2017: A Year of Strong Growth

2017 was a strong year for FMI Capital Advisors and the overall infrastructure services market. Engineering and construction markets have been growing and the M&A environment in the middle market has been very active with project and service pipelines at historically robust levels. 2017 was a year of growth at FMI Capital Advisors as the firm has further built out new dedicated practice teams in Oil & Gas Energy Services & Equipment and ESOP Advisory. The firm is looking to continue to build on its successes in 2018 with its focused coverage and strong market position.

The Energy Solutions & Cleantech (ESCT) market, is no different with a great 2017 performance and bullish outlook. In 2017, the ESCT Group closed six transactions and has an active deal outlook for 2018. The landscape continues to be incredibly dynamic as certain trends gain traction and longstanding fundamentals shift. The ESCT practice team is executing transactions across the energy solutions landscape on behalf of a number of client types and sees 2018 as a year where many parties jump further into the market after having spent time learning and testing the waters.

FMI Capital Advisors ESCT Transactions

Large international utilities have identified the U.S. energy services market as a key area of great opportunity. Not only is the legislative environment in many regions across the country conducive to energy efficiency projects, but more end markets are beginning to experience factors that allow energy efficiency projects to make financial sense. FMI represented Talen in its sale to Engie in 2017. This acquisition allows the French utility to further solidify its presence in the U.S. Additionally, this acquisition was supported by another growing trend, that of mechanicals and other “near ESCOs” being seen as part of the energy efficiency market.

Facility management providers are also expanding their solutions into the energy services market, which we saw through Veolia’s acquisition of Enovity earlier in the year. Enovity’s software supported energy services offerings provide Veolia with an even broader suite of facility solutions that they can provide across their viable portfolio.

There continues to be a wide range of energy service targets throughout the country, with differences in solutions, geographic reach, and end markets. Many acquirers have varying approaches to tap into this ever-expanding addressable market. FMI represented Retro-Tech Systems in its sale to LRI Energy Solutions, a portfolio company of DFW Capital Partners. Both portfolio companies are subcontractors to ESCOs and are the trusted providers of lighting, water, and building envelope solutions for energy savings projects. Retro-Tech Systems exemplifies several factors that are attractive in this space, including a market leading management team, self-performance capabilities, and a national footprint.

With limited national targets available, we have seen significant platform interest in acquiring geographically dispersed targets that lead in key markets around the country. Oaktree, building on its prior success with Noresco and OpTerra, made a strong push in this direction in 2017. FMI represented two ESCOs, Unesco and ADI Energy, in their sale to the Oaktree platform, IES. Unesco is a leading MUSH market ESCO in the Midwest that looks to capitalize on significant future demand in the K-12 market. ADI Energy, one of the holders of the Department of Energy’s indefinite delivery indefinite quantity energy savings performance contract, sees significant demand from the Federal government in coming years.

Bow River Capital out of Denver has taken a similar approach, but in a different geographic market. FMI represented Bow River in its acquisition of MidState Energy. Also focused on the MUSH market, -Mid-State aims to tap into the strong energy services market in the Southwest.

2018 Energy Solutions & Cleantech Outlook

FMI sees the robust energy solutions activity experienced in 2017 continuing into 2018 with several key themes playing out over the year. The next generation of ESCOs will continue to develop. Software supporting these companies will start to solidify as platforms of scale emerge. Software will continue to be a desired component and energy conservation measure as the internet of things further proliferates the built environment.

ESCOs will be tasked with adjusting their business models given the changes the industry is seeing in technology and financing. As the business model changes, so does the definition of what truly constitutes an ESCO. As we see more and more technology developments, the solutions of certain mechanical and electrical contractors continue to overlap with select ESCO offerings.

Domestically, walls between these historically different markets could start to fall. We believe we will continue to see softening of these competitive borders as various international energy solutions providers continue to make inroads into the U.S. market. Given the size of international entrants like Engie and EDF along with the slower pace thus far by domestic utilities, international acquirers aim to dominate the U.S. energy services market in the near term. We expect to see more domestic buyers step in from the sidelines, which will further drive up demand for acquisitions.

The strongest energy services providers continue to achieve sizeable EBITDA and associated margins, but successfully navigating the business development and service delivery processes to provide highly profitable projects is a challenge even the best management teams in the country face. As the landscape remains in flux, 2018 is expected to be another important year in the North American Energy Solutions and Cleantech market.

About FMI Capital Advisors:

FMI Capital Advisors, a subsidiary of FMI Corporation, is a leading investment banking firm exclusively serving engineering and construction, infrastructure and the built environment. With over 600 completed transactions, our unique industry focus enables us to provide our clients with valuable insight and advice. Clients gain access to our unparalleled network of industry contacts and relationships, deep market knowledge and technical expertise, based on decades of experience.

FMI Capital Advisor's Energy Solutions & Cleantech Group provides M&A and capital formation services for companies in the energy services and cleantech industry, including those focused on: