This piece focuses on the impact of the global pandemic on the residential Heating, Ventilation, Air Conditioning, and Refrigeration (HVACR) services sector and the current M&A environment with high Private Equity (PE) investor demand for both at-scale (i.e., platform) and sub-scale (i.e., add-on) targets. This is particularly true for residential/consumer services companies.
The HVACR services sector has historically been characterized by small companies with local or regional operating footprints. An estimate from HVAC.com claims over 100,000 businesses operate in the sector in the United States alone, making it a highly fragmented landscape.
Many of these businesses lack the personnel, capital resources, and experience to expand and grow without help. As a result, these businesses have been challenging to scale and financial investors, such as those in the PE community, haven’t historically been attracted to the space.
During the pandemic, media, academia, and pundits searched for “new normal” trends. One such trend is that at-home goods and services are, and will continue to be for the foreseeable future, in high demand.
“Shelter in place” became “work/learn from home,” which turned into “only leave home when necessary.” While many restrictions have since been lifted, we will likely see people continuing to spend more time at home. As a result, private equity investments in at-home goods and services are just warming up.
Fast forward to the end of 2021, the number of PE-backed platforms in the HVACR services sector has never been greater. Driven by the industry’s fragmented nature and aging owner pool, PE investors have demonstrated a commitment to investing in HVACR platforms.
Representative current PE-backed residential HVACR platforms
The potential financial rewards are substantial for investors who pick the right management team. Investors can supplement industry owners’ industry knowledge and experience to introduce tools to increase lead generation, capture customer relationship insights, streamline accounting functions, and enhance field operations visibility.
There are several reasons for private equity’s recent interest in the HVACR space, but a few stand out:
First, the emergence of third-party technology solutions has enabled PE’s ability to consolidate, integrate, and manage technical field services companies in ways that weren’t previously possible (e.g., cloud-based Salesforce was launched in 2012; or the proliferation of mobile phone ownership, which allowed for quick, convenient, and inexpensive communication).
With these solutions, PE has an arsenal of business management and improvement tools available to facilitate expansion and growth. Prior to 2012, many of these tools were less developed, not yet proven, or still in the early phase of their adoption.
Second, success breeds interest. Initial successful PE investments in the sector paved the way for additional PE interest. The investments below proved that the property maintenance and installation services industry could yield compelling returns.
- American Residential Services LLC (d.b.a., ARS Rescue Rooter): spun out of The ServiceMaster Company, LLC in 2006 when it was sold to CI Capital Partners LLC. In 2014, Charlesbank Capital Partners purchased the company and owned it until GI Partners took majority control in 2020.
- Service Experts LLC: sold by American Capital, Ltd. in May 2016 to EnerCare Inc. for $341mm (approximately 0.8x LTM revenue). Brookfield Infrastructure Partners L.P. later acquired EnerCare in August 2018 for $3.2 billion, or 3.2x last twelve month (LTM) revenue and 14.4x LTM EBITDA (or earnings before interest, taxes, depreciation, and amortization).
Third, demand for the industry’s services is consistent – particularly in today’s work-from-home environment – and the industry landscape remains highly fragmented.
The former allows PE investors to utilize debt (especially in today’s liquid capital markets environment) to amplify their investment returns. The latter provides a hunting ground of potential M&A targets, which offer a path to continued capital deployment and potential synergies.
With the rapid increase of PE firms in the U.S., it was only a matter of time before more of them would pursue platforms in HVACR.
Successful recent PE outcomes
Several blockbuster private equity sponsor exits have taken place since late 2018, with meaningful activity pickup since 4Q2020. Each generated fantastic returns for investors, with EBITDA multiples between 15x and 20x in each case. These types of successes generate a feedback loop of interest in a sector, which we see in HVACR services today.
Successful recent PE Exits
If you are considering a complete or partial sale of your business, we’d welcome a conversation to discuss the current M&A landscape and your options. Arguably, there has never been a better time to explore a sale.
We encourage prospective clients to speak with us at least eight to twelve months before their target sale date. Livingstone also provides capital markets advisory services to help companies raise debt to make an acquisition, invest in organic growth opportunities, or execute a dividend recapitalization.
Let’s have a conversation to determine how we can help you achieve your goals, including finding a partner to help you professionalize and scale your business or provide an ownership and/or management transition plan.