Tarrus Richardson shares IMB’s strategy for delivering returns in utilities and government contracting

'We generated 27 times return on our invested capital, which is a best for us,' said Richardson about the sale of LaFata Contract Services.

Earlier this month, IMB Partners marked a milestone in ROI when it sold a company that manages construction projects for government contracts. Founded in 2010, the firm “leverages our unique networks, capital resources, operational expertise and distinctive knowledge of electric and gas utility and government contracting suppliers to complete the strength of our partner companies and to deliver new profitable and sustainable revenue,” according to the website. To find out more about the firm’s strategy, PE Hub spoke with Tarrus Richardson, co-founder and CEO.

Before we discuss IMB’s recent deals, lets talk about the firm’s investment thesis and how you got here.

I started off my career in New York in 1991, working for Salomon Brothers in the mergers and acquisitions department. At 23 years old, I went to Ghana, West Africa, and started an investment bank. I got tremendous experience and exposure to doing business in Africa, running a financial services company at a younger age. I then left for business school here in the US and when I graduated, I joined JLL Partners, a leading private equity firm.

In 1998, when Michael Porter, the Harvard Business School professor, launched ICV Partners, I was the first full-time employee and a co-founder. I did that for 12 years and then left to start IMB Partners [in 2010].

IMB stands for Investors in Minority Businesses. We are intentional and unapologetic about trying to find ways to build, buy and/or grow minority or women-owned businesses. We are based out of Bethesda, Maryland, and we focus only on utilities and government contracting. We have completed seven acquisitions since 2014 and we expect to do at least two more by the end of the year.

Your firm invests in companies that support electric and gas utilities. What’s driving deals in the sector?

We were focused on what we consider to be safe, non-cyclical businesses and we thought both government and utilities were spaces where those businesses did well in good and bad times. When the pandemic happened, the words “mission critical” and “essential services” became the words used to describe these businesses, which has now made them attractive to a lot of private equity firms. For example, electric and gas utilities need to rebuild grids, and they now have allocated more capital to do it faster.

Over the last three to five years, there has been some speed to upgrade infrastructure, especially in renewables. The electric vehicle charging systems is just an addition to it. There is a ton of M&A activity happening now as founder-led, family-owned businesses are looking to sell out, and private equity is looking to get in – to professionalize and help take these businesses to the next level.

There is also the $1.2 trillion Infrastructure Act and the Inflation Reduction Act that just got passed recently, and all of that creates more dollars being spent to upgrade infrastructure for climate renewables, energy efficiency, net zero, transportation, bridges and roads, and electric grid upgrades. It’s a lot of opportunity where the federal government and state governments have provided more dollars to do that.

IMB recently sold LaFata Contract Services to Anser Advisory, backed by Sterling Investment Partners. Tell us about that deal, and what kind of returns were you able to get?

We bought LaFata Contract Services in January 2018. We thought we could help that company expand and put significant investment into hiring the best and brightest management team. We also went from 90 people to over 200 people. We started winning more contracts because we had assembled a team that built our capabilities. For our investors, we generated 27 times return on our invested capital, which is a best for us and really an indication that we built a very strong business.

Why was this a good time for this exit?

We purchased a business called Carr & Duff, which is an electrical contractor that also does business with the utilities to which LaFata provided project and construction management. So, it became a little bit of a conflict of interest to own the project manager of construction companies and then to be a construction company. So, we decided to exit our project management business, LaFata, and to focus on Carr & Duff, our electrical construction business, which we feel has greater potential to grow.

We are hearing that there is a gap these days between what buyers and sellers expect in deal valuations. How did you handle your recent acquisition and exit?

Given the utility and government contracting sectors we focus on, mission-critical businesses, the valuations are holding. The marketplace is factoring in strong demand from the anticipated increase in spending that is coming from the $1.2 trillion Infrastructure Act and also the fact that the sectors historically have experienced less of a downturn in declining markets. With these factors in mind, we don’t see a deterioration in value for the sectors we are focused on based on the outlook and demand.

There is obviously some pressure on the current financing environment and the expectation that interest rates will likely continue to rise over the next 12 to 18 months. Based on this, the cost of leverage is going to go up and the availability of leverage is getting pricier, which is going to lower the purchasing power of buyers in the coming 12 to 24 months. But I would say that we are seeing people continue to transact, particularly in the utility sector and the government contracting sector, because they think overall these businesses will hold up, survive and thrive.