Warmer days make AC a non-discretionary budget item, notes Investcorp

Investcorp recently invested in HVAC specialist Shearer Supply out of its recently closed debut North America fund.

Warmer temperatures, especially in the southwestern region, along with the growing population, market fragmentation and the opportunity to penetrate new markets are some of the attributes that attracted Investcorp to acquire Shearer Supply, an HVAC equipment distributor based in Dallas. Announced earlier in April, the deal comes out of Investcorp’s recently closed debut North America fund.

“The company operates in the Southwest region, which is attractive due to significant population growth and HVAC units being seen as a non-discretionary purchase, given the warmer year-round climate,” said Rajiv Sheth, a principal at Investcorp, in an interview with PE Hub.

Shearer was founded in 1983 and has grown to be one of the largest independent distributors of HVAC equipment, serving over 5,500 customers from 22 branches across Texas, Oklahoma, Arkansas, Tennessee and Louisiana, the company said. Its product lines include American Standard Residential and Commercial HVAC, Ameristar Heating and Air Conditioning and Samsung HVAC.

In the southwest region of the US, temperatures can hover around 100 degrees Fahrenheit in the summer. The HVAC business is a very localized business, and being closer to customers is very important, Sheth said.

Investcorp was impressed by how the Shearer family has grown the business after its formation almost four decades ago. But in this fragmented market, the family needed a partner that was going to help with M&A as the next growth strategy, Sheth explained.

Rajiv Sheth, Investcorp

The Shearer family “knew that the next phase of growth meant geographic expansion, so M&A will certainly play a key part in that expansion,” said Sheth. “We are excited for this partnership as the HVAC industry is a highly fragmented market that represents a $30 billion market.”

The HVAC market is poised for growth, in part due to new regulations such as the Environmental Protection Agency (EPA) proposal that will restrict the use of super-polluting hydrofluorocarbons in certain products and equipment where more climate-friendly alternatives are available. The proposal advocates for a wider use of more efficient heating and cooling technologies.

“We believe certain government regulations will play favorably for us during our hold period,” said Sheth.

The deal comes at a time when the state of the economy can affect consumer behavior on many fronts. But Sheth noted that the exposure may be less for HVAC industry. “One of the characteristics that we really like about this industry is that 85 percent of it is replacement demand, while the rest is tied to new construction, which could be volatile in a downturn, but that exposure is pretty minimal.”

The Investcorp also has experience working within the HVAC industry, following its previous investment in The Wrench Group in 2016. The firm exited the investment in 2019.

Debut fund

The deal comes out of the $1.2 billion Investcorp North American Private Equity Fund I, which held its final close in February. The vehicle makes control buyout investments in mid-market service businesses in North America. Investcorp, which is headquartered in Manama, Bahrain, and has an office in in New York, previously invested in North American companies deal by deal.

“We have a long and established history of investing in North American mid-market services companies, and we look forward to continuing to broaden and deepen our institutional investor base as this strategy continues to scale,” said Mohammed Alardhi, executive chairman of Investcorp, in a statement when the fund closed.

Another investment from the debut fund is CrossCountry Consulting, announced in December. CrossCountry is a McLean, Virginia-based company that was founded in 2011 to provide accounting, finance, risk, operations, cyber and technology-enabled transformation services to CFOs in public and private organizations.

Other investments from the fund include S&S Truck Parts, RoadSafe, Sunrise Produce, Fortune Fish and RESA Power.

“We invest in service-oriented businesses,” said Sheth. “From a business model perspective, people are critically important, but these businesses also tend to be less asset-intensive while generating strong free cashflow. These are the types of characteristics we look for, regardless of the industry.”

Even though overall deal activity is down, Sheth said that the firm will “continue to have an active pipeline and are confident that we’ll have attractive investment opportunities, given our sector and founder/family-owned business focus.”