Sandy Lifts Some Portfolio Companies; Need For Infrastructure Highlighted

Indeed, construction company executives are already examining affected areas and some are even worried about finding enough workers fast enough, The New York Times reported Oct. 31.

Private equity firms and their portfolio companies could play a role in the recovery by investing in companies in infrastructure, building products and other construction-related industries. But don’t expect much deal activity specifically pinned to reconstruction from Sandy, some firm executives told Buyouts.

For one, many private equity professionals in the near-term are more interested in getting their work done and helping friends and neighbors affected by the storm than in creating investment strategies from it.

“We really haven’t thought about it,” said Jay Jordan, chairman of The Jordan Co., which has invested in building products, industrial products, and transportation and logistics, among many other sectors, in its 30-year history. “I think it’s premature to be thinking about that. What private equity ought to be focusing on is helping those who are hurting.”

The main reason private equity firms won’t likely be making investments pinned to recovery from the disaster, however, is time. Though recovery seems insurmountable to those affected right now, to private equity firms, which hold investments for around three to five years, it is short-term.

“The ability to source, execute and grow a company that focuses exclusively on a storm is limited,” said Matt Katz, a managing director with FdG Associates, a firm whose portfolio includes Infrastructure & Industrial Constructors USA, a holding company that provides a variety of civil construction services in the Mid-Atlantic region.  

Another issue is that the housing market is expected to improve, making building products companies pricey targets. Moody’s Chief Economist Mark Zandi said at a recent conference that housing would spur a lot of job activity in the next few years and could even help establish full employment in the United States by 2016.

“I think there are a lot of people looking at building product companies, because the overall view is that the housing market will double over the next three to five years,” said Ira Starr, a founding partner of Long Point Capital, a New York and Michigan-based firm that invests in manufacturing, distribution and services companies. “The issue has been a lack of companies in the market, because if you don’t have to sell today and you see the market improving, you’re going to wait.“

Long Point Capital does have one portfolio company that is working on Sandy-related projects: Albany-based CHA, a provider of consulting services to municipalities, state governments and other entities for infrastructure-related engineering projects.

“They’re getting a lot of work out of this, but they’re already employed on other projects and they’re really just shifting resources, so it’s not a bump in revenue, unfortunately,” Starr said.

The real benefit of Sandy for private equity and other investors in the long term is that the storm highlighted the extensive need for capital investment to upgrade and maintain aging infrastructure in the United States, said Katz of FdG Associates.

“To the extent that the storm has identified or highlighted weaknesses that are long-term in nature, we would be interested in pursuing investments,” he said. “While there is clearly significant work to be done in the days and weeks following the storm, our focus is on making investments that create value over the intermediate and long term.”

Sectors that hypothetically could prove attractive thanks to the wake-up call provided by Sandy, Katz said, include those that provide civil construction services, earth work and concrete installation, foundation repair, steel erection and services related to underground utilities.