October 12, 2023 • 14 min read

DC Discusses: The growing opportunities in residential services

Related Subjects

Recurring revenue businesses in highly fragmented sectors have long been attractive for the private equity community, offering the opportunity to aggregate less-sophisticated “mom-and-pop” operators into large scale, professionalized companies. One of the most prominent categories experiencing this dynamic today is the residential installation, repair and maintenance services industry.

Activity in the sector has increased significantly over the last few years, as demonstrated by a 134% increase in residential services M&A activity from 2018 to 2022[1], including a 368% increase in private equity activity alone[2]. We believe several underlying industry dynamics have fueled increasing investor interest: consolidation opportunities, rising consumer demand and the non-cyclical, recurring nature of the industry. Moreover, overall consumer spending in the category has similarly grown, expanding 10% in 2022 on top of robust growth of 18% in 2021, with the current market size valued at $657 bn[3]. With macro factors supporting long-term demand and operator innovation increasing both breadth and access to services, it is our view that the residential services industry will continue to outperform the broader economy for the foreseeable future.

Combined with a highly fragmented landscape of small and medium-sized independent operators, we believe the residential services industry presents an exciting investment and consolidation opportunity for private equity.

DC Advisory’s Consumer and Business Tech-Enabled Services teams explore this emerging investment trend in more detail.

A diverse pool of services with significant fragmentation

The rising demand for residential services has gained momentum over the last decade, as growth of the on-demand economy has coincided with an ongoing evolution of consumer preference from traditional DIY (Do-It-Yourself) efforts to emerging DIFM (Do-It-For-Me) services[4]. The consumer has an abundance of choice with the services on offer, spanning across soft (less technical) and hard (more technical) competencies in installation, maintenance and repairs – from gutter cleaning to pool maintenance to pest control.

‘Home improvement’ represents the largest component within the market, accounting for 72% or $475 bn in annual consumer spend, with maintenance and emergency repairs delivering the balance[5] - accounting for 16% and 12% respectively. Offerings across residential services are multidisciplinary, with a selection of key service industries and their respective attributes - based on our observations in the current market – listed below as divided between hard services and soft services: [6]

Hard Services

Soft Services

The residential services market presents private equity firms with a unique landscape of highly fragmented and regional sub- and micro-sectors, as nearly 80% of the market is comprised of “Mom & Pop” and “Man with a Van” service providers employing less than 10 employees[7]. Advancements in technology over the last decade, including tech enablement and digital marketing, combined with a tightening market for skilled laborers[8], has presented the opportunity for platforms in these categories to scale effectively[9].

We believe that this market dynamic affords private equity an industry-shaping opportunity for platform building. By leveraging specialized management teams, robust operating infrastructure and access to capital to make tactical acquisitions, private equity firms can unlock value within highly attractive market.

Multiple underlying factors support long-term demand growth

We see growth in the industry underpinned by homeowner habits and demographic tailwinds – including a long-term aging of the U.S. population – as well as refocused consumer spending trends and changes in lifestyle behaviors, including:

Work from home: COVID-19 and associated lockdowns refocused homeowners’ attention to their domestic environment, prompting a 23% increase in investment across home improvement and maintenance categories from 2019 to 2021[10]. Moreover, while many of the initial domestic disruptions created by the pandemic have dissipated, working from home has become normalized, with 58% of American office workers still retaining the opportunity to work from home at least some portion of the week [11] - ensuring long-term demand for improvement and maintenance spend to support the increased use and importance of the home
Generational shifts: The next decade will be marked by situational shifts of the two largest generations – baby boomers and millennials. In the US we have 78 million baby boomers who are living longer and increasingly opting to age in-place[12]. This group is less likely to be able to DIY yet still requires both conventional home maintenance and independent-living home improvements. At the same time, we have 72 million millennials entering ‘peak first-time buying years’ at a later age into their 40s[13]. These new and evolving homeowners are expected to have a positive impact on home services spending[14] in general, with the younger generation of homeowners less DIY-oriented and more willing to use 3^rd party service providers[15]
Essential maintenance: The total US housing stock is continuing to rise to a total of 143 million housing units[16], with newer housing unit systems, combined with evolving regulatory codes for building and remodeling requiring more skilled DIFM-type services as well as more recurring maintenance services. More broadly, the median age per housing unit has now surpassed 40 years old[17], up from 32 just 15 years ago, with this growing collection of older units increasingly requiring non-discretionary maintenance as homeowners replace aging systems - electrical, roofing, plumbing[18] - requiring skillsets generally exceeding the ability of most DIYers

Source: American Community Survey Estimates: Median age of owner-occupied housing from 2005-2019, retrieved September 27, 2023 (link)

