PE-backed cleaning companies prep for rampant build-out after coronavirus

As consumer behavior changes, PE firms talk expansion opportunities in the hygiene sector.

To cater to new global hygiene practices, private equity firms in the post-pandemic world will be eager to expand existing portfolio companies in the cleaning space through add-ons, additional factories and other growth strategies, several sources told PE Hub.

“It’s not going to be a short-term shot in the arm,” said Lee Helman, managing director at Financo, explaining that the enhanced hygiene standards won’t disappear overnight.

Helman, who leads the advisory firm’s e-commerce and consumer verticals, said humorously that consumers will opt to maintain an inventory of sanitizer over underwear after coronavirus.

“One of the reasons it will be a long-term trend also is because covid-19 will go on for a good part of 2020,” added David Solomon, managing director at Financo, a boutique M&A firm focused on the retail and consumer sector.

Changed consumption patterns and sanitization guidelines will force private equity to grow their current portfolio companies to meet the sustained demand for cleaning products, solutions and services.

Simply put, the industry will need more capacity and higher service levels. Production in the existing setting is not enough and so more factories will need to be built or converted, Helman said.

Disinfectant manufacturing conglomerates such as The Clorox Company and Reckitt Benckiser – maker of Lysol and other soaps and sanitizers – have been rushing to meet the enormous demand of consumers.

And PE-backed portfolio companies are in the same boat.

In the last week of March, multipurpose cleaner sales jumped 85 percent, compared with the same week in 2019, according to research firm Nielsen.

“Two of our portfolio company partners – Diversey, a provider of cleaning and hygiene products, and Imperial Dade, a distributor of disposable food service and janitorial supplies – are currently focused on serving customers and meeting increased demand during this unprecedented time,” said Ken Hanau, a managing director at Bain Capital Private Equity, who leads the firm’s North American industrial vertical.

And while the short-term demand has been explosive by all measures, “once things settle down, demand will be higher than what it was pre-covid,” said Scott Potter, managing partner at San Francisco Equity Partners. Potter is a former board member of Method Products, an eco-friendly household cleaning brand previously backed by his consumer growth firm.

“We will see some softness next quarter and some in the third, but we won’t see a lot of softness,” added a bulge-bracket PE investor in the US cleaning space. “Governments all over the world are asking for large quantities to stockpile for next 12-18 months.”

For large funds that make limited bets every year, new platform acquisitions in the near future are less likely, even as additional add-on and R&D opportunities persist for existing investments, the sponsor said.

Still, massive levels of dry powder will position private equity to take advantage of consolidation opportunities

“There’s a lot of pressure to put money out,” Solomon said.

US private equity stands to benefit in the virus wreckage. The industry has amassed some $2 trillion, according to a Morgan Stanley report published in mid-March.

Talking valuations, Solomon added, “if companies are doing well, they will receive a high multiple, [but] if they had disrupted distribution, private equity would want to see some establishing [of] a normal financial recovery before investing.”

Finding the right add-on

Strong revenue streams, an e-commerce presence, a more domestic supply chain and undisrupted distribution – cleaning companies that not only survive the crisis, but check all of these boxes, will see attention from private equity firms looking to grow existing platform investments, several sources indicated.

“Brands that are servicing online channels and are more diversified – they are holding up better now,” Potter said. “We’d be more attracted to those brands.”

With overseas production affected by the global pandemic, cleaning companies with diversified and local supply chains are even more likely to field PE interest.

“Coming out of this they [companies] need to have multiple supply backups,” said Helman, emphasizing the importance of supply chain proximity allowing for rapid distribution.

There has been a general desire to produce essential products in America, Solomon said. The onshoring trend, already underway due to global tariff concerns, has been accelerated by the crisis, he added.

In other pre-covid trends, consumers were migrating towards green, organic and eco-friendly cleaning products, according to Potter.

But shoppers have been suspicious of the efficacy of green products such as Mrs. Meyers and Seventh generation amid the pandemic.

Even American Chemistry Council, an industry trade association for American chemical companies, published a list of coronavirus fighting products that left out eco-friendly products.

That said, every soap maker is enjoying demand right now, and it’s unclear whether green products will be as attractive as other disinfectants when the dust settles.

Cleaning services opportunities

From the consumer products perspective, there may be fewer investment opportunities as conglomerates have already largely consolidated the market, according to Brent Spiller, managing director within Harris Williams’ consumer group.

But there’s still opportunity in pockets of the services space.

In this environment, restoration and mitigation companies that often do flood and fire repairs are offering deep cleaning services, alongside traditional commercial cleaning companies, Spiller said.

Generally speaking, the overall profitability of janitorial cleaning companies are not particularly high, said Peter Holton, managing director of Caber Hill Advisors. That being the case, he expects PE firms to execute more add-ons in the space to build volume and attain higher levels of profitability.

The EBITDA margins of janitorial cleaning companies typically fall between 8 to 13 percent, Holton said.

Even though the shutdown of educational institutions amid the pandemic has impacted janitorial supply and services companies, according to both Holton and a sponsor in the space, these companies have found other avenues to stay strong and desirable.

“Their revenue is hurt [but] they are heading for retail and grocery chains,” Holton said.

For example, Lincolnshire Management, a New York-based private equity firm, is looking for new ways to strengthen one such portfolio company, Powerhouse.

Powerhouse, a construction services, rollouts and facilities maintenance business that is involved in the deep cleaning and sanitization of spaces, among other services, is thinking about post-corona opportunities.

“We want to grow the products and services to other spaces and do more in healthcare, retail and hospitality,” said Phil Kim, a managing director at Lincolnshire, speaking from his home in New Jersey, where he’s riding out the outbreak.

Last year, private equity firms closed 22 deals in the cleaning, janitorial and sanitary products space, representing the highest transaction count since 2015, Pitchbook said.

Action Item: Check out the graph above highlighting the sector’s performance.