Private equity firms have been increasingly targeting skilled trades companies like heating, ventilation and air conditioning (HVAC), plumbing and electrical businesses for acquisition and consolidation in recent years. PE investors have acquired nearly 800 companies in these industries since 2022, reported the Wall Street Journal, citing data from PitchBook.
This wave of PE investment is giving rise to a new class of millionaires across the country, significantly boosting the attractiveness of skilled trades careers. The trades are now being viewed not just as stable professions, but as potential launching pads for those with lofty entrepreneurial aspirations.
According to the National Student Clearinghouse Research Center, the number of students enrolled in vocational-focused community colleges increased 16% from 2022 to 2023. Fields, including HVAC repair and installation, are seeing major upticks in young people pursuing these careers.
Moreover, this shift by PE firms is fundamentally altering the ownership landscape of these businesses. Traditionally, these companies were often passed down through family lines or to long-term employees. However, the current trend sees many owners choosing to sell to PE firms instead. These sales frequently result in substantial payouts, often reaching into the millions of dollars, providing a lucrative exit strategy that wasn’t available to previous generations of trade business owners.
The World Of Private Equity
PE refers to investments in private companies or the acquisition of public companies with the intention of taking them private. These firms raise capital from institutional investors and high-net-worth individuals to create funds that invest in companies with potential for growth or improvement.
PE firms typically take an active role in managing and restructuring their portfolio companies, aiming to increase their value over a period of up to about seven years before selling them for a profit.
The goal is to generate returns higher than those available in public markets by implementing operational improvements, pursuing strategic initiatives and optimizing capital structures. PE firms often use a combination of equity and debt to finance their acquisitions, with the debt typically secured against the assets and cash flows of the acquired company. This industry has grown significantly in recent years, becoming an important source of capital for companies in need of funding and playing a role in driving innovation, economic growth and job creation.
Why The Skilled Trades?
PE firms see significant financial potential in skilled trades companies. Trades like HVAC, plumbing and electrical services are essential, providing consistent demand even during economic downturns. Additionally, the urgent nature of many repairs gives these businesses some pricing leverage, as customers often have limited time to negotiate.
PE firms are buying up smaller trade service businesses to create larger, more efficient operations with greater market share and economies of scale.
The strategy aims to streamline operations, increase marketing efforts and improve customer relationship management to boost profitability. By acquiring and merging smaller companies, PE firms can secure better supplier deals and overtake smaller independent players to become dominant forces in their respective trades.
By improving operations and growing the business, PE firms can potentially sell the consolidated company at a higher valuation. Skilled trades investments can provide portfolio diversification for PE firms, balancing their holdings across different sectors.
By leveraging these benefits, PE firms are able generate attractive returns while also potentially improving the overall efficiency and service quality in the skilled trades industry.
The increase in PE investment is also benefiting workers in the skilled trades. Graham Weaver, founder of San Francisco-based Alpine Investors and an early investor in HVAC companies, told the WSJ that technicians at the HVAC firms acquired by Alpine receive a 20% salary increase in the first year following the sale. This boost primarily comes from a combination of higher wages, bonuses and commissions.
The Potential Downside
The takeover of skilled trades companies by private equity firms can have several downsides for the businesses and their employees. One major concern is the potential loss of local ownership and control, as decision-making shifts to distant investors primarily focused on financial returns.
This can lead to a more profit-driven approach that may prioritize cost-cutting over long-term sustainability or quality of service. Employees may face increased job insecurity, reduced benefits or more demanding work conditions as the new owners seek to maximize efficiency and profitability.
The traditional career path of apprenticing and eventually buying into or taking over a small business becomes less attainable, limiting opportunities for skilled workers to become owners themselves. Additionally, the emphasis on short-term gains might result in reduced investment in training, equipment or community relationships, potentially affecting the overall quality of service and the company’s reputation.
There’s also a risk that the unique culture and values of small, locally-owned trades businesses could be eroded, replaced by a more corporate, standardized approach that may not align with the preferences of long-time employees or customers.
Source: Forbes
