Engineering and construction: Deals 2022 outlook

Committing capital to growth

Underutilized private equity funds and strong corporate balance sheets suggest substantial surplus capital available for deals. However, current demand-driven competition and high-valuation dynamics are expected to shift activity growth to adjacent sectors with investments in digital and connected construction capabilities.

The recently approved Infrastructure Investment and Jobs Act, which will contribute an additional $550 billion in federal infrastructure investments in roads, bridges, rail, water, mass transit and water transport infrastructure projects over five years, is expected to accelerate transactions in the nonresidential segment. While roads, bridges and water are budgeted to get the biggest boost in spending, mass transit and water transport will experience the largest percentage increase in allocated spending.

Despite inflationary pressures, a favorable interest rate outlook over the short- to medium-term coupled with urban supply shortages and pandemic-driven de-urbanization should bode well for continued strength in the residential segment over this period, although growth is anticipated at lower rates.

Unlocking value

Companies in the E&C sector are increasingly measuring transaction value through a sustainability lens, considering factors beyond typical diligence, valuation and integration metrics. With environmental, social and governance (ESG) becoming an increasing demand driver for  winning projects, companies are focusing on acquisitions that create associated competitive advantages in the marketplace. The industry is expected to continue investing in opportunities that support initiatives such as offsite construction, self-sufficient buildings and smart cities, carbon capture and storage technologies, and sustainable and responsibly sourced raw materials.

Increasing resilience

A number of factors are driving up input costs, eroding margins and impacting project timelines across the sector. The persistence of global supply-chain disruptions and sourcing challenges is expected to result in continued shortages in key construction materials and affect project profitability. Furthermore, pervasive labor shortages and increased competition for talent are also complicating the economic recovery as a surge in job openings has upended the labor market. Employees are quitting jobs in record numbers, indicative of current market imbalances. E&C companies’ ability to be resilient and navigate these headwinds will likely impact deal valuations.