involvement in the AEC industry.

I'm delighted to have joining me Ira Starr the Managing Director of Long Point Capital, a private equity firm co-founded by Ira in 1998. Ira has served as a general partner of funds with private equity investments, including over 40 in the AEC space. You may be familiar with some of them Wolpert, CHA Consulting, EYP, Cumming Group, and now MNS 

Engineers and Allnorth Consultants.

He holds a Bachelor of Science and Engineering degree from Princeton University and an MBA from Harvard. Ira, how are you doing today?

Ira Starr: I'm great, Jeff. Thank you for having me.

Jeff Adams: Ira, I've got to ask you. You graduated from Princeton with an engineering degree. How in the world did you wind up in private equity?

Ira Starr: That's a good question. Jeff, my career has basically been dictated by figuring out what I don't want to do. I grew up in my father's plumbing supply store, working there every Saturday, and I hated doing that. So, I knew I didn't want to work in a retail store or sell plumbing supplies.

I got to Princeton. I was a good math and science student. Tried engineering; I just didn't want to do engineering as a career. Business seemed more interesting. It was around the time Apple went public. So, I took a job as a strategy consultant at Booz Allen. I thought that would be of interest. It was a great background.

I didn't want to do strategy consulting, so I got an MBA to make a switch. I thought I wanted to get into the venture capital industry, but I ended up doing investment banking for leveraged buyouts. And luckily, one of my clients took a liking to me a couple of years in and said, would you like to join us doing private equity? So, I've been doing private equity for over 30 years at this point.

Jeff Adams: Very good. So, you never really practiced engineering? Just went straight into being an investment kind of guy.

Ira Starr: I never practiced the value of the degree; that is, I know what engineers do. So I can empathize with what they do, how difficult it is, and what their life is like. But no, I never practiced.

Jeff Adams: You probably think like one as well.

Ira Starr: I clearly think like an engineer.

Jeff Adams: You started your firm in 1998, right? So, what was your first investment?

Ira Starr: My first investment was a building products company. It was called Arch Aluminum and Glass. They made fabricated glass products. So, they took raw glass and made tempered glass, laminated glass, or insulated glass panels. We really did a lot of building product work at that point. It was very successful, and I'm still friendly with the CEO of the company.

Jeff Adams: So, it didn't exactly start in the professional services or AEC space with your first investment. At what point did you make that transition?

Ira Starr: We tended to do a lot of building products. When we started the firm, our main investor was a large building products company. So, we tended to be viewed as building products experts. I spoke at a lot of conferences about the building products industry and just started looking at the entire construction industry, and realized that we're missing out on a large part of the industry, which was the design side.

So we started focusing on that from 2005-2006. We viewed it as a great place to invest. Number one, parts of it were very stable industry, notably the pieces that were focused on infrastructure and what I call institutional building versus residential. A lot of people were scared of the residential cycles.

We saw a lot of reoccurring revenue from clients or work with the same consulting firm year after year after year. It wasn't the same project, but there were always projects to do. And we were one of the first or probably one of the first 2 or 3 private equity firms to be investing in that space.

So there was just, a large number of transactions, we could evaluate. I would say that the issue back then was convincing the engineering firms that private equity wasn't the evil empire, and was actually a good partner, but we viewed it as a great, area to invest in.

Jeff Adams: 

How do you feel now? You mentioned the evil empire. Do you still face that sometimes, or feel people are still trying to figure it all out?

Ira Starr: 

It's easier now because we can go back and reference all the great deals we've done, and we just say, if you're worried about it, just pick up the phone and talk to one of the CEOs of one of the prior companies. It's still in a lot of people's minds. They're very nervous about it. I mean, the first thing I do when I talk to any company who's never had a private equity investor is like, what is private equity?

And why is it helpful to you? Why we could be a good partner for you, and why we're not out to basically cut people and split up the company. All the things you read about in the papers. I would say the private equity firms that do that are out there.

It's a pretty small percentage of the firms that actually do that. Most of the firms out there are pretty good partners for management teams.

