Michael Akkawi is a seasoned professional specialising in private investment in the construction industry. This article will look at private equity investment and its role in helping construction companies to meet capital requirements to fund projects.
Private equity investment is the process of private investors providing financial backing for a company in return for a share of equity. A private equity investor may be a leveraged buyout fund, venture capital fund, growth equity fund, special debt fund, real estate investment fund or high-net-worth individual.
Due to the significant size of the investment involved, private equity investors often play an active role in the company they are financing, exerting substantial control and decision-making rights over its activities. Drawing on their considerable experience and skills to manage and maintain operations and revenue of the investee company, private equity investors ultimately improve the company’s worth, paving the way to sell their equity stake and achieve a healthy profit in the future.
Because of the vast sums required to fund construction projects, most construction companies are not self-sufficient, instead relying on alternative investment options. Popular funding avenues for construction companies include bank loans, taking on joint venture partners, private equity firms or securing financing from wealthy individual investors willing to invest in the form of equity or debt. In many cases, rather than relying on a single funding source, construction companies will rely on a combination of different investment options to raise the significant sums required for construction projects.
Certain inherent risks attach to investing in the construction industry. Nevertheless, investment by private equity investors has gained momentum in recent years, with legislation implemented in many countries with the goal of eradicating inherent problems, ensuring transparency and making developers more accountable for their actions. Around the world, government schemes and policies have triggered a surge in investor interest in the construction sector, including foreign investors.
Private equity firms provide financial support for the development of real estate projects. In some instances, legislation may require developers to pay investors interest where they fail to complete projects as per the agreed timeline. However, a lack of liquidity could result in the developer struggling to access sufficient available capital to complete an ongoing project. In such a scenario, private equity investors present a vital lifeline, providing the construction company with last-stage funding.
From the private equity investor’s perspective, providing last-stage funding has its own benefits, particularly in terms of reducing risk, as the necessary approvals are already in place and construction is verging on completion. Nevertheless, it is still imperative for private equity investors to undertake due diligence, gaining a complete picture as to why funding has stalled. For example, if the project has stalled due to prevailing economic headwinds, their investment may help in reviving and completing the project, providing scope for a healthy yield. If, however, the project has stalled due to pending litigation or a third-party dispute, the private equity investor’s funding may not solve the problem, culminating in a less than desirable investment proposition.
As the global economy recovers from pandemic-related disruptions, private equity deals have increased in value, with private equity funds raising larger amounts of capital from investors. Although private equity activity has dipped in recent months in line with borrowing cost increases, in recent years, international private equity firms and investors have increased their presence in regional markets.
Securing private equity investment poses a significant benefit for construction companies, enabling them to support their operations and expand their businesses. Issuing shares on a public exchange may provide a valuable injection of capital, but this is not the most appropriate option for every business. Instead, many construction companies are securing investment from a small number of investors in return for equity, enabling developers to raise the collateral they need without incurring the greater costs and complexities associated with raising funding via IPOs.
