December 2023 — By Nate Shepherd, Suzi Airheart & Shaan Patel
Evolving dynamics and recent trends in the lower-middle market paving industry have made it an attractive sector for private equity investment. Asphalt paving offers consistent revenue growth, high profit margins, and recurring revenue streams - all appealing characteristics that draw in investors.
Historically, this sector has received minimal attention from financial sponsors, but now private equity firms are keenly pursuing family and founder-owned assets to build scalable businesses. We've noted that investors tend to favor targets with revenues exceeding $10 million and a higher proportion of revenue from repair, repaving, or sealcoating (compared to new construction). In addition, the presence of a high-quality management team, and active recruiting and training programs, add to a company’s appeal.
Asphalt is utilized across an extensive network of roads and diverse commercial and residential applications throughout the nation. While the industry's top players primarily focus on large civil projects, including federal and state highways and airports, holding a dominant 60% market share, the remaining 40% is comprised of hundreds of paving projects covered by lower-middle market companies.
U.S. infrastructure has suffered from neglect, age, and insufficient funding, resulting in a backlog of road and bridge repairs exceeding $550 billion. While the U.S. economy has boosted all construction-related businesses, especially those operating in the commercial and residential sectors, the backlog remains strong. The 2021 Infrastructure Investment and Jobs Act (IIJA), allocating $350 billion for highway infrastructure over five years, is set to stimulate the asphalt paving space. This legislative push is expected to create a super cycle in the industry, making asphalt paving and maintenance a choice investment for private equity firms.
Private equity-backed platforms have been actively pursuing add-on acquisitions to build scale and a broader scope to improve valuation at resale. These platforms benefit from established local labor forces and equipment, making it challenging for newcomers to displace them. Companies like Pave America (backed by Shoreline Equity Partners), True North Asphalt (backed by Stonehenge Partners), Rose Paving (backed by Tenex Capital Management), and Tendit Group (backed by Osceola Capital Management) have made multiple acquisitions to expand their presence. Competition among private equity players for these assets has intensified, making it a popular space for investment.
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