Private equity opportunities in home repair and maintenance services

Private equity investment can create value in the fragmented, growing, $500 billion home repair and maintenance services market.

In brief

• Home maintenance and repair services businesses are ripe for private equity investment and value creation.
• Private spending on professional residential repairs and upgrades has proved resilient in two of the last three recent recessionary periods.
• PE portfolios can harness technology to digitize and scale home maintenance offerings.

Private equity (PE) firms in search of value creation opportunities have recently accelerated their investment in the fragmented home repair and maintenance services market, particularly in smaller and regional enterprises.

Spending on home projects jumped 54% as people cocooned during the COVID-19 pandemic.¹ This coincided with a boom in spending on home repair and maintenance services, including heating, ventilation and air conditioning (HVAC) installation and repair, bathroom and kitchen remodeling, landscaping, pest control and many other services categories.

With economic uncertainty, what is next for this more than US$500 billion market, including home repair, remodeling and maintenance services?

We sat down with Sean Levy , who has advised numerous clients in the residential services space on commercial due diligence, market studies, growth and value creation strategies. He addresses what is driving PE investment in home repair and maintenance services, how that has shifted and how an economic downturn could impact investments.

What drives PE investment in home repair and maintenance services?

Levy: It is a large and growing market. US housing stock is aging given the lack of sufficient new home construction while the population continues to grow, millennials are buying homes, DIY is becoming less common, older homeowners are staying in their homes longer, and people are moving to the suburbs. People discovered during the pandemic that they like to work from home, which increases the use and importance of the home, and this is not going to go away.

In addition to attractive underlying secular trends and a large market for home repair and maintenance services, private equity investors have developed increasing conviction on the economies of scale advantage. The core thesis for PE is to invest in a residential services platform with greater size and sophistication that can outgrow the underlying market through both mergers and acquisitions (M&A) and gain market share. There are also key margin improvement opportunities for PE through leveraging technology, procurement scale and improved operational effectiveness across functional categories.

How would an economic downtown impact the investment thesis in residential services?

Levy: The key question, after unprecedented growth in demand and increased prices for home-related services during the pandemic, is: Where will things go over the next 12 to 18 months given the potential risk of demand softening?

Concerns are growing that inflation and falling consumer confidence may increasingly cause consumers to cut back or trade down in the services or products they buy. And financing for these purchases may become less available to homeowners.

Our view is that these are material headwinds, but several factors will help mitigate the downturn to some extent. There are sustainable forces driving greater investment in the home. We think prices for most residential product and service categories will remain fairly sticky for two reasons: limited incentives for most value chain participants to lower prices and the fact that homeowners often do not aggressively price shop for residential services.

Private spending on residential improvement held up in two of the last three recessions

Residential improvement services spending was strong during recent downturns, except for the housing-driven Great Financial Crisis.

Historically, large providers with scale have been able to weather periods of market disruption better than mom-and-pop operators because they have greater access to capital and an increased ability to pivot their sales and marketing approaches and services mix. In fact, many of these companies grew during the Great Recession.

Why is PE investment growing now more than it was previously?

Levy: In the past, the conventional wisdom was that if a residential repair services business became too large, the added overhead and complexity did not sufficiently create advantages when competing with local mom-and-pop operators.

However, there are key catalysts today, including a much greater opportunity for tech enablement, evolving use of digital marketing and growing potential to differentiate via recruiting and training of the labor force in an increasingly labor-constrained environment.

PE firms have also continued to refine and tailor their strategies in many areas of home repair and maintenance services, including:

• Services for existing homes, which is often the preference vs. services for new construction or commercial customers
• The approach to choosing when to retain acquired brands vs. rebranding
• The most appropriate complementary service offerings to combine
• The best use of channel partners, such as big-box retailers, lead aggregators or insurers
• The breadth of geographic focus

What value creation levers currently hold the most potential to drive returns in the home repair and maintenance services industry? How are these businesses using data and technology?

Levy: Operational value creation is critical for success, although the degree to which PE-owned companies are following through on these opportunities can vary partly due to the pace of M&A they are pursuing.

Key levers include technician productivity, recruitment and retention, pricing optimization and sales force effectiveness, digital marketing effectiveness, cross-selling in adjacent services and leveraging procurement across the vendor base, not just with the largest suppliers.

Residential services businesses typically have branch networks spread across geographies, with local management often coming from acquired businesses. There are rich opportunities to track internal performance, benchmark and share leading practices (as well as benchmarking to competition).

Often, PE firms need to implement new core software platforms for financial reporting and managing operations, which is a significant undertaking. A substantial amount of blocking, tackling and prioritization is required given the speed of M&A and limits on management bandwidth. But the result can have a substantial impact on growth and margins.

How are PE investors shifting their investment strategies in the residential services sector?

Levy: Because valuations are higher on established assets in home repair and maintenance services, some PE investment is starting much smaller in a buy-and-build strategy. What might have been an add-on target company before may be a platform today if there are key executives to build around. This strategy requires more operational legwork and risk but presents an opportunity for significant value creation at exit.

There are also less-discovered categories in residential services for PE where there may be an early-mover advantage. These include recurring services categories, such as in-home improvement, where there is an opportunity to improve sales and service models. An example is a two- to three-day “quick hit” remodel to address a specific need vs. a full custom remodeling project.

Investors are also focused on finding individual categories that fit best with their specific investment theses, such as electrification of the home or a transition from DIY to DIFM (do it for me) supported by generational changes (e.g., gutter cleaning) or capitalizing on services where homeowner education can drive adoption (e.g., foundation repair).

There has been some pullback in PE deals. What is next for PE investment in home repair and maintenance services?

Levy: In the current environment, buyers are much more reluctant to commit to premium valuations. In addition, the lack of financing availability, particularly for larger deals, is a significant constraint. That being said, activity has been relatively resilient, and high-quality businesses are still coming to market. Interest levels from our private equity clients remain very high in this sector.