Why Monomoy bets on home building; and why LMP invests in the insurance sector

Monomoy Capital holds forth on the home building market.

Good morning, dealmakers. MK Flynn here with today’s Wire.

Happy Election Day! “Vote early and often.” Just kidding. It’s an old joke from my childhood in Chicago.

Here’s hoping that the results of the midterm elections, whatever they are, are delivered quickly, without another long, drawn-out process.

The last thing the M&A market needs right now is more uncertainty.

Also on the minds of dealmakers this week is the October Consumer Price Index, coming out on Thursday. It is likely to have an impact on the Fed’s interest rate strategy.

As for today, PE Hub is featuring my interview with Monomoy Capital Partners about the home building market – and why the firm is bullish on it, despite rising mortgage rates and higher home prices.

Today, we’re also taking a look at Lovell Minnick Partners’ approach to investing in the insurance industry, and PE Hub Europe explores Innova Capital’s recent sale of Inelo Group to a strategic buyer.

If you build it, they will come. Despite clouds on the short-term horizon, Monomoy is forecasting a bright future for construction in the single-family housing market over the next decade.

The New York firm has been active in the building products sector. Recent acquisitions include buying Artesian Spas and Marquis Hot Tubs, for undisclosed terms, and merging them to form a pool and spa wellness platform in January 2022; and buying Cast-Crete Holdings, a Seffner, Florida-based manufacturer and distributor of precast products and other masonry supplies, for undisclosed terms in November 2021. Recent exits include selling Atlanta-based Construction Resources, a provider of building products, to Mill Point Capital-backed International Designs Group, for undisclosed terms in July 2022; and selling Friedrich Air Conditioning to Rheem in August 2021.

For insights on the sector, I turned to Jaime Forsyth, who was named partner, head of Monomoy’s investment team, in December 2021.

Here’s an excerpt from my Q&A with Forsyth.

Despite talk of a nationwide housing correction, why does Monomoy continue to be attracted to the housing sector?
We remain encouraged by the long-term tailwinds and continued migration to Florida and the Sun Belt. The underbuilding of the past decade has resulted in a shortage of homes that will require more construction in the coming years, despite any temporary pullback due to rising mortgage rates.

We are long-term believers in single-family housing growth in the US over the next decade, and Florida and the Sun Belt stand out due to favorable tax policies and attractive weather year-round, which lend themselves well to people who are working remotely, seeking to retire or aiming to operate a business locally.

New housing construction is often perceived as highly cyclical, and building decreased considerably during the last financial crisis. What do you perceive to be different about the market today?
The single-family residential market is fundamentally different today compared to the lead-up to the Great Recession – lending standards to obtain a mortgage are significantly more stringent, and there is far less speculation driving unstable levels of construction.

Today, fewer homeowners are underwater, and recent buyers have considerable equity value in their homes. Additionally, home inventory levels are not inflated. On average, homeowners have mortgage rates meaningfully lower than the prevailing market – which increases the cost of moving and should moderate the number of homes available for purchase. We believe these factors create a floor significantly higher than that of the Great Recession. We also expect any decline in single-family construction to be temporary as the housing supply has been underbuilt over the past decade, and there is structural demand for new homes.

For more, see the full interview.

Risk managers. Private equity-backed deals in the insurance sector have been proliferating this year, and Lovell Minnick Partners has been active in the sector. In January, the Philadelphia private equity firm invested in Warner Pacific, a Westlake Village, California-based company that provides insurance agents with sales assistance, innovative technology and back-office support; Warner has made numerous add-ons, among them Beta Health in June.

PE Hub’s Obey Martin Manayiti caught up with LMP partner Jason Barg to discuss the firm’s approach to the insurance industry as well as trends driving deals in the sector.
Insurance has some built in recession-resilience.

“There are many challenges and risks in the world,” Barg pointed out. “Just some examples are the conflict in Eastern Europe, cyber-attacks on a frequent and unrelenting basis, and unpredictable weather conditions. Insurance is a key risk management tool. It’s not something that a company or an individual is likely to pull back on. It’s something that they require.”

Technology has become a differentiator.

“Insurance companies are looking very deeply at how to invest in technology and how to ensure that they are innovating,” Barg said. “Carriers see strong competition for clients, and they want to differentiate, be it on distribution, underwriting, or service. Carriers often look to invest in technology or partner with technology and data providers to ensure that they are staying current or, better yet, getting ahead.”

For more, read Obey’s full interview.

Keep on truckin’. In October, Innova Capital announced the sale of Inelo Group to Eurowag in a deal worth approximately $300 million. Innova senior partner Krzysztof Kulig spoke with PE Hub Europe’s Nina Lindholm about the changes the Warsaw-based PE firm made during its four-year holding period.

Inelo, headquartered in Bielsko-Biała, Poland, provides integrated IT services for heavy-duty transport in Eastern Europe. The company’s product offering includes driver time analysis and calculation software and GPS satellite location software to aid driver vehicle tracking, routing, and vehicle monitoring.

Innova introduced operational and management changes and consolidated Inelo’s product offering to create a “unique” product for the transport, shipping and logistics sectors, Kulig said.

Inelo’s management saw significant changes under Innova’s wing. Most of the team, including the CEO and CFO, was changed. (An exception was the vice president of sales.)

“Inelo was very entrepreneurial, they barely even had a budget to operate on. So, we brought in a lot of processes and know-how,” Kulig explained.

For more on how Innova grew the company – including details on four add-on acquisitions – read Nina’s story on PE Hub Europe.

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PEI Awards 2022. This year marks the 21st anniversary of the PEI Awards, and there are only a few more days left to submit entries. The deadline is Friday, November 11.

Click here to learn more.

On that note, I’ll sign off. Aaron Weitzman is on duty tomorrow for the Wednesday Wire, filling in for Chris Witkowsky, who’s on vacation this week. And I’ll be back with the Wire on Thursday.

All the best until then,