HVAC has continued to be a hot target for private equity investors. Five years ago, there was limited interest; now, there are many interested acquirers. Let’s examine the reasons why:
1. Stable cash flows: When debt is added, a transaction becomes inherently more risky. It is paramount to be able to quickly adapt to inflation by increasing the prices of inputs (labor and supplies) and passing these costs on to the customer.
2. Fragmentation: Many tiny “mom-and-pop” outfits in the industry can easily be consolidated into more significant plays. There is no clear market leader, and the most prominent players still have < 2% market share.
3. Recession-Resistant: HVAC is an essential service for residential and commercial properties. I currently own and have been involved in restaurants that need quarterly HVAC maintenance to keep employees and customers comfortable while in the restaurant. This is excellent recurring revenue.
4. Growth Industry: At about a 5-6% CAGR, this is well above the US GDP growth rate. The average lifespan used to be about 20 years for an HVAC rooftop unit; now, it is closer to 13 years (thanks to global warming!). Also, retrofitting is more popular to increase energy efficiency.
5. The addition of complimentary services: Plumbing and Electrical contracting are accessible add-on revenue streams.
HVAC issues:
1. Installation is non-recurring: Not all HVAC is created equally. Project-based installation may be a great way to generate revenue, but it is considered “non-recurring” and thus not amenable to adding debt.
2. Labor Shortages: The HVAC industry also has a labor shortage, and techs, especially seasoned ones, can command excellent salaries.
While this PE interest won’t last forever, a few more innings remain.
See chart below (source: PitchBook)
Comments