Prefab attracting investor dollars as construction industry undergoes full remodel

07 June 2019

Private equity and early stage investors are pouring more capital into prefabrication companies, which are fast disrupting the US construction industry, industry experts said.

  • Market facing labor shortage, rising costs 
  • New areas emerging for prefab investment
  • Consolidation still early days

Private equity and early stage investors are pouring more capital into prefabrication companies, which are fast disrupting the US construction industry, industry experts said.

Once considered a risk by the industry at large due to a resistance to change in construction processes and the misconception that modular means mediocre, prefabrication has gained traction as technology has developed and demand for new construction projects far outpaces labor supply. General contractors are increasingly seeking methods to reduce onsite work time, including virtual construction techniques and offsite fabrication, according to a January report from the Associated General Contractors of America.

“Construction is just a mess, whether you’re looking at design, construction or the software that manages projects,” said Michael Marks, CEO of prefab unicorn Katerra. Katerra, reportedly valued at around USD 4bn, is one of the best examples of growing investor interest in the space. Katerra has raised USD 1.2bn since 2015 from investors such as SoftBank Vision Fund, according to securities filings.

Kam Valgardsen, the general manager of Aspiration Holdings-owned Irontown Homes, noted the labor shortage driving up costs and delaying projects is not a temporary issue. While other industries such as technology, manufacturing and furniture production have responded to a declining workforce by automating and adopting new technology, construction has been slow to innovate, he said.

“But there are forces pushing us [toward modular construction] now instead of just being a cool idea,” Valgardsen said. “Why wouldn’t you build a building room by room? It’s less expensive and takes less time.”

The trend toward prefab in construction has longevity, making it a highly investible space, according to Riverlake Partners founder Eric Krieger. Private equity firm Riverlake penetrated the market early, acquiring modular hotel manufacturer Guerdon Modular Buildings in 2014 for an undisclosed price.

“We’re a strong believer that the long-term dynamics are extremely robust, principally due to large seismic demographic changes that have been taking place in this country and others,” Krieger said.

Money being poured like concrete

The largest end-market for prefab manufacturers remains in single family homes, small commercial projects and single story buildings.

Skyline Champion Corporation falls primarily into this category. The company, which has a market cap of USD 1.33bn, is the result of a merger between Guerdon competitor Bain Capital Credit-backed Champion Enterprises Holdings and Skyline Corporation. Katerra also caters to the residential housing industry in the US and Saudi Arabia, and the commercial and office construction industries in India.

As modular construction continues to gain traction, players like Skyline and Guerdon have taken on larger, multi-family or multi-unit projects, while other types of prefab companies are entering the fold and attracting interest.

iMod Structures, for example, raised USD 11m in Series A funding from Goldman Sachs Urban Investment Group, which will enable the company to begin commercial scale production of prefab classrooms later this year. EIR Healthcare, a modular hospital room construction firm, is raising funding and has seen suitor interest not only from construction companies, but healthcare technology entities, according to a March Mergermarket report.

The space is beginning to consolidate as well. Along with the Champion/Skyline deal, 2018 saw modular space supplier WillScot Corporation acquire Modular Space Holdings for an enterprise value of approximately USD 1.1bn. Near the end of last year, Balmoral Funds bought an undisclosed stake in VESTA Modular from Soaring Pine Capital and Wells Fargo Central Pacific Holdings.

Skyline Champion’s newly appointed CEO Mark Yost said in the company’s most recent earnings call that Skyline intends to pursue prefab acquisitions to expand manufacturing capacity and retail locations, indicating a likelihood of additional deals in the space in the near future. According to the company, 2018 industry shipments of modular homes in the US increased 10% year-on-year to 15,530 units, of which Skyline accounted for 13% of market share.

Despite this, Guerdon CEO John Beddow noted that prefab M&A is still early days, adding that there is not enough density for prefab factories to begin combining on a significant scale. Additionally, many new companies venturing into modular construction are sticking solely to single family or single story projects, Beddow said.

Katerra CEO Marks echoed this, pointing to expansive white space within the USD 1.2tn US construction industry.

“Just the residential [construction industry] in the US is USD 550bn,” he said. “We’re doing a few billion and there’s room for lots of companies here.”