Jeff Adams: Yes, certainly. And I guess private equity kind of varies by industry. Right. So, like in manufacturing, maybe part of the synergies, part of the value that private equity is able to bring a lot of times is through G&A synergies, which does involve reducing cost and consolidating it.

Ira Starr: It can. What you're trying to do is you're trying to grow profits, and sometimes it's cost-cutting, and sometimes it's revenue growth. In the AE space or professional services in general, we're generally, or I would say, always adding people because the only way to grow a professional services firm is to have people because, basically, you're charging for people's time.

And if you don't have the people, you can't charge for the time. So, our goal in every case is to grow the firm by adding people; we're generally adding people on the management side. We're adding people on the billable side. And what we're trying to do is we're trying to make the firm an employer of choice.

It's really key for us to, be viewed as a great place to work. For a professional services firm, you really need to show that you're growing, because to attract really good talent, they want a career. They're not looking for a job. Great people want a career, and you don't have a career unless the firm is growing.

And so it's really important to show your outside constituencies, namely the people that you can grow, because otherwise you're not going to get good people.

Jeff Adams:  Well, and you mentioned, with people being the main source of revenue for AE firms, I can't recall the last time I heard someone say we've got too many people, looking to get rid of some. So, there is an overall shortage in the industry, and everybody's feeling it.

Ira Starr: It clearly is today; it's much more important to be viewed as an employer of choice. I will say that I've been doing this for a long time, at various times, it's much easier to attract people these days. The chief constraint to growth is good people.

Jeff Adams: Yeah, absolutely. So you mentioned you started out with a building products background type investor. And so naturally invested in building products. How did you go about determining where to invest funds from that? Did you go straight into AE from there, or were there some steps in between?

In general, how do private equity firms decide what industry to go in?

Ira Starr: You know, there are a lot of different kinds of private equity firms out there. So, I can't generalize. Some private equity firms have a specific industry focus; some private equity firms are pretty opportunistic. I would say that originally, we were pretty opportunistic. We did everything from logistics to building products; we even did a restaurant deal.

When we started focusing on professional services, we just saw it was more unique. And, I would say the most important thing about professional services is the leadership of the companies is really wary about who they bring in as a partner. So it's not just, we're going to sell to the highest bidder, because if they sell to the highest bidder and they keep equity in the company, what happens is, they could end up with a bad partner, and having a bad partner could drive people away.

You get into a death spiral. So I like to say that any professional services firm, if they're going to pick PE partner, it's got to be a PE partner that has an aligned strategy, has an aligned culture, has an aligned way of partnering with the management team. So, and I say that, we started focusing on professional services.

And really, one of the things about professional services is that the more you do, the more successful you are, and the more you can attract other investors because they trust you. I mean, we've had companies, you know, we're one of the original leaders, and we have companies that are on their third private equity firm. We've companies that grew from less than eight of EBITDA to over 150 of EBITDA at this point.

So, we have a really successful track record of making these companies growth-oriented, resilient, stable, and can grow. We don't build houses of cards. And it's valuable when we're talking to new management teams because they just pick up the phone and talk to people and can see what's happened.

Jeff Adams:  Yeah. Well, Ira, you mentioned a couple of things a while ago about what kind of drove your interest in the space. But I want to just step back a little broader just for private equity as a whole, in case some people miss that. What has been driving the PE interest in the AEC industry in the past two decades?

Ira Starr: So, our first investment was in 2006, and very few people were doing it. 2008 was our first engineering firm. Before that, it was a project management firm. 2008, I was still getting questions from my partners and my investors like, what the hell are you doing? You know, these are people, businesses.

I think part of the interest in PE has really been generated by our success and success of, a small number of other firms. And then it all accelerated due to the infrastructure plan. Once the infrastructure plan passed, I think all the PE firms are looking for investment themes. One of the investment themes was, there's going to be a lot of money coming for infrastructure.

How do we invest in that? And they can't own bridges or highways in general. I've had a friend who owned a tunnel in the past, but in general, you don't do that. And so they started looking at how do we play the theme. And, infrastructure engineering has been a major, way for people to do it.

