Tech construction, investments and M&A grow but companies remain micro

The 'weight' of Contech - i.e. the set of technologies supporting the design and construction of buildings or infrastructures - is growing in Europe, thanks to venture capital, private equity and strategic M& A operations. And yet, companies in the building and architecture supply chain - which could increase their productivity by up to 60% - invest less than 2%, mainly because they are too small. Highlighting the contradiction is a snapshot of the sector taken by Klecha, an independent pan-European investment bank specialising in the tech sectors.

The construction sector employs 7 per cent of the global workforce and generates 14 per cent of the world's GDP, or $10 trillion, which is estimated to rise to $14 trillion by 2037. With a multiplier of more than two jobs created in adjacent industries, it is estimated that the sector and supply chain employs more than 38 million workers in Europe. In 2023, with a market share of around 20 per cent, Europe is confirmed as the second largest region globally - surpassed only by the emerging Asian countries - and it is estimated that the sector will grow by 1 per cent more than GDP over the next 15 years, supported by European incentives. In particular, Italy, for the second year in a row, recorded the highest growth rate in 2023 (+12.1 per cent), while Bulgaria recorded the steepest decline with -23.1 per cent.

The construction industry globally consists of 99.9% of companies with less than 50 employees, and is equally fragmented in Europe where there are over 3 million companies, 95% of which have less than 20 employees . It is precisely due to the small size of companies that underinvestment in IT (1.5% of investments) is 55% lower than the average in other sectors . But it is precisely the digitisation of the sector that could support its productivity, which has been declining since the 1990s by more than 23%: it is estimated that the adoption of Contech could increase the productivity of the construction sector by up to 60% and could support a more sustainable approach, a crucial factor in the current green transition, considering that 40% of global CO2 emissions come from the built environment.

The total value of investments made globally in Contech (by venture capital, angel investors, private equity and through M&A and IPOs) rose to USD 30 billion in 2023, after accumulating capital of USD 50 billion in the two-year period 2020-2022, up sharply (+85%) from USD 27 billion in the previous two-year period (2017-2019). The number of deals also increased to 1,229 (+30% compared to 944 in the previous biennium). Strategic M&A deals accounted for 48% of the $50bn invested in Contech in 2020-2022 and 68% of all exits in terms of value. The average size of M&A deals was about $215m spread over 105 deals in 2020-2022.

Operations have been led by a few market-leading companies: the top ten players in construction software applications control over 43% of the market and have aimed to incorporate into their offerings functionalities or emerging technologies developed by start-ups and scale-ups. As a result of this dynamic, the spread of Contech unicorns is now limited: there are 17 of them, of which only 7 are US-based. The 10 IPOs in the two-year period had an average size of around USD 240 million. Private equity increased its total investments to USD 7 billion (2020-2022) from USD 4 billion in the previous two-year period, while the average deal size remained unchanged at around USD 50 million. In a decade, venture capital has globally invested about USD 29 billion in Contech, 3 of which in 2023 through 236 deals (+3.5%), mainly carried out in the US. The drop in investments (-44%) is lower than the overall decline in venture capital investments (-54%), confirming the growth of the Contech share of total investments. Recent research also indicates that 51% of Contech venture capitalists expect to increase their investments in 2024 compared to 2023, a percentage that rises to 81% in corporate venture capital.