Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up HVAC Companies
Transcript
- Lucas: So there's a specific number that's been stuck in my head this week — it's around three point five million. That's roughly how many residential HVAC systems are installed in the U.S. each year. And if you're in private equity, that number looks like an annuity. Luna: An annuity because every unit breaks eventually, right? The replacement cycle is predictable. Lucas: Exactly. And that predictability is why we're seeing a wave of consolidation in HVAC that's actually been accelerating since about 2021. I've been tracking the major roll-ups, and the pace of acquisitions by firms like Leonard Green, Berkshire Partners, and a few others has more than doubled year-over-year in the residential space. Luna: We've talked about a lot of roll-ups on this show — vet clinics, funeral homes, car washes. What makes HVAC different? Lucas: Good question. The difference is the maintenance contract model. A vet clinic might see a patient once or twice a year. An HVAC company can lock a homeowner into a twice-a-year tune-up contract that costs maybe two hundred bucks annually. That's recurring revenue with extremely low churn. Luna: Low churn because nobody's switching HVAC companies for fun. If you find a reliable tech, you stick with them. Lucas: Right. So the private equity playbook here is what's called 'buy and build.' Step one: acquire a regional platform company — say, Service Champions in California or One Hour Heating & Air Conditioning in the Midwest. Step two: centralize the back office — dispatch, billing, marketing, HR. And step three: use that infrastructure to bolt on smaller independent operators in adjacent territories. Lucas: Each bolt-on adds customer contracts and a trained technician workforce without adding much corporate overhead. The math works because the platform's fixed costs are already covered. Luna: What kind of multiples are these deals getting? I've seen some eye-popping numbers. Lucas: Yeah, pre-2020 a decent HVAC company might trade at five to six times EBITDA. Now we're seeing eight to ten times for quality platforms, and some bolt-ons are going for nine to eleven times if they have a strong recurring base. The multiple expansion is partly from PE competition and partly from the perceived stability of the cash flows. Luna: But here's my concern — and I think a lot of homeowners share it — does consolidation actually make service better? Because I've heard horror stories about call centres and long wait times after a private equity firm takes over. Lucas: That's a fair point. The data is mixed. A 2024 study from the National Association of Home Builders found that customer satisfaction scores at pe backed HVAC companies were, on average, about eight percent lower than at independent shops. The main complaint was scheduling inflexibility. Lucas: But there's a counter-argument: the larger firms invest heavily in training and inventory management, so when a system fails in July — which is the peak season — they can often get a truck to you faster than a two-person operation. Luna: So it's a trade-off. You get reliability of response, but maybe less personalized service. Lucas: Exactly. And from the PE perspective, they're betting that most customers prioritize 'fix it now' over a relationship with a specific technician. The data on retention suggests they're right — churn on maintenance contracts is under ten percent annually even after consolidation. Luna: Let's talk about the debt. These roll-ups are highly leveraged. With interest rates where they are in mid-2026 — the ten-year Treasury is still above four percent — how does the math hold? Lucas: That's the critical question. When you're paying eight to ten times EBITDA, and you're financing sixty to seventy percent of the deal with debt at eight to ten percent interest, your debt service can eat up a big chunk of your free cash flow. Some of these platforms are running at two to three times leverage. Lucas: But here's the thing — HVAC cash flows are defensive. Even in a recession, people repair their furnaces. The replacement cycle might slow, but maintenance doesn't stop. So lenders view it as relatively safe. Luna: Still, if housing turnover drops significantly, fewer new homeowners means fewer new maintenance contracts. We saw that in some markets in 2023. Lucas: True. And that's why some of the smarter firms are now pivoting toward commercial HVAC. Commercial contracts are larger, longer-term, and less seasonal. A hospital or an office building needs climate control year-round. The churn is even lower. Luna: Are there any public comps we can look at? I know Watsco is publicly traded, but they're more distribution than service. Lucas: Watsco is a great reference point. They trade at about twenty-five times earnings, which implies the market sees durable growth. Another is Comfort Systems USA — they're more commercial and industrial, and their stock has doubled over the past five years. That kind of performance attracts PE attention. Lucas: But the real action is in the private market. There are probably two hundred to three hundred pe backed HVAC platforms now, each doing anywhere from ten to fifty bolt-on acquisitions. It's a land grab. Luna: And I've noticed a trend where these platforms are expanding into adjacent trades — plumbing, electrical, even pest control. The idea of a 'home-service super-platform' seems to be gaining traction. Lucas: Absolutely. ServiceTitan, the software company that powers a lot of these operations, recently filed for an IPO. Their platform is used by over a hundred thousand home-service professionals. If that goes public, it'll give us a window into the scale of this ecosystem. Luna: So what's the endgame for these firms? Are they planning to hold these assets for ten years, or is there an exit strategy? Lucas: Most are aiming for a sale to a larger platform or a strategic buyer within five to seven years. Some are even exploring dividend recaps — taking on more debt to pay themselves a dividend while keeping the company. That's a sign the market might be getting frothy. Luna: And if the music stops? If rates stay high and multiples compress? Lucas: Then some of these heavily leveraged platforms could face distress. But the good operators — the ones that built genuine operational efficiency and a strong brand — will survive. The weak ones get bought by the strong. That's the cycle. Luna: You know, speaking of things that survive — I've been thinking about how this show survives without ads. If these conversations have moved your work forward in some small way, there's a simple way to support us. Lucas: Yeah. Honestly, if today's episode was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It keeps the show ad-free and independent, and it really does help us keep digging into these niche corners of private equity. Luna: And it's a tiny ask that adds up. So thank you to everyone who has already done that. Now, back to HVAC — Lucas, you mentioned the pivot to commercial. Are there any notable deals this year? Lucas: Yes. In March, Leonard Green-backed American Residential Services acquired a commercial HVAC company in Texas called Cool Care, which had about fifty million in revenue. That's a classic bolt-on — geographic expansion into a commercial vertical. Lucas: And Berkshire Partners recently merged two of their portfolio companies — one in residential and one in commercial — to create a combined entity with over a billion in revenue. That scale gives them pricing power with equipment manufacturers and better terms on financing. Luna: So the consolidation isn't just about buying mom and pops anymore. It's about merging platforms to create regional powerhouses. Lucas: Exactly. And that trend is likely to continue. The question is whether regulators will start paying attention. The FTC hasn't focused much on HVAC, but if a few dominant players control fifty percent of the market in major metros, that could change. Luna: Good point. For now, it's still fragmented enough that the roll-up thesis works. But I wonder at what point the acquisition targets dry up. Lucas: That's the billion-dollar question. There are roughly sixty thousand independent HVAC contractors in the U.S. Even if PE buys a thousand a year, that's decades of runway. But the best operators — the ones with strong brands and recurring revenue — those are finite. Lucas: So the race is on to identify and acquire them before competitors do. It's a classic first-mover advantage situation. Luna: And for a homeowner like me, it means I'm increasingly likely to be dealing with a company backed by private equity, whether I know it or not. Lucas: Right. The logo on the truck might be local, but the ownership is increasingly institutional. Whether that's good or bad depends on execution. But the trend is undeniable. Luna: All right, Lucas. Good episode. I'm going to check my maintenance contract now. Lucas: Ha. And if you don't have one, you might be getting a call from a pe backed company soon enough.