And because of our past success and other people's past success combined with the infrastructure, it's just PE firms have flooded the market in the last few years. So, ten years ago, not so many, five years ago, a lot more. We sold CHA, I think it was in 2016 or so. There might have been 10 or 20 private equity firms that would have looked at it.

Now they're over 100. It's really changed a lot between 2016 and 2024.

Jeff Adams: Well, IRA, you're kind of walking into something there. We hear the term "dry powder." Right. And I think it was at the end of 2022, there was supposedly $2 trillion of dry powder. And now I think I hear it might be as high as $3 trillion.

Ira Starr: So yeah, there's no lack of money. 

Jeff Adams: Explain to people what this "dry powder" is and where it comes from.

Ira Starr: Yeah. So, this is how private equity works. Private equity, in general, works, with investors committing to providing capital to the private equity firm when they need it. Dry powder is basically the availability of that capital. So if you have a $1 billion fund and you only spent $100 million, you've got $900 million of dry powder.

And so there's a lot of difficulty finding good investments in the last couple of years. It's been very slow for a lot of people over the last couple of years. Therefore, private equity firms are generally trying to invest the money over a five-year period. So if they got their commitments two years ago and they haven't invested much money, there's a big emphasis on putting money to work.

So I think that's what you're talking about. People are trying to invest the money, and they're looking for good places to put it. And the AE space has been a good place to put it. And when I say the AE industry, it's really the E part of the industry. And specifically with an E, it's infrastructure - E. There haven't been many people investing in architecture firms.

There haven't been many people investing in what I would say, other kinds of engineering firms. Industrial has not been a hot area. MEP has not been such a hot area. It's really the transportation and water-oriented firms are the firms that are really getting the big investments.

Jeff Adams: And it goes without saying, I think a big reason for that, and the reason for that, is we know the government is pushing it. Right. There's going to be a lot of money being poured into our infrastructure in the coming years. And that's where private equity is going, right?

Ira Starr: It is. We like the space, even without the infrastructure plan. When we invested in CHA, it was December of 2008, which was a scary time to be investing in any company. And it was after Lehman Brothers basically went bankrupt. We viewed it as good work that had to be done no matter what.

And so there's a lot of stability. And literally, we went back before we made the investment. We called a bunch of their top clients, and we said, well, looks like the world economically is falling apart. Are you going to continue to get CHA work? And the answer was, "We have to." And so that's sort of been our theme throughout the years.

We don't need the industry to be growing rapidly. It's a giant industry. There's always ways to grow by providing additional services to your clients, by doing add on acquisitions that help you grow strategically. So the infrastructure plan has accelerated, but I think the infrastructure plan is just brought more attention to it than anything else, and it's made it more competitive.

Jeff Adams: Well, and as you mentioned, there were 10 to 20 firms back in 2016 that you felt would be interested in CHA, and now you think there'd be over 100. So putting the pieces together, saying, all right, the infrastructure bill has kind of driven it five, six times or more, interest in private equity in the industry.

What do you think? That says, for the future of private equity in the industry, do you think there's going to come a day where it's just the 10 to 20 that are back in there again, and the interest kind of wanes, and private equity money goes elsewhere?

Ira Starr: Well, this gets into the whole public versus private market. I think private equity is going to continue to grow. There are fewer and fewer reasons to be a public company. There are large and larger private equity firms. So, even ten years ago, I would have said that if we had a $50 million EBITDA, an engineering firm, there would be a limited number of buyers.

Now, you could easily have a $200 or $300 million EBITDA engineering firm and find buyers for it. I think private equity is gradually replacing public equity in a lot of cases. So I don't see any shortage. It's going to continue to grow. It's not only going to continue to grow where we are today; it's going to continue to grow in other sectors of the AE space.

Jeff Adams: Okay. So you said you see private equity as a whole continuing to grow the dry powder building and all that. As more and more investors climb into the private equity space. But also, what I'm hearing is you feel like they won't be leaving AEC in the foreseeable future. It's something here to stay.

Ira Starr: Oh, it's clearly here to stay. What's interesting is we haven't had any disasters. Maybe there have been, but I haven't heard about them. So I'd say, by and large, the investments have gone well. As long as the investments go well, people will put more money into them. You know, once something bad happens, who knows?

