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Christopher A. Brown, a partner in Duane Morris’ offices in Dallas and Fort Worth, Texas, practices in the area of commercial litigation with a focus on construction law. The opinions are the author’s own.
The construction industry is highly fragmented, with suppliers, subcontractors, general contractors, architects, engineers and owners of all sizes. It has traditionally been a local and regional industry driven, in part, by relationships.
Although private equity firms have historically tended to avoid investment in the construction sector, this fragmentation, combined with an excess 630,000 privately owned US construction companiesit is an invitation to private capital to deploy capital.
Not surprisingly, the construction industry has recently become a strategic target for private equity capital. It is estimated that the construction reached 453 agreements and $31.4 billion in deployed capital by 2025, according to a January 2026 report from PitchBook. That was up from an average of 299 deals and $25.9 billion between 2021 and 2024.
Much of this activity is directed at construction companies that have been vertically integrated, or open to a private equity capitalization strategy in which the PE firm acquires several smaller fragmented companies and merges them into one large, cohesive platform.
Christopher A. Brown
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This vertical integration approach allows a development company to control the entire development process, sometimes from land acquisition to construction, leasing and asset management. The incentive for developers who do different levels of in-house build delivery is faster delivery, cost control, quality assurance and an attempt to manage market volatility.
An ideal construction target for PE firms is often a mid-sized or family-owned business seeking capital.
This trend has also been particularly prevalent among large multifamily and homebuilding companies looking to mitigate risk and increase efficiency in a market that still faces labor and supply challenges.
Federal infrastructure spending has added fuel to PE interest by creating sustained demand in projects related to transportation, utilities and energy.
The biggest advantage of private equity in construction is the infusion of large amounts of capital needed to finance projects, giving a potentially higher return for investors. The idea behind it is that the company and investors benefit from a streamlined process, apparently reducing project risks and flexibility to adapt to market pressures.
The risk of an affiliate structure
But this deal also means the developer is no longer hiring a remote general contractor. Instead, it is awarding work to a subsidiary, which introduces potential conflicts of interest and increases the importance of fiduciary governance and disclosure.
When a developer sits on both sides of the transaction, as project sponsor and construction supplier, it may be incentivized to favor its affiliate even if outside contractors could offer better prices or quality. Affiliate profitability can be tied to change orders, claims, and how costs are allocated throughout the project.
If the sponsoring entity or an affiliate is an investment adviser to the PE fund, the Securities and Exchange Commission has made clear that the adviser is a fiduciary. This means that the adviser must remove conflicts or make full and fair disclosure of material conflicts so that investors can give informed consent.
Such disclosure must be specific, not generic, language suggesting that the adviser “may” have conflicts when the conflict actually exists. In a vertically integrated construction model, the probability that a fund-controlled developer will award construction work to its own subsidiary is not hypothetical: it is a built-in feature.
Shorter investment times
There are additional risks inherent in this vertical integration. Creating an in-house construction team increases the operational complexity of projects, which leads to greater exposure to risk and requires significant capital investment. Nowhere is this more evident than in a project budget, both in terms of labor and materials.
PE firms typically look for a three- to seven-year return on their investment, which can put pressure on construction companies to value short-term profitability over long-term growth.
Another risk is that private equity firms often use debt to finance their acquisitions, and doing so can lead to high levels of debt for construction companies, exposing them to economic downturns or project delays that affect cash flow.
In a developer-builder model where the general contractor is an affiliate, self-contracting can appear as inflated contract prices, preferential contract awards, or the shifting of project risks to the investment vehicle while profits go to the affiliated contractor.
A good government essential
Because fiduciary claims are often processed, an integrated developer-builder project benefits from governance practices that demonstrate informed and independent oversight.
Protective measures include:
- Recover conflicted executives from key decisions.
- Use independent advisors or a conflicts committee for the award of affiliate contracts and major change orders.
- Obtaining competitive bids or price benchmarks from third parties.
- Document why the affiliation agreement is in the best interest of the project.
- Track performance as project conditions change.
Investors should also receive clear information about ownership interests in affiliated construction entities, fee structures for construction services, and procedures used to compare prices.
Private equity sponsors can successfully run integrated development and construction models, and in some markets they are strategically compelling.
The most effective risk control strategy is to treat affiliate construction agreements as an ongoing fiduciary issue. This means specific and full disclosure, ensuring that decisions are made by disinterested parties and documenting all of the above.
In doing so, the integrated model is shown to work to the benefit of the developer and its investors rather than shifting value to an affiliate through unclear pricing, cost allocations or switching practices.
