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Over 20 Years of Middle Market Investing | | | |
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IRONWOOD'S FACILITY SERVICES
INVESTMENT PERSPECTIVE
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This posting discusses Ironwood’s perspective on facility services, changes in the market landscape, key investment considerations, and our experience investing in the sector. Facility services continues to be an attractive segment of the market for private equity investment due to its recurring nature of demand, trends towards the outsourcing of services, and often regulatory driven end market exposure. The global facility services market is expansive, addressing a variety of end markets, and is projected to grow at a high-single-digit rate over the coming decade.
Ironwood has invested in numerous facility services businesses over its 20+ year history and looks to continue investing in the space given the strong industry fundamentals and opportunity for consolidation. Ironwood looks to pursue opportunities in the facility services market with strong cash flow dynamics, recurring, recession resistant demand, and value-added services such as HVAC, plumbing, janitorial, and industrial cleaning services.
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Industry Value Drivers
Facility services is a broad, multi-billion-dollar segment of the economy consisting of a diverse range of service providers who often possess specialized skills to maintain and operate both commercial and residential facilities. The industry is often broken down into categories such as soft services – lower technical requirements, higher labor intensity – and hard services – more highly skilled labor and regulatory demands. Facility services companies typically specialize in either commercial or residential customers but can do both. Companies across all of the above categories have seen continued growing interest in the private equity investment landscape.
Fundamental value drivers have stayed consistent over the past two decades. Investors typically look to invest in companies with regulatory driven or otherwise recurring demand streams, providers with white glove service capabilities and strong data utilization, and in industries seeing a push towards outsourced services vs. self-perform. Regional dominance, specialized expertise, and strong leadership teams continue to drive premium valuations. While these qualities create attractive investment dynamics, value drivers have expanded beyond these core fundamentals as investment in facility services continues to mature and expand.
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Re-occurring vs. Recurring Revenue – While recurring demand has long been an attractive feature to investors, investors are also seeing the value in re-occurring models. Predictable break/fix volume and high-frequency move/add/change project work can be viewed as stable in nature. Additionally, a captive, cohort-driven installed base of managed facilities can be viewed as recurring-like revenue due to its level of predictability in the aggregate.
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“Synthetic” Recurring Revenue – Providers are creating “synthetic” recurring revenue through preventative maintenance programs with monthly subscription fees. This model smooths lumpy maintenance costs for customers (specifically in higher ticket, low frequency industries such as roofing, paving, security) and generates consistent, recurring revenue for providers.
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High ROI Asset-based Models – While low capex, asset-light models continue to drive attractive cash dynamics, investors are now realizing the opportunity for well capitalized asset-based models. Investment in equipment can allow platforms to differentiate themselves from mom-and-pop competitors. Leasing models have also come into play due to strong unit economics.
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High Urgency Demand – While contractual inspection and maintenance agreements drive consistent revenue and operational performance, high-urgency demand (e.g., weather-related events) can drive substantially higher margins, outweighing the consistent nature of contracts.
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Cross-selling Opportunities – Specialization by service or industry continues to drive value in the market; however, many platforms look to move beyond one trade to capture customer wallet share rather than focus on building geographic reach and winning new customers.
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Market Trends
In the past, investor interest in facility services companies focused on a few common service types such as HVAC, Laundry and Linen, Fire & Life Safety, Elevator Maintenance, and Waste Services. While these categories are still attractive today, interest in facility services has broadened over time.
Soft Services
Underinvested areas such as roofing, paving, landscaping, restoration & remediation, and janitorial services have seen increasing investment. Examples include:
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Exterior building service providers (roofing, paving, landscaping, window cleaning, snow removal) see significant recurring and re-occurring revenue opportunities; the business model for most of these services must be outsourced due to the specialization of the services provided and equipment requirements.
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Janitorial services providers, which traditionally operate on multi-year contracts, have seen an increase in demand following the COVID-19 pandemic; customers look to demonstrate their commitment to cleanliness through the utilization of outsourced services.
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Restoration and remediation services are typically emergency driven and non-deferrable, creating demand that is independent of economic cycles; lack of price sensitivity drives strong margins. Services are often triggered by events such as natural disasters, inclement weather, mold growth, pipe breaks, fire, etc., which are unpredictable but occur with regular frequency. Attractive businesses have a stable base of preventative work with upside driven by increasing weather-driven catastrophes. Due to the event-driven nature of demand, platforms benefit from geographic and service diversification.