For the last 15 or so years, the economy's been growing pretty nicely. There are a lot of people with short memories. Bad things happen. The infrastructure-oriented engineering firms did pretty well during COVID. Other industries have been decimated. So, something may happen at some point, and people will reevaluate.

But you can never anticipate those things. But for right now, I continue to see the interest growing.

Jeff Adams: Well, Ira, let's switch gears here a little bit. Just talking about the typical investment model that private equity has, specifically in the AEC space. How would you answer that? What would you say is the typical investment model?

Ira Starr: I would say a typical investment model is:

Providing the management team/owner some liquidity and really teaming up with the management team to grow the business. I know what we do, I don't know what everybody does. We tend to view these companies as investments. We view them as we're partners with the management team. I'd say we've owned anywhere from 40% of the company on the low end or we've been a minority investor to that 60% on the high end.

We've where we've been a majority investor. But by and large, we want the management teams to own about half the company. And we come in; we'll make an investment and borrow some money from a lender, usually not a lot. And we'll work with them to grow the company. So something I learned very early on with a lot of these companies that are owned by multiple people is they grew over time, a bunch of partners on them,

they make most of their money from equity distributions. There are owners of the company, and they distribute the profits. When you have a model like that, It's really difficult to grow the company. The CEO of the first engineering firm we invested in said to me, "I can never do an acquisition because, number one, we don't have any experience.

Number two of my partners don't want to go home to their significant others and say; we're not going to be taking distributions for the next few years because we're doing an acquisition." So that just doesn't work. What we need to do is get people some money in the bank and make their families feel good, and then we could focus on growing equity value. Growing equity

value is the real way to grow these companies because if you're just looking at distributions, you're missing a lot of growth opportunities, and going to be stuck because you're not taking enough risks. So I forgot what your original question was, Jeff, but that's it.

Jeff Adams: Well, it was about the typical investment model. I think one thing you said in there that jumped out to me is sometimes, personally, with Long Point, you're thinking about maybe sometimes you'll take 40% investment, sometimes more than 50. You usually try to stay around 50. 

Ira Starr: We want to be partners with the management team. What determines it? We'll do a majority investment or a minority investment. It really depends upon the goals of the management team. I would say, in general, when I meet a company for the first time, I explain who we are and what we do, and then I ask them to evaluate their goals for the transaction.

And so their goals could be, we've got one of our owners who just wants to cash out. We just need to cash them out, and we want a partner to help us grow the value of the company. So that's one model. Another is a couple of companies we invested in were owned by entrepreneurs who owned a significant part of the company, and they had their whole net worth tied up with the company. They wanted to grow, but they felt it was prudent to diversify their net worth.

So pulling money out and leaving money in, made sense. So, you start with what a company's goals are, and then you determine what transaction meets the goals. So if a minority transaction meets the goals because the management team wants more upside, that's fine with us. If, majority investment meets their goals, that's fine too.

It's easy for us to do a majority investment because with a minority investment, you need to deal with a little more, documentation on what the management team can and can't do without us. But we view companies the same both ways. We work with them the same, we interact the same, and provide the same amount of strategy support, financing support and M&A support and everything else.

So, by and large, it doesn't make a difference to us.

Jeff Adams: Very good. I guess what I see a lot of times in M&A deals with private equity is that PE firms tend to come in and acquire; I'll call it a midsize to even large-size firm; that is considered what we call the platform. And then there's either, you know, much smaller firms to get brought in that are called Bolt-on's or add-ons, to that, that's the most typical there.

There's other models I see where people, don't combine the brands, but they keep the brands, standalone, kind of as a group of a family of companies that they're putting together. But talk to us a little bit about that. Just as far as what the the mindset is behind the various models.

Ira Starr: I would say that virtually all of the private equity investments in the space have focused, add on acquisitions to grow the companies. It's really especially important; I would say, in the infrastructure engineering area, you could be a great engineering firm in Cleveland. If you want to go to Atlanta, you can set up a shop,

and the clients in Atlanta have their own consulting firms. You can't just set up there and expect to grow. So, most of the growth in the civil infrastructure area has been done through acquisitions. To do that, you really need to know how to do acquisitions. You need to know how to find them. You need to know how to negotiate them, do the diligence, and integrate them.

