Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Plumbing and HVAC Contractors
Transcript
- Lucas: You know that moment when your water heater dies on a Sunday evening and you call five plumbers who all say they can't come until Tuesday? Luna: I just lived that last month. It's infuriating. Lucas: Right. Well, the company that eventually showed up at your door — or more likely, the company that dispatched the van — might be owned by a private equity firm you've never heard of. Because PE is quietly buying up plumbing and HVAC contractors at a pace that's reshaping an entire industry. Luna: We've talked about vet clinics and laundromats, but this one feels bigger. Plumbing and HVAC are in every home. Lucas: Exactly. And if today's episode helps you understand who's actually fixing your furnace, that's useful. If it's useful enough that you want to help us keep these conversations ad-free, you can find us at buy me a coffee dot com slash fexingo. Luna: Small gesture, big difference for us. Lucas: So let's get into the numbers. The poster child for this trend is a company called HomeServe. It's a uk based home warranty and repair service that, in 2025, was acquired by a private equity-backed roll-up platform called Service Champions. The deal valued HomeServe at roughly $2.3 billion. Luna: That's a big number for a company that's essentially a call center and a network of contractors. Lucas: It is. But here's why PE paid that: HomeServe had over 6 million customers in the US alone, each paying an average of $240 a year for a warranty plan. That's recurring revenue — sticky, predictable, inflation-adjusted. And those customers, when something breaks, they call HomeServe. HomeServe dispatches a local plumber or HVAC tech, but now that local tech is increasingly owned by the same PE firm that owns HomeServe. Luna: So they're vertically integrating. The warranty company pushes leads to their own contractors. Lucas: Exactly. And since the acquisition, Service Champions has rolled up more than 30 local plumbing and HVAC companies across Texas, Florida, and the Carolinas. mom and pop shops with $5 million to $20 million in revenue, good reputations, loyal customer bases. The PE playbook is: buy them, put them on a shared software platform, rebrand them under a regional name, and funnel warranty calls their way. Luna: What's the typical multiple they're paying? I've heard service businesses are expensive right now. Lucas: For a well-run plumbing company with recurring maintenance contracts, you're looking at 8 to 12 times EBITDA. That's high compared to five years ago, when those same shops traded at 5 to 7 times. But the logic is that the PE firm can juice those margins by cross-selling warranties, financing upgrades, and centralizing back-office functions. Luna: And the homeowner? Do they benefit? Because my experience last month was still pretty lousy. Lucas: It's mixed. On paper, the pe backed contractor has more capital for trucks, training, and 24-hour dispatch. But critics argue that quality suffers when the technician is an employee of a national platform rather than a local owner-operator who stakes their reputation on every job. There's a study from the University of Chicago that looked at service quality in pe owned HVAC firms and found a slight uptick in call-back rates. Luna: So more calls back because the first fix wasn't done right. Lucas: Exactly. But also, the price you pay: pe backed firms are more likely to upsell you a new system rather than repair the old one. Because a new installation is a $5,000 to $15,000 transaction, versus a $150 repair call. The incentive structure has shifted. Luna: Let's talk about who's doing the buying. Which PE firms are most active? Lucas: The biggest is probably Leonard Green & Partners, which owns Service Champions. Then you have Summit Partners backing American Residential Services. There's also Roark Capital, which is famous for buying franchise businesses — they own One Hour Heating & Air Conditioning. And then there's a newer player, Gridiron Capital, which has been rolling up plumbing companies in the Northeast under the brand 'Benjamin Franklin Plumbing'. They're all chasing the same thesis. Luna: The thesis being: Americans spend over $400 billion a year on home repairs and improvements, and most of that goes to small independents. Lucas: That's the number. And of that $400 billion, only about 12 percent is currently controlled by national or regional chains. So there's a massive fragmentation play. The PE firms are betting they can consolidate that 12 percent to 30 or 40 percent over the next decade. And the numbers support it: home warranty penetration has jumped from 28 percent of US households in 2020 to 42 percent in 2026. That's a huge growth in the addressable market. Luna: 42 percent. That's almost half of homes. And I assume most of those are sold by real estate agents during home purchases? I got a warranty when I bought my house. Lucas: Yes, that's the main channel. But PE firms are now buying home warranty companies specifically to capture that lead flow. It's a data play. They know when your water heater is 12 years old because you filed a claim on your dishwasher. They can proactively offer you a replacement before it fails. Luna: That's both clever and a little creepy. Lucas: It's predictive maintenance. And it's exactly the kind of margin expansion that justifies the 9-figure acquisition prices. But there's a risk, too. If the economy slows and homeowners defer repairs, these pe backed firms are carrying a lot of debt. Some of these platforms have leverage ratios above six times EBITDA. Luna: That's high. What happens if we hit a recession? Lucas: We actually saw a preview in 2022. When interest rates rose and home sales slowed, warranty cancellations ticked up. A few smaller roll-ups in the HVAC space had to restructure their debt. The big guys like Service Champions are more diversified, but the leverage is real. The entire model depends on steady or growing recurring revenue. Luna: So is this a good investment for the PE firms, or are they overpaying for growth? Lucas: I think the smart money is cautious. The multiples have expanded faster than the underlying earnings growth. But if you can genuinely improve operations and cross-sell, the internal rate of return can be attractive. The key metric to watch is customer lifetime value relative to acquisition cost. For a plumbing company, a loyal customer might generate $1,500 in profit over 7 years. If you can acquire that customer for $300 through a warranty lead, that's a 5-to-1 ratio. That's good. Luna: And if a PE firm can bundle plumbing, HVAC, electrical, and handyman services under one roof, that lifetime value goes up even more. Lucas: Exactly. That's the holy grail: the 'home services super app'. One call, one truck, one brand for everything. Several firms are trying to build that now. The question is whether they can execute without destroying the local relationships that made these small businesses valuable in the first place. Luna: And whether homeowners will keep paying a premium for a brand name when the local guy was cheaper. Lucas: Right. And that's the tension at the heart of this entire roll-up thesis. PE needs to add enough value — better dispatch, better training, better pricing on parts — to justify the markup. If they don't, the whole thing unravels. But if they do, we may look back at this moment as the point when home services went from mom and pop to institutional. Luna: I guess the next time my AC goes out in July, I'll check the fine print on the truck's logo. Lucas: And you'll know exactly who's behind it.