MSCP bets on roofing and other residential services with a pair of acquisitions

Residential services is a highly fragmented sector involving expenses that are often non-deferable, like fixing a leaky roof. Success in the sector is tied to the strategic and operational experience of the investor, Morgan Stanley Capital Partners managing director Adam Shaw told PE Hub, as the firm picks up two platform investments.

Later this morning, MSCP will announce a pair of acquisitions. The mid-market focused private equity team at Morgan Stanley Investment Management is buying Allstar Services, a full-service provider of residential exterior replacement, repair and maintenance services across trades including roofing, siding, windows and gutters; and RowCal, a provider of outsourced homeowner association (HOA) property management services.

Both companies are headquartered in Minneapolis.

On Allstar, MSCP is partnering with the current management team led by chairman Pete Carlson, who will continue to lead the business. Founded in 1979, Allstar primarily operates in the Minnesota, Wisconsin, North Dakota and South Dakota markets.

On RowCal, MSCP is partnering with the current management team led by CEO Jake Christenson, who founded the business in 2018. The company currently serves the Minnesota, Colorado and Texas markets.

For the residential roofing that Allstar focuses on, Shaw said the sector represents a $40 billion market and is a largely non-discretionary and non-deferrable service. Like other residential services, “residential roofing is an analog industry that is dominated by unsophisticated, undercapitalized mom and pop providers,” he said.

Sophisticated operators can meaningfully outpace industry growth and win share. “Scaled operators have been able to grow 5x industry average over the past five years, consistently driving double digit organic growth,” he continued.

Given the size of the market and the limited market share of any market leader, Shaw said outcompeting a favorable competitive landscape and winning share allows these scaled platforms to grow regardless of the broader market trends.

For the success of the platforms, MSCP will pursue both organic and inorganic strategies. Organically, the firm believes that there is a material opportunity to optimize customer acquisition and improve service delivery through some sophisticated strategies and tech enablement, just as consumers are increasingly using digital channels to source and vet providers.

“Similarly, we believe there is a compelling opportunity to improve service delivery through greater technology enablement in the field,” Shaw said.

Because of the fragmented nature of the sector, MSCP said there is a compelling consolidation opportunity. “We believe that the consolidation opportunity is in the very early innings and believe there is a very tangible opportunity to quickly build the leading national platform in the space,” he noted.

Even though the deals are coming during a tight macroeconomic environment, with fears of a recession, demand is expected to be strong considering Allstar’s services are non-deferable.

“The roofing and other exterior services industries do have some cyclicality, but the vast majority of the industry is non-deferrable and non-discretionary and therefore have fairly limited cyclicality,” he said.

Extreme opportunities

Extreme weather conditions such as tornadoes open up opportunities for the business as houses often get damaged as severe weather sweeps across a region. “While the core of our business will be focused on “end of life” roofing replacements, the long-term secular trends around more extreme weather will be a favorable tailwind as lifecycles are naturally truncating as a result,” Shaw said.

Deal flow has been negatively impacted by the tight macroeconomic environment in the PE sector. But Shaw said the firm has lined up a significant amount of committed financing, which will give it sufficient firepower and flexibility to pursue add-on targets. “With that committed financing we feel like we can navigate the uncertainty in the environment and continue executing on strategic add-ons,” he pointed out.

AllStar is the third acquisition by MSCP in the residential space following the acquisition of Sila Heating & Air Conditioning, a company focused on residential HVAC, plumbing and electrical services, in May 2021, and of Fairway Lawns, a provider of recurring residential lawn treatment services acquired, a year later.

RowCal is the third acquisition by MSCP in 2023 after Apex Companies, a provider of environmental consulting and engineering services, and AllStar.

Banking on its previous experience, MSCP said it has developed an inhouse team of operational and external resources that can be deployed to help build each platform. “These companies have not really developed their digital marketing capabilities yet and that’s an area we have a deep bench of advisers and talent to work with management.”