Table of Contents

Why HVAC Private Equity Is Booming

Updated February 2, 2024
  • Private equity firms are attracted to the HVAC industry because it is growing rapidly and there is plenty of money to be made.
  • New technologies are emerging that are revolutionizing the HVAC industry, making it even more attractive to private equity investors.
  • Private equity firms often take on large amounts of debt to finance their acquisitions, putting the companies they buy at risk of default if business slows down.
  • 2024 could be tougher for HVAC contractors according to ACHR News. They predict consolidation in the industry as some private equity-backed firms struggle with refinancing debt at higher interest rates.
Why HVAC Private Equity Is Trending

For private equity investors, the HVAC industry is an attractive proposition. The sector is growing rapidly, and there is plenty of money to be made.

Let’s take a look at why the HVAC industry is so interesting to private equity investors and analyze some of the key trends that are driving growth in the market.

The HVAC industry is benefiting from several positive trends.

HVAC systems have long been essential for homes and businesses, providing a comfortable indoor environment year-round. However, the importance of HVAC was brought into sharp focus during the pandemic.

People were advised to stay indoors to reduce the spread of the virus. This led to a surge in demand for HVAC services, and private equity firms took notice. Many firms saw HVAC as an essential service in high demand regardless of the economic conditions.

As the world’s population continues to grow, so does the demand
for air conditioning and other forms of climate control.

Year-round warm weather has increased the demand for efficient HVAC systems and reliable service providers in many parts of the world.

With the right investment, a company in this industry can expect significant growth in the coming years. They see it as an industry with great potential for long-term growth.

New technologies that are revolutionizing the HVAC industry are emerging
. These include energy-efficient renewable energy systems and high-efficiency indoor air quality control products.

These trends prove that the HVAC industry will continue to grow even more in the future.

There are too many small-medium HVAC contractors in every major market that could immediately benefit from consolidation.

Fragmented markets like this make an attractive investment opportunity for private equity firms.

article trending now

Who They Are And What They’re Looking For

Private equity investors are looking for companies with high potential returns that are undervalued by the market. These companies often have experienced and strong management teams and need capital to fuel growth.

Firms will typically invest in companies in industries with high barriers to entry, such as the HVAC industry. This is because these companies typically have strong competitive advantages, which make it difficult for new entrants to gain market share. As a result, private equity investors are often attracted to HVAC companies with strong brand recognition, reliable customer relationships, and efficient operations.

By investing in these types of companies, private equity firms can help them unlock their full potential and generate significant returns for their investors.

PE investors are looking for:

  • High potential returns
  • Experienced management teams
  • Companies in need of capital to fuel growth
  • Industries with high barriers to entry, such as the HVAC industry

HVAC Contractor Consolidation By PE Firms

The consolidation trend is likely to continue in the future as the benefits of scale become more important and private equity firms look for new opportunities to invest.

Primary benefits include:

  • Increased market share and efficiency
  • Access to new technology and expertise
  • Reduces competition in the industry
  • Provides an opportunity for firms to invest in a growing industry

As a result, homeowners and businesses can expect to see fewer choices when selecting an HVAC contractor. However, they can also expect more sophisticated services and products as the industry becomes more consolidated and competitive.

recommended for you

What success metrics are PE firms attracted to?

There are 4 of them. It starts with strong leadership, which naturally trickles down into strong recurring revenue, a good reputation, and an EBIDTA above 10%.

Learn more →

The Risks Associated With HVAC Private Equity

Private equity firms have been pumping billions of dollars into the HVAC industry in recent years, attracted by the steadiness of demand and the potential for high returns. However, this influx of capital has also brought increased risks, both for the companies involved and for the workers who depend on them.

One of the biggest dangers is that private equity firms often take on large amounts of debt to finance their acquisitions, putting the companies they buy at risk of default if business slows down.

Warning signs to lookout for:

  • Firms focused heavily on short-term gains
  • High turnover, especially with management positions
  • Historically volatile or aggressive deals

Examples Of Successful HVAC PE Investments

As an HVAC business owner, the success of your PE investments will be measured based on your needs and goals. Regarding PE investments, the most important thing is to align your goals with the needs of your HVAC business. That way, you can be sure that the deal you’re getting is exactly what you need to achieve your desired outcome.

For example, you may want to stay in charge of the company, be on the board of directors, retire, or get paid perpetually. Or, you may have a different goal entirely. Regardless of what you want, it is important to remember that there is no one-size-fits-all solution. Instead, each PE deal is unique and should be structured accordingly.

By taking the time to understand your needs and goals, you will be able to ensure that your PE investment is successful. Here are 2 examples of successful deals:

Gryphon Investors acquired Ed’s Supply Company Inc.The Byram family legacy of leading Ed’s Supply will continue with Steve becoming an adviser to the Heritage Distribution Holding management team. His son Tucker, most recently vice president is set to become its new President.

Percheron Capital Partnership with McWilliams & SonTrey McWilliams, will remain a significant investor and continue to lead the residential HVAC and plumbing services company.

How Our Economy Affects Investments

The US economy has a significant impact on private equity investments in the HVAC home service businesses. The level of economic growth and the health of the housing market are the two most important factors that affect private equity investments in this industry. Consumers have more money to spend when the economy is growing, leading to increased demand for HVAC services. The housing market is also important because homeowners are more likely to invest in home repairs and upgrades when the value rises.

In a down economy, potential investors may be more hesitant to invest in businesses that don’t have a solid track record of profitability. However, businesses with strong maintenance and repair revenues may be more attractive to potential investors.

This is because those businesses are seen as having more stability and less risk. As such, HVAC home service business owners should prepare for a strong negotiation position with potential investors. This may include highlighting the company’s history of strong performance, as well as its prospects.

Additionally, it is important to have accurate financial information ready to present to potential investors, including profit and loss statements, balance sheets, and cash flow statements. By doing so, you can show potential investors that your business is healthy and has the potential to be profitable in the future.

Industry Indicators:

  • Rising interest rates: This could make it more challenging for PE-backed firms to refinance debt, potentially leading to consolidation or exits.
  • Economic uncertainty: Concerns about a potential recession might dampen investor confidence and transaction activity.
  • Focus on value creation: PE firms are likely to prioritize operational improvements and cost-cutting to enhance portfolio companies’ attractiveness.
  • Sustainability and technology: Growing demand for energy-efficient solutions and smart HVAC systems could attract investment.

What do these indicators suggest for the HVAC industry?

The outlook for HVAC private equity in 2024 appears cautious.

Economic headwinds and rising interest rates pose challenges, but the large amount of available capital and potential asset sales present opportunities. The focus will likely shift towards value creation within existing portfolios, with sustainability and technology playing a bigger role in attracting investment.

Disclaimer: This information is based on publicly available sources and should not be considered financial advice. Please consult with a professional for personalized investment guidance.

We send out a monthly guide on industry trends to hundreds of businesses like yours.

contact us to get started
contact us to get started

Don't miss out on the HVAC industry's top insights

Say goodbye to the stress of staying informed, and let us deliver the next 30 days of your business operation strategy straight to your inbox.