Source: Harvard Joint Center for Housing Studies tabulations of the Department of Housing and Urban Development (HUD), 1995-2021 American Housing Surveys, retrieved September 28, 2023 (link)

Rising housing costs: As new home construction costs have increased 139% since 2005[19], and as prevailing 30 year Fixed Rate Mortgages remain above generational highs of 7%[20], many homeowners are facing a mortgage lock-in effect which can make home improvements more attractive than moving. Additionally, home equity gains of $11.6 trillion since 2020[21] have provided homeowners with increased access to home equity credit for home improvements

Source: Statista Research Department: Average price per square foot of floor space in new single-family homes in the United States from 2000 to 2022, retrieved September 27, 2023 (link)

Time management: Increases in dual-wage earning families – recent reports show that both parents are full-time employed in over half[22] of two-parent families – combined with other competition for time – family, education, recreational activities, social activities – has resulted in DIY and maintenance projects often not making the To Do list. As a result, consumers are now placing a higher value on the convenience factor of service over most all other adjacent elements[23], shifting preferences away from traditional DIY efforts toward DIFM services with a high degree of “stickiness” from ever going back
Click-to-buy accessibility: Like many other industries, the “Amazon effect” – the evolution and disruption of the traditional retail market – has spurred change within the residential services category. Enhanced booking platforms continue to simplify the communication, payment and booking process for consumers who prefer services on-demand, while increasingly complex marketing technology allows service providers to target and acquire potential customers more efficiently. The value of home services booked online, rather than through traditional mediums, is expected to grow globally at a CAGR of 61% through 2026[24]
Subscription nation: Growth in residential services subscription options – from annual heating and cooling service contracts to quarterly pest control treatment to weekly home and pool cleaning – has been one of the most important developments over the last 10 years and one of the most attractive attributes for private equity. Recurring revenue models help operators more efficiently manage expenses while offering consumers greater piece of mind and an overall better customer experience. Moreover, subscription services often provide operators a “license to upsell,” with monthly or quarterly preventative maintenance helping to build customer loyalty while often leading to early detection of problems and an opportunity to lock-in additional revenue[25]
Government incentives: Federal, state and local programs across the country have been enacted in recent years to incentivize certain home improvements related to energy efficiency standards. This includes the ‘Energy Efficient Home Improvement Credit’ program, offering homeowners up to $3,200 in tax credits for making energy efficient improvements [26] or the 2022 Residential Clean Energy Credit offering a 30% income tax credit for clean energy equipment[27]. Additionally, an array of state and local legislation has resulted in many regional utility companies providing consumers further efficiency incentives through the installation of modern equipment, insulation and appliances[28]. We see these incentives accelerating home improvement efforts within energy efficiency adjacencies, such as roof replacement, window replacement, Home EV charging equipment, HVAC upgrades and kitchen remodeling

Compelling investment opportunity for private equity

Despite secular headwinds of higher interest rates, a cutback in leveraged loan financing and overall economic uncertainty, the residential services sector has sustained continued interest from private equity, strategics and lenders. We believe residential services’ defensive growth characteristics - moderate insulation from the economic risks (particularly with more non-discretionary services), macro and demographic drivers, and a growing recurring revenue model - will remain highly attractive to investors as they seek to deploy capital into comparatively less volatile categories.

Source: Angi: The Economy of Everything Home: 2022 Market Growth Returns to Normal, retrieved September 28, 2023 (link)

While the category is benefiting from increased technology integration - such as booking payment and customer acquisition processes - the required physical presence to perform the residential service removes the potential for total disintermediation. This local element contributes to the offshore proofing of the industry, providing operators with a high degree of defensibility against exclusively online and out-of-area competition.

With this stable foundation, we believe private equity can further create value by pursuing business- development strategies otherwise unfeasible for smaller businesses:

Target add-on acquisitions to expand geographical coverage and / or service offerings
Deploy tech-enabled tools and systems to improve workforce productivity
Pursue broad digital marketing campaigns to elevate brand awareness
Scale home service offerings of related digital products such as connected home systems
Offer complementary service offerings from other owned portfolio-company providers
Offer centralized and specialized workforce training sessions

We believe that organic growth and multiple expansions have pushed this industry to perform so well, as demonstrated below, and that this has contributed to increasing interest from private equity - demonstrated by a nearly 400% increase in private equity backed transaction activity within the sector from 2018 to 2022.[29] Despite the reduction in transaction volume this year so far, down ~22% YTD, we are optimistic that private equity activity will continue to remain significantly above historical levels[30].

