Commercial building rebound fuels construction software sector

If you want to know why private equity investors and investment bankers are paying attention to the construction software segment, all you really need to do is look up.

From San Francisco to Miami, skylines are once again dotted by construction cranes, a sure sign of a rebound in commercial building.

After a sharp drop in commercial building during the recession — and flat growth in the years since — commercial building is expected to grow again. The most optimistic projections call for commercial starts to grow from 802 million square feet in 2013 to over 1 billion square feet in 2014, an increase of more than 25 percent.

As a result, providers of architecture, engineering and construction (AEC) software have seen a sharp uptick in revenue. AEC software firms provide everything from project management systems to bidding and estimating tools, as well as collaboration software to commercial and residential builders. Key customers of AEC software include architecture and engineering firms, multinational construction and contracting firms, and local/regional contractors.

After suffering through the downturn, there are clear signs of healthy growth in this corner of the software market. Gartner categorizes AEC software as part of the broader Project and Portfolio Management market, which Gartner projects to grow at a 8.5 percent compound annual growth rate through 2016. Other research firms expect the AEC software market to grow greater than 10 percent annually over the next several years.

This resurgence of growth has spurred healthy investor interest from both the public and private markets. Exhibit A would be Textura, a provider of on-demand construction project management software. The company, founded in 2004, reported $35.5 million in revenue in 2013. Textura priced at IPO in June and saw its stock price soar close to 100 percent in its initial public offering.

Today, Textura trades north of 15 times enterprise value to revenue, with a market capitalization of approximately $700 million.

But Textura is only one of a number of AEC software providers that are of interest. As growth rates continue to outpace the broader market, it is expected that both transaction volumes and acquisition multiples will be strong over the remainder of 2014 and into 2015.

Strategic acquirers are looking to M&A for several reasons. Within the AEC sector, firms are looking for increased efficiency through integrated, modular software systems. They want new lead-generation tools and better visibility into cost data. Larger strategic buyers are looking for ways to increase customer satisfaction and reduce costs.

Rather than developing home-grown solutions to respond to these wide-ranging customer demands, AEC software providers are looking at acquisitions to supplement current product portfolios. Recent evidence of this trend is seen by Textura’s acquisition of Latista to augment its mobile functionality.

This effort by software providers to increase share of wallet across the customer base is pervasive. So far in 2014, Coaxis purchased Maxwell Systems and Explorer Software purchased Computer Guidance, as both acquirers looked to expand their presence in project management solutions.

Private equity firms are also playing in this arena. They are looking for new platforms that can bolster organic growth rates with several tuck-in acquisitions. Representative deals in the past year include the acquisition of On Center Software by Accel KKR and the purchase of Axium by General Catalyst.

The proliferation of cloud-based solutions is also reaching the AEC software landscape and will further drive industry consolidation. Project management solutions have traditionally been sold via an enterprise license model, with software installed on each customer’s own computer system. However, cloud-based solutions within the sector are gaining popularity and are seeing increased adoption rates. This will be a growing trend over the next several years, as customers demand access to Web-based solutions.

AEC software providers with purpose-built cloud solutions will be high-profile acquisition targets over the next few years.

Garin Arevian is a managing director at MHT Midspan, an investment bank focused on the middle market. Arevian, who is based in Boston, leads the firm’s technology industry practice. 

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