Q: Since Rotunda Capital is a fundless sponsor, how do you raise money for deals?
A: We’ve developed a network of investors that we’ve had a relationship with. We have a good sense of which investor will like each deal and how much they’ll want to contribute. With each deal, we go to our investors and find a group that’s most interested. I can’t name any specific names, but we have a lot of family offices, endowments and some institutions, as well as high net worth individuals. We’ve been doing this since early 2009. I joined the firm in 2013 from Thoma Bravo as Rotunda’s fourth partner. Right now, we’re pretty set as a team. We don’t have any immediate plans to launch a fund. We don’t know what the long-term future will bring.
Q: Any thoughts you could share on avoiding high deal prices?
A: You need to be focused on a narrow part of a sector where you have that deep expertise. This allows you to see unique opportunities and identify value, or have a better understanding of the risks. Then you need to have a strategy for creating value. For us, that means maintaining a deep network of industry executives in our verticals and developing and repeating processes for improvement. When we combine all these, it helps us find opportunities that others have missed, while keeping our valuations manageable.
Q: Rotunda Capital has made a couple investments in heating, ventilation and air conditioning, including Munch’s Supply Co, a distributor, and Microf Financial, which provides HVAC financing. What’s the thesis here?
A: We focus on distribution, specialty finance and logistics. These two deals fit the first two. Within those businesses, we take an industry thesis and pursue it. We did that with HVAC. Generally speaking, we like the opportunity. With Munch’s Supply, they have a large business for replacement, maintenance and services. While there’s been consolidation in HVAC distribution, it’s not been at the level of other distribution businesses and we see it picking up. We also believe some of the larger distributors such as Watsco and Ferguson are reaching a saturation point with their vendors. Some people would prefer Munch’s as a consolidator as opposed to big distributor getting bigger. Microf Financial provides financing solutions that dealers provide to their customers.
Q: Why not combine Munch’s Supply Co and Microf Financial into one platform?
A: They have different value propositions, different objectives and different alliances. Munch’s is a partner with Ingersoll Rand as a preferred vendor. Microf Financial has a strong relationship with Carrier and is focused on financing for those products. Munch’s is focused in the Midwest and Microf is a national opportunity. They don’t fit together.
Q: Any other macro trends that fueled your interest in HVAC?
A: The space is driven by replacement and repair of HVAC systems. There are different numbers thrown around, but between 75 percent and 90 percent of demand is related to replacement and repair, depending on the territory. The industry is benefiting from the general economic recovery in the U.S. Most of the units have a life of 10 to 20 years. We’re at nearly 10 years since the last housing boom. It’s expected that a large number of units in the last housing boom will need to be repaired or replaced.
Edited by Steve Gelsi