Hard Services
Hard services investment has expanded into building controls, facility technology services, plumbing, security systems integration, and warehousing. Examples include:
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“Smart building” and ESG initiatives have started to drive interest in building controls and energy management as building managers seek to promote ESG compliance and save energy costs.
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Facility technology services growth has been enabled by new technology advancements (5G, IoT), new facility applications, and continued demand for functional hybrid work environments. The design, implementation, and support for technology systems create recurring and re-occurring demand in an evolving market.
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Warehouse, dock, and door equipment maintenance can be crucial to the functionality and profitability of a business. There is a recurring break/fix demand need due to the consistent usage of machinery causing wear and tear. Services tend to be mission critical, and businesses look to minimize equipment downtime and facility inefficiency.
Additionally, facility services interest historically focused on businesses serving commercial customers, but over the past few years demand has shifted to include residential service providers, which tend to be higher volume and lower ticket with very large addressable markets. Modest marketing and technology investments can substantially differentiate platforms in the residential space relative to local providers who typically rely on word-of-mouth referrals. Internally, integration of ERP systems, CRMs, and fleet management systems have allowed companies to effectively manage employees and more efficiently service customers. Externally, consumer-facing dashboards and portals, remote scheduling, and automated remote monitoring services create value to customers.
On the commercial side, customers continue to shift towards increased amounts of outsourcing in their operations, allowing them to remain asset-light and receive consistent quality services instead of investing in equipment and managing personnel. Attractive end markets include those with strong long-term tailwinds such as renewable energy infrastructure, data centers, healthcare facilities, food service, and education.
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Investment Considerations
The facility services market has multiple value-driving mechanisms. Facility services businesses are often single location, single geography, family run businesses; hence, buy and build platforms are a frequently used strategy. The combination of several small businesses can create a geographically diverse platform serving an array of customers. Cost synergies and operating leverage drive margin appreciation, and professionalized, integrated platforms demand premium valuations upon exit. Additionally, the ability to effectively leverage technology to manage customer relationships, maintenance contracts, employee dynamics, and financial reporting are critical aspects in driving value to the business. Upon exit, data utilization allows sellers to demonstrate credible statistics and buyers to validate their investment thesis.
Key investment risks include personnel management, as most businesses in the facility services space rely heavily on either skilled or unskilled employees to complete work. Businesses either hire a full-time base of employees (often used for highly skilled positions such as plumbers or electricians) or subcontract out all or portions of the employee base. Subcontracting out the entirety or components of the labor force allows companies to easily flex the size of the workforce, which can drive cost savings. In the US, the market for skilled labor continues to tighten as the population ages and too few young people enter the trades. Ability to hire, train, and retain employees or effectively leverage subcontractor relationships is key to success in the facility services industry.
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Ironwood Experience
Ironwood has invested in numerous facility services companies over our 20+ year history and continues to seek investments in the facility services space across an array of end markets. In the past, Ironwood has invested in janitorial, plumbing, landscaping, security, and industrial cleaning services. Recent examples include Peltram Plumbing (exited in 2021), a provider of residential and commercial plumbing services; The Facilities Group (exited in 2022), a janitorial services provider to retail, education, medical, and other end markets; and Groome Industrial (current), a provider of maintenance and industrial cleaning services.
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Conclusion
Over time, success stories have continued to drive increasing investor participation and market competition in the facility services space. Ironwood looks forward to continuing to collaborate with founders, company leadership, and other investors in the facility services industry. Ironwood’s flexible junior capital solutions are well-suited to support both organic and inorganic growth and our industry experience fosters opportunities for strategic partnerships.
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We’re excited about the opportunities we see in the facility services sector and are actively evaluating investments aligned with this thesis. To learn more, please visit our website and reach out to one of our facility services team members: | |
The information contained herein has been obtained from sources believed to be reliable, but the accuracy of such information cannot be guaranteed. Views expressed are as of the date provided. Ironwood is under no obligation to update this information or to advise on further developments relating to the investments discussed herein. References to a particular investment is not a recommendation to buy or sell such investments. The information contained in this document is prepared for general circulation and is circulated for general information only. Past performance is no guarantee of future results. Any investment contains risk including the risk of total loss. There is no assurance that the investment objectives will be achieved or successful. Please refer to the Firm’s Form ADV 2A Brochure for more information about the Firm, services and fees on file with the SEC, www.adviserinfo.sec.gov. Firm CRD #321642. You may also contact us at 860-409-2100 or visit our website for a complete list of investments at www.ironwoodcap.com. | | | | |
