Christopher A. Brown, a partner in the Duane Morris offices in Dallas and Fort Worth, Texas, practices in the area of commercial litigation with a focus on construction law. Opinions are the author’s own.
The construction industry is heavily fragmented, with suppliers, subcontractors, general contractors, architects, engineers and owners of varying sizes. It has traditionally been a local and regional industry driven, in part, by relationships.
While private equity firms have historically tended to avoid investment in the construction industry, this fragmentation, combined with over 630,000 privately owned U.S. construction companies, is an invitation for private equity to deploy capital.
Not surprisingly, the construction industry has recently become a strategic target for private equity capital. Construction reached an estimated 453 deals and $31.4 billion in capital deployed in 2025, according to a January 2026 report by PitchBook. That was up from an average of 299 deals and $25.9 billion between 2021-2024.
Much of this activity targets construction companies that have vertically integrated, or those open to a private equity roll-up strategy in which the PE firm acquires multiple smaller fragmented companies and merges them into one large, cohesive platform.
This vertical integration approach allows a development company to control the full development process, sometimes from land acquisition through construction, leasing and asset management. The incentive behind developers pulling different levels of construction delivery in-house 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 looking for capital.
This trend has also been particularly prevalent among large multifamily and homebuilding firms looking to mitigate risk and increase efficiency in a market still facing labor and supply challenges.
Federal infrastructure spending has added further fuel to PE interest by creating sustained demand across transportation, utilities and energy-related projects.
The greatest advantage of private equity in construction is the infusion of large amounts of capital needed to fund projects, yielding a potentially higher return for investors. The idea behind it is that the company and investors all benefit from a streamlined process, seemingly reduced project risks and flexibility in adapting to market pressures.
The risk of an affiliate structure
But this arrangement also means the developer is no longer hiring a general contractor at arm's length. Instead, it is awarding work to an affiliate, which introduces potential conflicts of interest and heightens the importance of fiduciary governance and disclosure.
When a developer sits on both sides of the transaction, as both project sponsor and construction provider, it may be incentivized to favor its affiliated entity even if outside contractors could offer better pricing or quality. The affiliate's profitability may be tied to change orders, claims and how costs are allocated across the project.
If the sponsor 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. That means the adviser needs to either eliminate conflicts or make full and fair disclosure of material conflicts so that investors can provide informed consent.
This disclosure must be specific, not generic language suggesting the adviser "may" have conflicts when the conflict actually exists. In a vertically integrated construction model, the likelihood that a fund-controlled developer will award construction work to its own affiliate is not hypothetical: It is a built-in feature.
Shorter investment timeframes
There are additional risks inherent in this vertical integration. Building an in-house construction team adds to the operational complexity of projects, which leads to greater risk exposure and requires significant capital investment. Nowhere is this seen more than in budgeting a project, both on the labor and on the materials side.
PE firms typically look for a return on their investment in three to seven years, which can lead to 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 impact cash flow.
In a developer-builder model where the general contractor is an affiliate, self-dealing can show up as inflated contract pricing, preferential contract awards, or the shifting of project risks onto the investment vehicle while profits go to the affiliated contractor.
Good governance a must
Because fiduciary claims often come down to process, an integrated developer-builder project benefits from governance practices that show informed, independent oversight.
Protective measures include:
- Recusing conflicted executives from key decisions.
- Using independent directors or a conflicts committee for affiliate contract awards and major change orders.
- Obtaining competitive bids or third-party pricing benchmarks.
- Documenting why the affiliate arrangement is in the project's best interest.
- Monitoring performance as project conditions change.
Investors should also receive clear disclosure of ownership interests in affiliated construction entities, fee structures for construction services and the procedures used to benchmark pricing.
Private equity sponsors can run integrated development and construction models successfully, and in some markets they are strategically compelling.
The most effective risk-control strategy is to treat affiliated construction arrangements as a standing fiduciary issue. That means specific, full disclosure, ensuring decisions are made by disinterested parties and documenting all of the above.
Doing so shows that the integrated model is operated for the benefit of the developer and its investors rather than to move value to an affiliate through unclear pricing, cost allocations, or change-order practices.
