Future-proofing Infrastructure Engineering

At a Glance:

• The 2021 State of the AEC Industry Analysis & Insights survey asked CEOs to consider the significance of going digital in their firms’ future-proofing strategies.
• CEOs in the architecture, engineering and consulting (AEC) industry said they will make IT investments with less pushback than they would have received before the pandemic.
• Andrej Avaleni, president, AEC Advisors, described four mega trends that position the AEC industry as highly attractive with institutional investors.

If the pandemic tested digital initiatives the architecture, engineering and consulting (AEC) industry had been pursuing, the industry passed with flying colors.

“Going digital proved to be a necessity, not a luxury,” Andrej Avaleni, president, AEC Advisors, told virtual audiences at Bentley Systems’ Year in Infrastructure event (Dec. 2-3). Moreover, CEOs at AEC firms will be able to make IT investments with less pushback than they would have received before the pandemic.

This is the general sentiment expressed in the 2021 State of the AEC Industry Analysis & Insights, a report structured around asking CEOs to consider the significance of going digital in their firms’ future-proofing strategies. The 100-page KPI survey of the AEC industry was produced by AEC Advisors, a leading investment banking and corporate finance firm that provides advisory services to executives and boards of architecture, engineering and consulting companies.

“The pandemic had a net positive impact on the performance for the industry,” said Avaleni. Profit margins exceeded expectations during the pandemic, he said. The median operating profit margin on net revenue in the AEC industry reached 15% in 2020, and is a record of note that was maintained in 2021.

AEC Advisors examined its own priorities for direct and indirect impacts from the pandemic. There were three instructive findings, according to Avaleni. Firstly, AEC Advisors re-examined its business model to ensure the firm was not concentrated in any one area. Secondly, it found that operations could be handled remotely, in part because IT investments were made and were already in place.

Finally, the pandemic brought the firm closer to clients. For instance, the firm leveraged such tools as biweekly webinars with targeted CEOs to keep abreast of developments and to provide insights during the pandemic. “Going [virtual] proved the ability to reach more people with greater ease and effectiveness than ever before,” Avaleni said, adding that AEC Advisors’ experience was analogous to the AEC industry at large.

AEC Mega Trends

The AEC report outlines four mega trends that position the infrastructure engineering industry as highly attractive with institutional investors:

1. Infrastructure Repair and Hardening/Resilience. This trend focuses on resiliency to climate change. This driver has received significantly more funding in light of the infrastructure bill. Rising sea levels, strong hurricanes and frequent fires underpin the necessity to reinforce infrastructure against catastrophic environmental events. According to the AEC report, infrastructure resiliency costs are rising considerably, with climate change increasing associated costs by as much as 25% per year.
2. Environmental, Social and Governance (ESG) Movement. Environmental services can be considered the core of the industry, said Avaleni, as its effects will be seen across the board, from roads to bridges to power lines, and the industry should expect to see substantial growth over the next decade. Social and governance is being elevated, too. The AEC report noted that the majority of publicly-traded (77%) and private equity-backed (61%) AEC firms (these are the most active strategic acquirors in the industry) believe ESG has a medium to high impact on a company’s valuation.
3. Energy Transition to Renewables/Electrification of Everything/Decarbonization. The AEC industry is at the center of this trend, said Avaleni. Sixty percent of electricity in the United States comes from fossil fuels. While this statistic points to a long road ahead for bringing about change, it highlights the considerable opportunity for greener alternatives.
4. Going Digital. The AEC industry continues to rapidly shift from legacy technologies to data-driven digital technologies. An interesting finding in the survey of CEOs, said Avaleni, is that 20 years from now, half the value of an AEC firm is going to be based on its current digital initiatives and from transformation that is already underfoot. Also notable was that two-thirds (65%) of firms are already allocating R&D funding towards going digital.

Going Digital is Not an End in Itself

“Private and public investors are piling into the industry right now,” Avaleni said. In the last 24 months AEC Advisors closed 40 M&A transactions, half of which involved private equity.

The AEC industry has been valued higher in the past two years, in large part due to the four mega trends, and going digital is the one trend that validates the other three trends, argued Avaleni.

“We can build more infrastructure quicker and cheaper; we can transition to renewables faster and safer; I think we can achieve ESG goals—including diversity, equity and inclusion—as well as our objectives with going digital initiatives,” he said. “That’s the promise of going digital and it was a consensus at our CEO Summit.”