A new infrastructure platform titan?

April 23, 2024

My take on Schneider Electric's reported $16 billion acquisition of Bentley Systems, and my views on the rise of "infraplatform" titans combining design software and operational platforms.

Schneider Electric, the French multinational automation and infrastructure giant with a $120B market cap, is reportedly in discussions to acquire Bentley Systems, who is currently valued at $16B. This would be a transformative deal in the infrastructure software space, combining a leading hardware+services provider with the top software player. It's a bold move that could create a new type of full-stack category leader. In this post, I'll unpack the thesis, the implications, and especially what it means for founders in the architecture, engineering and construction sectors.

Design software for infrastructure and data centers

To start, let's look at where Bentley fits in the overall market for computer-aided design (CAD) and engineering software. The CAD space is highly fragmented, with a wide range of solutions targeting different verticals. In architecture you have building information modeling (BIM) tools like Autodesk's Revit. In manufacturing it's Dassault Systemes' SolidWorks. In media and entertainment, specialized tools for VFX and animation. And in infrastructure and industrial, it's Bentley.

Within the infrastructure vertical, Bentley is the 800-pound gorilla. Their comprehensive software portfolio spans the project lifecycle from early-stage modeling and simulation to construction workflows to asset performance management. And it covers all the key sectors like roads and bridges, rail and transit, water and wastewater, utilities and grid, and data centers. Bentley is a one-stop-shop for infrastructure design, and that makes them highly strategic.

Why now?

So why is infrastructure software suddenly in the spotlight? The key driver is the boom in infrastructure investment that we're seeing worldwide. In the US, the Biden administration's $1.2 trillion Infrastructure Investment and Jobs Act is funneling hundreds of billions into upgrading roads, bridges, rail, the power grid, water systems, broadband, and more. Of these, Invest.gov is already tracking $350B of infrastructure investments in the US per end of 2023.

India is spending $150B on infrastructure in 2024+2025 alone. And Europe is doing something similar with their "NextGenerationEU" recovery plan. And don't forget: Infrastructure investment has been a key part of the growth story in Asia for decades.

Much of this investment will go to overhauling aging systems that in some cases are 50-100 years old, and adding new infrastructure that's fueled by software demands:

  • Data centers and networks to unlock AI
  • Energy and grid infrastructure to enable "electrify everything"
  • Water infrastructure to cope with climate change implications
  • Traditional transportation infrastructure (often times decades old) to facilitate our re-organizing supply chains

Governments and asset owners are recognizing that in order to build infrastructure that is sustainable, resilient and future-proof, they need to leverage technology across the lifecycle from design to construction to operations. This is driving demand for solutions that run on the future of design authoring and data, like browser-based collaboration across involved experts, generative engineering, AI-powered simulations, digital twins, and real-time monitoring. The infrastructure sector might have been under-invested from a technology standpoint, but that time is over now.

Why Bentley?

As mentioned, Bentley's design authoring, engineering and planning software suite for energy, data centers, water, networks and traditional infrastructure is just really comprehensiveand almost all-encompassing.

In this context, you can see why Bentley is such a prime acquisition target. They are the clear leader in infrastructure design software, with an estimated 45% market share across all the relevant infrastructure verticals. Their solutions are used by the majority of the ENR Top 500 Design Firms, including 90% of the top 10. They have a 40-year track record and deep relationships across the ecosystem. Bentley also has a highly diversified business – they serve 172 countries with a very low customer concentration risk.

From a financial standpoint, Bentley growth is projected to slow to the mid-single digits in 2023 and 2024. The company has made a long string of acquisitions (20+ in the past decade) which may add to its relatively lower capital efficiency. Financial analysts see Bentley substantially less attractive compared to many of its CAD peers.

However, in the grand scheme those are financial quibbles. In isolation, Bentley is a highly profitable business with 22%+ EBIT margin and a sustained growth runway in a market that is booming. Acquiring them would give Schneider clear market leadership in a key software category, with a platform they can build on for years to come.

Why Schneider?

Which brings us to Schneider's rationale. Why is a French industrial conglomerate that makes switchgears and circuit breakers interested in infrastructure software? The answer is that Schneider has been on a multi-year journey to transform from a pure-play hardware provider to a full-stack hardware + software + services company. They call it their "Schneider Electric Sustainability Impact" strategy.