To integrate them. You really need a what I call a full management team. So platform generally needs what I would say, a fully built out management infrastructure. So you need a good finance team, you need a good HR team, you need a good IT team. You need everything that would allow you to buy a company and integrate it in.

So, platform companies are generally a little bit larger. They're larger, and as a result of being large, they have built out that management team, and they're more suited to do what I call add-on acquisitions. I hate to use the word bolt-on, that just seems to be a bit of a derogatory term, but add-ons, and I would say, there are two different pretty distinct ways people have done this.

We generally work with the management team and try to figure out what we want to look like in five years. So, I like to use CHA as an example. CHA, where you worked, Jeff, for a period of time. It was an upstate New York.

Jeff Adams: That's right. That's how we originally met; Mike Carroll introduced us.

Ira Starr: Exactly. So CHA was an upstate New York, Albany-based transportation engineering firm. And when we invest in it, the clear way to grow value was to expand geographically and to expand into other markets. So, they were primarily transportation. So, we used acquisitions to expand geographically into the Northeast, into Canada, into the Midwest, and into the Southeast.

So, we added additional vertical markets. We became much bigger in the water market, the utility market, and in the power market. So we used acquisitions to diversify ourselves. Diversification generally means more stability because having a more diversified firm means if some things go down, some things will remain stable and go up generally. And so if you're more diversified and more stable, you're going to be worth more.

And that's what we did with with CHA. So we've used acquisitions for vertical strategic purposes. This is what we want to look like in five years. And how do we get there most effectively. There are other firms that have just grown through acquisition for the sake of growth. To be able to show people we can grow 20, 30% a year by doing acquisitions.

A lot of those have worked. We just haven't done that. A lot of those have worked partially because the bigger you get, the higher multiple people attribute to you. People are generally valued as a multiple of EBITDA. So, if you're a $5 million EBITDA firm, you're going to get a lower multiple than if you're a $40 million EBITDA firm.

So a lot of people have just grown for the sake of growth to get that multiple offer, which has worked well for a lot of people. We just haven't focused on it that way. We really focused on it: these are our strategic goals; how do we achieve them? It could be organically or through acquisition? Once we hit the point where we've tried to get to, we'll try to look at an exit for our investors.

But both have worked. But in order to start, you really need what I would call a management team that's capable of supporting the acquisitions.

Jeff Adams: So, I guess for a firm owner out there, Ira, if they're contemplating, I guess, either some investment, needing some capital infusion to help them grow or looking for an exit strategy, as you said, to bear to get some of their stock out of business and convert it to cash. How should they look at themselves to determine whether they're a platform or an add-on?

Ira Starr: I would say that to be a platform, you really want to manage; you want to be on top of the company, not in the company. You want to be managing the company, and the CEO of a company like that really needs to be a manager, not an engineer. I would say that's sort of the clear demarcation when I talk to firms.

I ask the CEOs what they liked doing. If they say we like to work on projects and work with our clients, that's very different from, we'd like to manage the firm, and we're trying to develop strategies to grow it. So, to really be a platform, you really want to.

You really want to be a true CEO and focus on the management of the company. It's interesting when we do add-ons; we're looking at a couple of add-ons for one of our portfolio companies today. And when I talk to the owners of the company, I say, what do you like to do?

And they'll go, well, I hate this stuff. I hate this IT stuff, and we don't know what to do about AI. And yeah, we've got a CFO, but their CFO is really a controller at best. We like to work with our clients. Those are perfect add-ons because, essentially, our platform company has those capabilities.

And we say to that CEO, you know, what we're going to do with you is if you become part of our platform, you can focus on what you like to do. You want to work with clients. That's wonderful. That's a really valuable, attribute, but, if you want to grow the company, you need to team up with somebody because in order to grow the company, you need to invest in the the management infrastructure.

Jeff Adams: I think that's a great point you're making there; IRA, engineers, and architects generally get into the business because that's how they're naturally wired. That's what they like to do. That's what's the fun of it all. And, I've referred to it sometimes as different engineers, architects; they've become accidental CEOs.

