Private Equity and Bonded Contractors: Building a Foundation through Communication

Author, Andy Roberts, Surety Group Leader, Rancho Mesa Insurance Services, Inc.

Private equity firms have been actively purchasing construction companies. For the firms that are acquiring the construction companies that perform bonded work, it is highly important that they know there is a stark difference between how surety companies underwrite standard construction bond programs and how they underwrite private equity-owned construction bond programs. Matt Gaynor discussed this in detail in a previous article. Because of these differences, it important that the firms involve their agent and surety company early in the acquisition/due diligence process. This is to ensure the firms know the specific information that the surety company will want to see in order to advise regarding the impact the acquisition will have on the bond program.

As noted in the previously linked article, the financials from private equity-owned companies often carry more debt due to acquisitions, which often leads to a net loss on the income statement. It will be important that the firm can present a pro forma financial so the agent and surety can see how much the debt and goodwill will impact the statement going forward. If there is significant degradation, it can impact the amount of support the surety company may offer. 

Additionally, review of the work in progress (WIP) and backlog to identify how much of the work is bonded, or will need to be bonded, will be equally important. If the company that is being acquired relies on bonded work as their primary revenue source, an inability to get bonds after the acquisition would be detrimental to the business. For the current surety partnered with the company being acquired, it is important to know what their appetite for writing bonds is within the private equity space, and also how long the current management/ownership team will be staying on board to help with the transition. This last point is of the most importance, because the longer the involvement of the previous team, the smoother the transition tends to be.

For the private equity firms that are acquiring companies that rely on bonded work for their revenue, open and clear communication is critical between the firm, their surety agent and surety company. Knowing the questions that will be asked and what information the surety will want to see will help determine if the contractor can continue to get bonds post acquisition.

For questions on this or any other surety matter, please contact me at (619) 937-0166 or at aroberts@ranchomesa.com.