Source: Residential Services Composite*

*Illustrated composite consists of the following: TSX:FSV, NasdaqGS:FTDR, NYSE:ROL, LSE:RTO, NYSE:ADT, NYSE:FBIN, NYSE:BLD, NYSE:IBP, NasdaqGS:ALRM, NYSE:SGU, NYSE:CHE, NYSE:FIX, NYSE:BV, NasdaqGS:BECN. Daily pricing from 9/27/2013 to 9/28/2023 retrieved from S&P Global Market Intelligence (and its affiliates, as applicable) on September 28th, 2023. The DC Advisory team believes in good faith that these companies are representative of the North American residential services industry. The team reviewed publicly available resources including, but not limited to, Company Filings, Company Websites, S&P Global Market Intelligence (and its affiliates, as applicable), Pitchbook, and other Wall Street research to make an informed evaluation of each firm’s respective revenue contribution attributable to residential services (vs. manufacturing and distribution); extent of operating presence within the North American market; and proportion of service to residential (B2C) end customers as opposed to commercial (B2B) end customers. Companies deemed to have insufficient North America, service, or residential revenue were excluded from the composite. While our view is based on good faith assumptions and analysis, others may differ in how they would approach composing a list of relevant companies in this sector or how to divide the sector, and accordingly, others may reach different results. Consequently, this is not a definitive or exhaustive list. This chart has been prepared for illustrative purposes only and is not a recommendation to buy or sell any security for companies listed herein or otherwise; please consult your own advisor for any investment decisions. Please review our disclaimer for more important information >

Source: Pitchbook, search criteria: Deal Date from 01-Jan-2000; Deal Option: Search on a full transaction; Backing Status: PE-backed; Keywords: Home services, pulled 9/28 (link)

Notable transactions in the space:

May 2023: Morgan Stanley Capital Partners (MSCP), the middle-market focused private equity team at Morgan Stanley Investment Management, acquired Allstar Services, a full-service provider of residential exterior replacement, repair and maintenance services across trades including roofing, siding, windows and gutters. Allstar primarily operates in the Minnesota, Wisconsin, North Dakota and South Dakota markets. This acquisition marks MSCP’s third investment in residential services, a focused sub-sector within MSCP’s Business and Consumer Services effort.[31]
January 2023: Gridiron Capital, an investment firm focused on partnering with founders, entrepreneurs and management teams, acquired Legacy Service Partners, a provider of residential HVAC, plumbing and electrical services. Founded in 2021, Legacy offers replacement, repair and maintenance services to customers across 16 states and 28 brands throughout the US. This acquisition by Gridiron supports its efforts to expand their residential services and products business on top of its prior acquisitions of Leaf Home and Erie Home.[32]
January 2023: Cortec Group, a private equity firm with ~$6 billion capital under management and 8 institutional funds, acquired A1 Garage Door Service, a provider of direct-to-consumer residential repair and replacement garage door services with financing provided by Audax Private Debt. Founded in 2007 and headquartered in Phoenix, Arizona, A1 operates in 18 states and 25 markets across the US.
December 2022: GTCR, a leading private equity firm, acquired Senske Services, a regional provider of recurring subscription-based residential lawn care, pest control and other home services. Founded in 1947 and based in Kennewick, Washington, Senske serves over 80,000 residential and commercial customers across 16 branches in Washington, Utah, Idaho and Colorado. This acquisition is one of many that GTCR has done to transform companies in the Business & Consumer Services market.[33]

Future of the market

We believe the residential services category has reached an inflection point and anticipate strong demand trends in the years to come, resulting in an increasingly attractive total addressable market.

As millennials buy homes, baby boomers opt to age in place, consumer lifestyles adjust post-COVID, and the US housing stock continues to age, we expect household demand for residential services to continue to expand. Moreover, as the largely smaller independent businesses that dominate this highly fragmented market often lack the resources to effectively scale, we see this combination of growth and fragmentation as a powerful consolidation opportunity for private equity from which to drive outsized multiples for businesses capable of serving as roll-up platform opportunities.

To discuss any of the trends and themes explored in this piece, get in touch with the authors, John Lanza and Patrick Furlong, here >

This article has been prepared solely for information purposes and is not intended to function as a “research report.” In particular, this means that it is not intended, nor does it contain sufficient information, to make a recommendation as to the advisability of investment in, or the value of, any security.

Additionally, this article does not constitute or form part of, and should not be construed as, an offer to sell, or a solicitation of any offer to buy, or any recommendation with respect to, any securities. You should not base any investment decision on this article; any investment involves risks, including the risk of loss, and you should not invest without speaking to a financial advisor.

For additional important information regarding this article, please see insights and publications disclaimer.

DC Discusses: The growing opportunities in residential services

A diverse pool of services with significant fragmentation

Multiple underlying factors support long-term demand growth

Compelling investment opportunity for private equity

Future of the market

What to read next

DC Advisory advises Bowmark Capital on the sale of ASK4 to GI Partners

AUTHORS

Your briefcase is empty