And I don't mean that in a derogatory way by any means. But what I mean by that is they've started their trade, they had fun, they were having success. They got more clients. They had to hire people. Many of them started their firm out of their basement. Right. Or their kid's bedroom or garage or something like that.

Ira Starr: Absolutely.

Jeff Adams: They grow, and they start scaling. And before they know what, they're no longer getting to do what they love to do. But they've kind of gotten stuck in this thing of having to manage a business. And that wasn't what they signed up for when they launched out on this.

Ira Starr: Yeah. You have to like to do that. We've had CEOs who have really grown into the role. They started with one person, and they may have a thousand people today, but they have become management students. And, when you have a thousand people, it's a firm that really needs to be managed.

If you have 50 people, your CEO, you probably know each of the 50 people. They probably have been with you for 20 or 30 years. You know their kid's names; you know their spouse's names. And it's a different way of managing a business. If you have a thousand people and you're making acquisitions, you need to manage it more by the numbers.

You need to have better financial systems and better HR systems in place. Jeff, I would say I see your comparison more in architecture than I do in engineering. It's a bunch of architects who happened to be in business. We like a business that happens to be in architecture

engineering. A leader is a leader is a leader, generally; it's good to have experience in professional services, but we need a firm that knows how to be managed. As opposed to a firm that basically grew up and has a great client base, but really isn't being managed. And you need to it's a different way of looking at a business.

Jeff Adams:  Absolutely. And I love the way you said all that, IRA. And I think that can be very helpful to our listeners here who may be contemplating what their next move needs to be. And where they kind of fit in that. I would tell us a little bit: how does private equity make money for its investors?

Ira Starr: Well, let's say we need to grow the value of the equity. We don't get investors unless we can grow the value of their investment. There are different kinds of investors. Obviously, if you're a debt investor, you're looking for a lowish type of return. You know, better than the Treasury market, less than private equity.

Private equity investors are typically looking for any, you know, 20, 25% compound, you know, growth in the value. Everybody's different. Larger firms are probably looking at lower returns. Smaller firms are typically looking at larger returns. It's completely achievable. On average, we've made over five times our money on these investments for ourselves and for the management teams.

It's pretty straightforward. A little bit of leverage, a little bit of debt, and a lot of strategy. Using some acquisitions to position yourself to achieve your goals more quickly. And you could readily do it. And it's really difficult, but it's straightforward. The difference, I'll say, Jeff, that I learned a long time ago when I tell the management teams I'm looking to triple the value of the equity in five years, which we're trying to do, and the eyes roll.

It's like, oh, my God, it's taken me so long to get my company to this point. How am I ever going to triple the size of my company in five years? Well, number one, we're not asking them to triple the size of their company. We're asking them to triple the size of the equity value. And I explain to them how it works.

And literally I've put together about a 30 minute presentation where I explain to people this is precisely how it works, because I want the management teams are our partners, and if they don't understand how we do things, it really isn't going to work. So I sat down and spent 30 minutes and just walked through an example of this is precisely what we do.

This is how a transaction gets started. This is what it looks like on day one. This is how you take money out. This is how you retain ownership. In the example I have, a management team takes out 75% of their equity value in cash, which in the bank and but retains about a 50% ownership interest in the business.

People don't understand how that works. So you get most of your liquidity. But you retain a lot of upside. And then, I walk through it with them how do we actually grow the company's value? And again, it's straightforward. It's difficult to execute but it's straightforward. And people, by the time I get through that presentation, people go, oh, is that all it is?

And I go, yeah, that's all it is. It's obviously difficult to execute. People make mistakes in acquisitions. They make mistakes all the time. One of the things we add value to is we've made a lot of mistakes over the years. We're not going to make the same. We're not going to let the companies make the same mistakes we've made.

Obviously, there are still new mistakes to be made. But we've been doing this for close to 20 years. We've learned how to do things better, and we've learned what not to do. And we try to stay away from them. So that's a long way of saying we're trying to triple the value of the investment over five years, not triple the value, the size of the company.