A key part of this strategy has been a string of software acquisitions. In 2020 they bought a controlling stake in AVEVA, an industrial software provider, in a deal that valued the company at $10B. In 2022 they acquired RIB Software, a German construction software provider, for $1.5B. And now they have their sights set on Bentley, perhaps the crown jewel of infrastructure software.

If you zoom out, you can see how the pieces fit together. AVEVA gives Schneider a platform for operational data management across industrial sectors. RIB gives them construction management and cost estimation software. And Bentley would give them the market leader in infrastructure design authoring and planning. Tie a bow around that and you have a software suite that spans the full infrastructure lifecycle from concept to construction to operations.

A great thesis !

My core thesis for the CAD Wars is that whoever controls authoring + data infrastructure can orchestrate all other design and purchasing choices.

Which is why the real magic happens when you look at how this software suite could tie into Schneider's hardware business. Schneider is already one of the largest providers of physical infrastructure like electrical equipment, building automation systems, and data center gear. They have the global reach and the deep customer relationships. By adding software, they can now influence the design process and steer customers to their hardware offerings. It's a classic "design win" strategy that has powered companies like Autodesk and Ansys for years.

Even more intriguing is the potential for Schneider to pioneer a new type of "all-digital" project delivery model. Imagine a scenario where Schneider works with an asset owner from the earliest stages of concept and design, helping to optimize the project for cost, sustainability and performance. Then they supply the hardware components, the software to manage construction, and the operational twin for asset management. It's an end-to-end solution that would be very hard for competitors to match.

Now, pulling this off will require some heavy lifting on the product/platform front. A true seamless offering will not be easy. I expect Schneider to consider building common data models, and thus enabling itself to create seamless workflows across the offerings. This will take time. Usually I would say they might have to upskill their sales force to engage customers in a more consultative way, but Schneider might already have that competence in-house through their Aveva acquisition (in that light, perhaps an even smarter move). If they can execute, the payoff could be enormous.

It's a strategic deal

Clearly this deal is not about short-term financial metrics. At 35-40x EBITDA multiple (where Bentley is trading, or even more !), Schneider might be paying a substantial premium for Bentley. And Bentley's projected growth and margins are not exactly best-in-class, with ca. 6% revenue growth and a comparatively lower 22% EBIT margin compared to other CAD authoring peers. So this is a strategic deal through and through. Schneider is betting that by combining leading hardware and software they can create a differentiated offering and tap into the trillion-dollar infrastructure opportunity.

There are also defensive considerations at play. If Schneider doesn't make this move, one of their competitors almost certainly will. Siemens, ABB, and Honeywell are all vying for position in the digital infrastructure market. And on the software side, Autodesk has made no secret of their ambitions in AEC. Hexagon is another player to watch given their focus on sensor tech and reality capture. The industry is consolidating, and Schneider doesn't want to be left out in the cold.

Implication: The CAD Wars are on

Stepping back, it's hard to overstate how transformative this deal could be for the construction and infrastructure software market. If executed, by my research it will be the largest AEC software acquisition in history, and a sign that the sector has well and truly caught the attention of the big strategics. It's also a validation of the importance of software in the broader industry shift towards digital delivery and operations.

More fundamentally though, Schneider is writing the playbook for the next generation of CAD and infrastructure lifecycle management. The winning platforms of the future won't just be point solutions for design authoring or project management. They will be true end-to-end platforms that combine design tools, construction management, operational twins, and real-time data analytics. And the kingmakers will be the companies that can combine those capabilities with industry-specific content, artificial intelligence, and global reach.

This has big implications for founders in AEC and real estate tech. In a sense, it's never been a better time to be in this space. The market pull is there, the exit opportunities are expanding, and incumbents are hungry for becoming software platform players. At the same time, the bar is getting higher. Founders need to be thinking about how to build a generational design company on a grander scale.

My advice? Pick and begin in a narrow-enough segment of the B2B design market. Bentley proves that you can become highly substantial by building a focused design suite. Stay close to your segment and have a deep understanding of the workflows and the dynamics, allowing you to build track record. And then scale like crazy to cement your position in that segment. If you can do that, the exits will much more take care of themselves than in almost any other verticals.

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