Private Equity Subcontractor Deals Propel Construction Market M&A Growth
Capstone’s latest Construction Services Market Update reports that legislative tailwinds and stable backlog levels have supported contractor optimism and a positive Construction market outlook. This durability—coupled with long-term tailwinds such as pent-up demand for affordable housing—has contributed to sector merger and acquisition (M&A) activity acceleration through year to date (YTD) 2025. M&A growth will likely persist for the foreseeable future as sector participants and private equity (PE) firms prepare for a rebound in commercial and residential construction activity.
Looming headwinds from tariff-induced input cost acceleration and lost energy transition momentum have threatened to exacerbate ongoing pressures related to the higher-for-longer interest rate and inflationary environment. Notably, construction input costs have started to rise. This cost inflation is expected to worsen as many inputs—like steel—have yet to materially see price increases from new tariff rates. Moreover, pullbacks in tax incentives and unobligated Inflation Reduction Act (IRA) funds following the One Big Beautiful Bill’s (OBBB) July ratification will likely derail ongoing momentum for energy transition projects that have helped uphold construction activity amid elevated interest rate environment.
At the same time, data center-driven backlog growth and legislative-based tailwinds have kept contractors’ optimistic outlook intact for the remainder of 2025. Of note, OBBB inclusions targeting semiconductor manufacturing construction, 100% bonus depreciations, and affordable housing will likely help stimulate construction activity and cash flow for sector participants. Furthermore, a clause that has expanded 529 accounts for skilled trades training is expected to help address widespread labor shortages that continue to disrupt project timelines and push labor wage expenses higher. Coupled with the ongoing boom in data-center construction, these OBBB stipulations will likely help offset rising input costs and diminishing energy transition momentum, propping up construction activity in select pockets of the market.
Through YTD 2025, Construction market M&A growth has been upheld by flourishing data center activity amid the artificial intelligence (AI) race. Additionally, pent-up demand for new residential construction has increasingly attracted investments from PE buyers in the space. M&A activity in the Construction Services sector has continued its three-year expansion, rising 33.8% year-over-year (YOY) from 272 deals to 364 in YTD 2025. Fueled by new platform formations and aggressive roll-up activity from existing portfolios, the majority (73.4%) of this M&A volume growth has stemmed from financial buyers.
While both platform formations and add-on deals have expanded YOY, strategic M&A activity has experienced bifurcated growth. Namely, public strategic M&A has fallen 38.6% YOY amid a Q2 2025 tariff uncertainty-induced deal deceleration. In contrast, private strategic—benefitting from fewer stakeholders, greater operational flexibility, and largely cash-based deal financing—deal flow has risen 26.9% YOY in YTD 2025. Construction market M&A momentum will likely persist as competition for quality targets continues to heat up and both strategic and PE buyers look to pursue inorganic growth opportunities that bolster market share and expand service capabilities.
Also included in this report:
• An analysis of sector PE M&A growth through YTD 2025, with a particular focus on Subcontractor segment deal flow.
• An overview of labor shortage concerns that have continued to plague contractor operations, backlogs, and profit margins.
• How Capstone Partners helped advise electrical contractor, Ickler Electric, in its recent Recapitalization ESOP transaction to Mosaic Capital Partners.
• A review of equity financing activity and recent transactions within the Construction Services sector to date.
Capstone Partners’ Building Products & Construction Services Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the building products & construction services industries. Our team partners with leading mid-to-large sized building and construction businesses that serve growing end-markets. We ultimately look to work with companies that manufacture highly engineered products and differentiated services with an entrenched competitive position.
For more information on the Construction Services Market Update featured in this report or to speak with one of our Buildings Products & Construction Services M&A Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today to start a conversation.
