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Long-term Service Contracts Key to PE Interest in Local Businesses


The developed modern world is growing more and more reliant on appliances, machinery and gadgets to function in just about everything we do. Historically, private equity groups or “PEGs” have been uninterested in service industries such as HVAC, electrical contracting, plumbing and waterproofing, and appliance/vehicle maintenance and repair which support these machines. These businesses were considered typically local with small revenues and prone to seasonality. Most companies in these industries can still appear to fit this description, so why is it that large multi-billion investment groups have taken a recent interest in the US service and repair market? 

Businesses depend on the quick response and skill of repairmen even more than the average consumer in their private capacity: If an oven breaks down at home, the family can go out for dinner or switch to alternative meal options until the oven is fixed or replaced, but a restaurant which loses their working grills, fryolators or ovens will lose most of their customers until the appliances are repaired. Often such equipment is leased by the business, and service contracts in place for maintenance and repair, which becomes a necessity for the business and is no longer performed by in-house technicians. 

Because of these service contracts which are often long-term, local businesses such as HVAC and appliance repair have seen their revenues grow and stabilize, making them amenable to absentee ownership and rollup strategies traditionally employed by private equity investors. The high potential for consolidation and scaling is further reinforced by the consistent market predictions of growth in the HVAC and repair industry. 

The automotive parts and repair segment is also considered a sound investment, as described by the Marubeni Corporation’s May 5th press release upon its acquisition of Automotive Parts and Services Holdings, LLC. The multi-billion dollar Japanese-based trading group drew particular attention to the high cost of future vehicle repair and necessity of parts, which are predicted to only increase in the coming years in the United States, where Marubeni’s most recent acquisition is located. This is a different market, yet the reasoning and investment strategy sees the same basic principle: reliable maintenance requirements and long- term contracts add up to predictable cash flow and thereby a trend is created. The continuing unresolved challenges faced by electric vehicles and high-performance component shortages only bolster the focus on maintaining current vehicles. 

Will it last? Some claim that this private equity trend into businesses such as HVAC and automotive parts will crash and burn, however this has not happened yet. Supply-chain troubles and labor shortages have provided a sobering effect, keeping valuations and promises from running too far ahead of reality. Not every small or middle- market service company is a good fit, but those that are will find favorable conditions with more buyers available to them than ever before. 

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