Private Equity Mergers and Acquisitions of Construction Firms May Heighten Project Risks

Author: Christopher A. Brown, a partner in the Dallas and Fort Worth offices of Duane Morris LLP, whose practice focuses on commercial litigation, with an emphasis on construction law. This article represents the author's own views.

The construction industry is highly fragmented, with suppliers, subcontractors, general contractors, architects, engineers, and owners of varying sizes. The industry has traditionally been dominated by local and regional markets, partly relationship-driven.

Although private equity firms have historically tended to avoid investments in the construction industry, this fragmentation, coupled with more than 630,000 private construction companies in the U.S. (source: Grata), presents an opportunity for private equity to deploy capital.

Unsurprisingly, the construction industry has recently become a strategic target for private equity capital. According to a PitchBook report from January 2026, there were approximately 453 construction industry deals in 2025, deploying $31.4 billion in capital, up from an average of 299 deals and $25.9 billion annually between 2021 and 2024.

Much of this activity has focused on construction companies that have achieved vertical integration, or those open to private equity's "buy-and-build" strategy—where PE acquires multiple small, fragmented companies and consolidates them into a unified larger platform.

This vertical integration approach enables development companies to control the entire development process, sometimes from land acquisition through construction, leasing, and asset management. Developers internalize different levels of construction delivery to accelerate schedules, control costs, ensure quality, and attempt to navigate market volatility.

For PE firms, the ideal construction acquisition target is typically a mid-sized or family-owned business seeking capital.

This trend is particularly prevalent among large multifamily and residential construction companies seeking to reduce risk and improve efficiency in a market still facing labor and supply challenges.

Federal infrastructure spending has further fueled PE interest, as transportation, utility, and energy-related projects create sustained demand.

Private equity's greatest advantage in construction is injecting substantial project capital, potentially generating higher returns for investors. The rationale is that both the company and investors benefit from streamlined processes, seemingly reduced project risk, and flexibility to adapt to market pressures.

Risks of Affiliated Structures

But this arrangement also means the developer no longer hires a general contractor on an arm's-length basis, instead awarding work to an affiliated entity, which introduces potential conflicts of interest and highlights the importance of fiduciary governance and disclosure.

When a developer acts on both sides of a transaction as project sponsor and construction provider, it may be inclined to favor its affiliated entity, even if an external contractor could offer better pricing or quality. The affiliate's profitability may be tied to change orders, claims, and how project costs are allocated.

If the sponsor entity or affiliate is an investment adviser to a PE fund, the SEC has made clear that the adviser is a fiduciary. This means the adviser must eliminate conflicts, or make adequate, fair disclosure of material conflicts to enable investors to provide informed consent.

Such disclosure must be specific, not generic language such as stating that conflicts "may" exist, when conflicts actually exist. In a vertically integrated construction model, the possibility that a fund-controlled developer will award work to its own affiliate is not hypothetical but inherent.

Shorter Investment Horizons

This vertical integration also carries other inherent risks. Building an internal construction team adds operational complexity to projects, leading to greater risk exposure and requiring significant capital investment. This is particularly evident in project budgets, whether in labor or materials.

PE firms typically expect returns on investment within 3 to 7 years, which can pressure construction companies to prioritize short-term profitability over long-term growth.

Another risk is that private equity firms often use debt financing for acquisitions, which can leave construction companies with high debt levels, making them more vulnerable during economic downturns or when project delays impact cash flow.

In a developer-builder model where the general contractor is an affiliate, self-dealing may manifest as inflated contract pricing, preferential contract awards, or shifting project risks to the investment vehicle while profits flow to the affiliated contractor.

Good Governance Is Essential

Because fiduciary claims often turn on process, integrated developer-builder projects benefit from governance practices that demonstrate informed, independent oversight.

Safeguards include:

• Having conflicted executives recuse themselves from key decisions.
• Using independent directors or a conflicts committee to approve affiliated contract awards and material change orders.
• Obtaining competitive bids or third-party pricing benchmarks.
• Documenting why the affiliated arrangement serves the project's best interests.
• Monitoring performance as project conditions evolve.

Investors should also receive clear disclosures regarding ownership interests in the affiliated construction entity, the fee structure for construction services, and the procedures used for benchmarking pricing.

Private equity sponsors can successfully operate an integrated development and construction model, which is strategically attractive in certain markets.

The most effective risk control strategy is to treat affiliated construction arrangements as an ongoing fiduciary issue. This means specific, adequate disclosure, ensuring decisions are made by disinterested parties, and documenting all of the above.

Doing so demonstrates that the integrated model is operated for the benefit of the developer and its investors, rather than transferring value to affiliates through opaque pricing, cost allocations, or change order practices.