Part of it is through just focusing on organic growth better than maybe they have. We spend a lot of time trying to figure out how to accelerate organic growth, figure out strategically how to create the most value and use acquisitions as a method to get there faster.

Jeff Adams:  Well, I'm certainly not going to ask you to do the 30-minute presentation here, but if anybody here is interested in knowing, reach out to Ira Starr, and I'm sure he'll be happy to share that with you. Ira, one thing you mentioned in your example was the 50% rollover investment that the selling owner might have going forward after you acquire the firm. We kind of have something that we love, and I call it the second bite of the apple when it comes to private equity.

You want to talk about that just a little bit.

Ira Starr: So when I talk about rollover, it's really, in general, the management teams, you know, for, let's say, every $100 of equity value, you own the company based upon a certain valuation. We're generally asking the management teams to take $30 out of that $100 and roll it back into the company's equity to take out $70. So you're taking the bulk of your investment.

It's in cash. You put it in a diversified portfolio. You make your families feel good. The $30 we ask you to roll over that $30 is really the second bite at the apple. So if what we're trying to do is to use that simple example, if you take out $70 upfront and you think $30, then we're trying to triple the value of that over five years.

So that $30 becomes a $90. So that's the second. Bite it up. You take out $70. Day one. You can take out $90, five years later. So what has happened in every one of our investments is the management teams have said this has been a great experience. We want to do this with another private equity firm.

And as a result, what they've done is they've taken that $30 million, which may be $90, $100, $120 million. And they've said, let's do it again. Let's take 30% of it and roll it over, so let's say it's worth $90 million. They may take another 60 million out, put it to cash, put it in the bank, take the $30 million, and roll it back.

And so we have two companies which are on their third private equity owner. So, the initial transaction took out money. They've taken out money three times. The CEOs of those companies will go private equity is the greatest thing to the engineering industry. That's never happened because it's the ability to basically every five or so years to take out a bunch of money for the management team. I'm gonna go further on the explanation, which makes it easier to attract really good management talent because if you're a large, private engineering firm and you get people equity, they don't know when they're going to

get the money out if you're a private equity back engineering firm. And we brought a lot of people into one of our portfolio companies, giving them equity as an inducement to come on board; they know within a certain period of time, they're going to get a big check. With a large private firm, you don't know when you're ever going to get money out.

So it's really become a powerful way to attract really strong management talent who want to be part of a growing firm and would like to create some wealth for themselves and their families.

Jeff Adams:  Yeah, I've seen it happen multiple times where private equity firms help owners. Some, like you said, the second bite of the apple can be a bigger bite than the first one. And it can be a very lucrative proposition. And to your point, repeatable. Right. You can go through it several times, and several layers of management can go through it and get to benefit from it.

Ira Starr: Absolutely. And yeah. And you say several layers of management. It's interesting because in a lot of the firms we've invested in, the management has changed completely over the years. CHA, just because I use that as an example, the entire management team we started with changed during the course of our investment period. I mean, because they all retired, we bought their stock over time.

We promoted people internally to grow the company. It becomes a market for us as people retire. We provide it to other people in the company. So, it tends to be a great mechanism. Not everybody's going to be there forever at every company. And so you need to build in management succession.

And it's a great way to do it.

Jeff Adams:  Well, Ira, as you pointed out at the start of our conversation, people are very important in this industry, in the AEC space, and culture is very important. We hear a lot out there when it comes to private equity. That's probably where I hear the most negativity: the cultural conversation related to private equity.

What are your thoughts on that? How do you know if your culture is right for private equity?

Ira Starr: Yeah, I would say that for 95% of the people in any company, their day-in and day-out lives are exactly the same pre- our investment as opposed to post- our investment. We have the people; engineers tend to be a pretty dedicated crew. They want to serve their clients, and they're going to continue doing that. It's really the top layer of people who need to focus more on how to grow the company.

If somebody's serving their state DOT client, they're going to be doing that. It's not going to change a lot. What they're going to see is, if anything, I've seen the cultures really become better because they become growth engines. And there's just much more opportunity to grow, as far as a career.

