VSS Capital Partners invested in The HFW Companies, forming a new platform company focused on consolidating architecture, engineering and construction (AEC) service firms.
The firm’s initial investment in HFW was between $20 million and $30 million and could increase, according to sources familiar with the deal. The platform’s first add-on is Miller Legg, a multi-disciplinary engineering and consulting firm based in Fort Lauderdale, Florida. Financial terms of the transactions were not disclosed.
VSS, an experienced investor in roll-up strategies, believes there will be “meaningful” tailwinds in infrastructure that will fuel the platform’s growth.
“We like the approach of backing management teams with relevant market experience and pursuing consolidation in fragmented industries,” said Jeffery Stevenson, managing partner at VSS. “We have invested in almost 100 platform companies that have in turn completed 400 add-on acquisitions. ”
In this case, VSS will look to consolidate the highly fragmented AEC market via HFW: “Some PE firms have started to pursue this industry but it’s still early days.”
For example, as the PE firm supports the platform’s M&A playbook, “we can expand those firms in their markets through diversification – such as a civil engineering firm being able to offer environmental engineering capabilities.”
On the heels of Miller Legg, HFW is on track to close on two additional deals by the end of the month, according to Stevenson. “We have a robust pipeline of opportunities and there is a pipeline beyond those first three deals so that we can continue to grow.”
The firms that VSS acquires in this strategy typically roll over equity in their business, “creating both a liquidity event for themselves and a continuing participation on the upside.”
“When we exit, we will have aggregated many dozens of AEC firms, so we expect to become a much larger, more diversified entity with a substantial amount of EBITDA, which should attract a higher multiple versus the value attributed to any one stand-alone,” he said. “Our partner firms will participate in this appreciation through their roll-over equity.”
VSS, a structured capital firm focused on the lower mid-market, typically invests through a hybrid model injecting both debt and equity into companies. It focuses on the healthcare, information, business services and education industries.
Headquartered in St Louis, Missouri, HFW is led by an executive team of three industry veterans with experience in AEC services including prior operating, investment and leadership experience.
Recognizing the high degree of fragmentation in the industry, the team set up HFW to execute a buy-and-build strategy focused on AEC firms who are interested in transitioning partial ownership of their businesses. HFW will serve as an integral partner to any AEC firm that joins its platform to ensure its successful continuity, preservation of equity ownership, current brand identity and operational independence.
VSS declined to comment on the financials of the deal. Crewe Capital served as financial advisor to HFW.