Morgan Stanley Capital Partners recently backed Sila Heating & Air Conditioning in a bid to capitalize on the growing consolidation opportunity within the residential HVAC services universe.
With the transaction, exiting investor Dubin Clark generated a 250 percent IRR and over 5x return in under two years, a source told PE Hub.
Achieving scale through M&A and technology upgrades under Dubin Clark, Sila – now a collection of seven HVAC service providers – is poised to post more than $100 million in revenue this year, another source said.
Sila’s new backer is eager to fuel continued growth. “It’s a fragmented sector,” said MSCP managing director Adam Shaw, declining to comment on financials or deal terms. Some 90 percent of providers are small shops with less than 20 employees, he said. “There’s a huge consolidation opportunity.”
Over the past few years, the HVAC services industry has transformed. For starters, providers have invested heavily in technology, Shaw said: “Years ago they would come with a carbon copy page; now it’s about having the right tablet in the salesperson hand.”
Sila, which has serviced HVAC units for more than 30 years, has also benefitted from scale, having developed an HR team among other things.
This solves a common industry problem: a shortage of technicians. “We are competing against the one-to-five-person team down the street that can’t invest in an HR team,” Shaw said.
Scaling up has also resulted in cost advantages, with the company achieving lower costs on machine parts. “OEM manufacturers provide volume discount to big buyers; they want to consolidate their customer base,” Shaw said.
MSCP plans to further build out the platform by acquiring smaller service providers, taking in their technicians and customers, as well as through the strengthening of its digital marketing strategy.
In fact, Dubin Clark has a deal pipeline ready for MSCP to execute on post-closing, said the firm’s partner, Mike Hompesch. “We sold and also set the business up for a lot of additional acquisitions to do,” he said. Dubin Clark also declined to comment on deal terms.
Dubin Clark initially acquired HVAC contractor Astar Heating & Air in 2019. It subsequently inked three add-ons before combining the assets under the newly acquired platform Sila in 2020.
“Sila was the largest multi-location acquisition; the brand resonated better with customers,” Hompesch said, clarifying that the firm retained the local brand names.
Integrating acquisitions, Hompesch said, has become easier than ever thanks to improvements in technology. “We implemented a new ERP system; [you can] really see what’s going on in real-time.”
Furthermore, the firm added two operating partners as Sila’s full-time members who focused on IT and finance, Hompesch continued.
Mid-market focused MSCP has a slightly different plan for upcoming M&A.
The PE firm will turn to its “accelerators,” or mid-level operationally focused executives that are dedicated portfolio company resources. This “allows us to be better at integrating add-ons,” Shaw said.
Accelerators are typically consultants that have spent time at Bain, McKinsey or BCG for five or six years and advise portfolio companies at MSCP, firm head Aaron Sack said in a prior PE Hub report.
With the acquisition of King of Prussia, Pennsylvania-based Sila, MSCP joins an ever-growing list of PE firms building out national HVAC platforms.
In 2019, Alpine Investors launched Apex Service Partners, which served as the foundation for partnerships with local HVAC, plumbing, electrical services companies. Until August last year, Apex, with gross revenue of around $200 million, had purchased 14 companies, according to publication Tampa Bay Editor.
In the same year, Ares Management bought CoolSys, a collection of HVAC services companies, from Audax Private Equity. The company, which posted about $500 million in revenue in 2019, is aiming for a $2 billion valuation by 2023 and $1.2 billion of annual revenue, according to Orange County Business Journal.
About two weeks ago, commercial and industrial HVAC plumbing service provider, Reedy Industries, made its 12th acquisition since it was acquired by Audax in 2019.
When asked why Dubin Clark decided to exit the business in under two years, Hompesch said: “We [Dubin Clark] felt we had achieved the goal [of growing] the size and team.”
Nonetheless, the firm continues to invest behind the residential services sector through another portfolio company. Dubin Clark in July 2020 bought Affordable Water Heaters & Plumbing, which replaces water heaters and repair and installs plumbing services.