As far as the platforms go, it's the same company going forward that it's been in the past. It's the same culture, it's the same company. Every company has its own unique culture. Everybody thinks they're completely unique. Most of them are pretty much the same. But in every company, people are going to be working day in and day out, doing the same thing.

And all we're trying to do is, I guess number one, we're trying to figure out what we do to make it more valuable at the end of, say, a five-year period? How do we make it an employer of choice? The only way to make it a great company is to become an employer of choice and really add the resources to figure out how to grow the company.

In every company we've ever invested in, we've added a lot more management resources because, typically, most companies are underfunded in a lot of areas. They're focused on serving their clients. Usually, the CFO is the person on whom they spend the least money because they have to deal with the people. So, they typically do HR.

They need IT because they get systems. CFO is typically an area that could be improved. Not always. So we're just focused on how do we put the right people in the right seats to grow the company and, culture-wise, I've gotten thank you notes when we've got into liquidity for everybody was like, Jay, we heard what you said upfront and we really we weren't sure what to expect.

We respect our CEO. And he wanted to do it. But it worked out great. Thank you. And that's been so the unanimous opinion of a lot of people. 

Jeff Adams: It sounds like a win-win. 

Ira Starr: Knock on wood, it's really worked well. I mean, it's worked well; we love to work with smart people, engineers, and their leadership are smart people. But you show them a little bit of a different direction on how to take the company and grow it. People buy it pretty quickly.

Jeff Adams: So, Ira, I guess as we're wrapping up here, you have two investments in the AEC space. I believe right now. MNS Engineers out of California, and Allnorth out of Canada.

Ira Starr: Correct?

Jeff Adams: Yeah. You want to just tell everybody here what you're kind of looking for as you're growing that.

Ira Starr: Yeah, sure. They are very different kinds of companies. MNS is an infrastructure firm that is focused on transportation, water, and other government services, primarily planning services. They're more construction management than they are engineering right now. We're trying to make it much more of an engineering firm now, too. So it's construction management. They're basically in the field, making sure the projects are constructed per the design for their clients.

So we have a lot of people in the field. The idea where, MNS is primarily Central Coast, California, between LA and the Bay area, we're expanding rapidly into Southern California now, we're looking to expand into Northern California. Our focus is on California. Could it be someplace else in the Pacific time zone? Sure. But, California is just an enormous economy.

I think it's the fourth or fifth largest economy in the world after Germany. California's like five states in one. So we're in one of the five states, and there are other states to grow into there. So it's working great there. We started the company with probably 145 people.

Now it's at 200 people, 210 people. A couple of years later, we've added a lot of management talent at the top, and it's worked super. We're having a lot of people reach out to us because they want to join us. So we've really become an employer of choice, which has really been key.

And we're looking to do acquisitions. We have half a dozen acquisitions in process, one way or another, that we're trying to bring to a close. Allnorth is a different kind of company. Allnorth is just an engineering firm. It's primarily civil engineering and construction services, construction services being survey, material, testing, and different markets in Western Canada.

The markets in western Canada are infrastructure, but also mining, pulp and paper, oil and gas, oil and gas, and more midstream pipelines, which is more infrastructure. Mining is a lot of infrastructure. So they provide a lot of the same services. We are looking to grow and diversify that company through acquisitions; I think we started with about 600 people.

They have about a thousand people today. So they've been growing pretty rapidly. We did a pretty significant acquisition, a few months ago. So it's going great. The CEO there grew up from one person to a thousand people. He's a true entrepreneur. But he's not only a true entrepreneur but has really become a student of management.

He's always looking to manage the company better. So, he's been a pleasure to work with. So, we've had a lot of people on the management team; we probably added half a dozen top-level people from other engineering firms. So, it's been a good ride so far.

Jeff Adams: Well. Very good. Well, thank you so much for joining us today. And giving us, some more insight into the private equity. And it's interesting the AEC space. I want to thank everyone for tuning in to AEC unscripted, the mergers and acquisitions edition. I'm Jeff Adams, and it's been a pleasure guiding you through the ins and outs of private equity in the AEC industry.

Please remember to subscribe and leave us a review wherever you get your podcast. And until next time, keep pushing forward.