unpublished alpha

Private equity firms have long recognized the hidden potential in seemingly mundane home and garden repair businesses. These “unsexy” sectors have consistently delivered impressive returns, transforming overlooked niches into profitable powerhouses.

car washes: sparkling returns

The car wash industry has emerged as an unexpected darling of private equity, delivering eye-popping returns. Mister Car Wash (NYSE: MCW), backed by Leonard Green & Partners, stands out as a prime example. When Leonard Green acquired Mister Car Wash in 2014, it had 134 locations. By the time of its IPO in 2021, it had grown to over 340 locations, with the IPO valuing the company at $5 billion. This represents a staggering return for Leonard Green, estimated at over 10x their initial investment. The sector’s appeal lies in its recession-resistant nature, high margins (with EBITDA margins often exceeding 20%), and significant opportunities for consolidation in a fragmented market.

The shift towards subscription-based models creates recurring revenue streams, making car washes even more attractive to investors. With an estimated 60,000 car washes in the U.S. and only about 20% being part of chains, the runway for growth through roll-up strategies remains substantial, promising continued private equity interest and potentially lucrative returns in this surprisingly bubbly sector.

pest control: a bug’s strife

Rollins Inc. (NYSE: ROL), parent company of Orkin, has been a standout performer in the pest control sector. Since its acquisition by Rollins family in the 1960s, the company has seen tremendous growth. Over the past 20 years, Rollins has delivered a total return of over 2,000%, significantly outperforming the S&P 500.

In 2019, Anticimex, backed by EQT Partners, acquired American Pest for $200 million, reflecting a valuation of approximately 3.3x revenue. The pest control industry has seen consistent EBITDA multiples between 10x and 15x, showcasing the sector’s attractiveness to investors.

windows and doors: the gateways to profits

Masonite International Corporation (NYSE: DOOR), a door manufacturer, was acquired by KKR in 2005 for $1.9 billion. After a successful turnaround, the company went public in 2013. Since its IPO, Masonite’s stock price has increased by over 200%, delivering strong returns for its private equity backers.

In the window sector, Apogee Enterprises (NASDAQ: APOG) has been a quiet achiever. While not a pure-play private equity success, its acquisition strategy has delivered solid returns. Over the past decade, Apogee has delivered a total return of approximately 150%.

lawn care and landscaping: mowing down the competition

TruGreen, formerly a part of ServiceMaster, was acquired by CD&R in 2011 for $790 million. In 2014, it was merged with Scotts LawnService in a deal valuing the combined entity at $1.3 billion. The transaction represented a significant return for CD&R in just three years.

BrightView Holdings (NYSE: BV), backed by KKR, went public in 2018 at a valuation of $2.2 billion. While its post-IPO performance has been mixed, KKR’s initial investment in 2013 reportedly generated a 2.5x return on their original equity investment.

hvac and plumbing

Ingersoll Rand’s (NYSE: IR) acquisition of Trane in 2008 for $10.1 billion has proven to be a masterstroke. Since the acquisition, Ingersoll Rand’s stock price has increased by over 300%, significantly outperforming the broader market.

HomeServe, a UK-based home repair and improvement business, was taken private by Brookfield Asset Management in 2022 for £4.1 billion ($5.3 billion). This represents a premium of 71% to the closing price before the offer was announced, showcasing the value private equity sees in these businesses.

roofing

Beacon Roofing Supply (NASDAQ: BECN) has been a beneficiary of private equity interest. CD&R acquired a 75% stake in Beacon’s residential roofing business in 2021 for $850 million. Since this investment, Beacon’s stock price has increased by approximately 50%.

self-storage: outsized returns in small spaces

The self-storage industry has proven to be a treasure trove for private equity investors, offering remarkable returns in a sector that thrives on societal trends towards urbanization and consumerism. Extra Space Storage (NYSE: EXR), one of the largest players in the field, exemplifies the sector’s potential. Since going public in 2004, Extra Space has delivered a total return of over 2,000%, dramatically outperforming the broader market.

Private equity firms have taken notice, with Blackstone’s acquisition of Simply Self Storage for $1.2 billion in 2020 marking a significant move in the space. The industry’s appeal lies in its low operating costs (with NOI margins often exceeding 60%), steady cash flows, and resilience during economic downturns. Moreover, the fragmented nature of the market – with about 70% of self-storage facilities still independently owned – presents ample opportunities for consolidation and value creation through professional management and technological upgrades.

The sector’s stability, coupled with its growth potential, has led to impressive valuations, with transactions often occurring at cap rates between 4% and 6%. As urbanization continues and living spaces shrink, the demand for self-storage is expected to grow, positioning this often-overlooked sector as a continued source of attractive returns.

As you can read a lot of the success stories above have similar vocab, they highlight several key themes:

1. consolidation opportunities: Many of these sectors were initially fragmented, allowing private equity firms to create value through roll-up strategies.
2. operational improvements: Private equity firms often implemented significant operational enhancements, driving profitability.
3. recession resilience: Home repair businesses tend to perform well even in economic downturns, providing stable cash flows.
4. multiple expansion: As these businesses scaled and professionalized, they often saw significant multiple expansion, further driving returns. There was a larger buyer universe, so deals got more competitive, which drives up multiples.
5. exit opportunities: Whether through IPOs or strategic sales, these businesses have provided attractive exit options for private equity investors.

While individual returns vary, it’s not uncommon to see private equity firms generate 2-3x returns on their investments in these sectors over a 3-5 year holding period. Some standout performers, like Rollins in pest control, do substantially better

The success of private equity in these “unsexy” home and garden repair businesses underscores the potential for significant returns in overlooked sectors, so what’s next? A few ideas below:

1. waste management and recycling: With increasing focus on environmental sustainability, this essential service sector offers stable cash flows and consolidation opportunities.
2. pet services: The growing humanization of pets and increasing pet ownership rates present attractive opportunities in grooming, boarding, and veterinary services.
3. funeral services: An aging population aka the ‘silver tsunami’ and the fragmented nature of the industry make this recession-resistant sector ripe for consolidation and modernization.
4. laundromats: The shift towards app-based, self-service models and the potential for add-on services could revolutionize this traditionally fragmented industry.
5. car washes: While already seeing significant activity, the car wash industry still has room for further consolidation and technological advancement.
6. commercial cleaning services: Post-pandemic hygiene concerns and the potential for technological integration present opportunities for growth and improved efficiency.