Private equity has been interested and purchasing HVAC contractors for more than a few years now. In the past five to 10 years, contractors from around the country have been selling their businesses for more than they could have imagined before this private equity trend started.
But it seems like we are now on to the next phase of this process. Experts in this area are seeing a move from middle-market private equity being interested in HVAC to the upper market becoming more of a player. That means private equity selling these HVAC companies, or a collection of these companies, to other private equity firms.
While private equity has been interested in HVAC for a while now, it really ramped up in 2021 as the industry was enjoying the continued growth that started during the COVID pandemic.
The typical hold period for private equity firms is four to six years. So, do the math. The limited partners at these firms are now interested in getting a return on their investment, liquidating their money, and exiting the HVAC industry stage left.
Jacques Zureikat, vice president of investment banking at Houlihan Capital, was telling me about what he is seeing from his clients and the marketplace in general. Zureikat has been helping HVAC contractors and private equity companies connect.
“Recently, one group was the first big platform to exit. They went for something like 17 times EBITDA (Earnings Before Interest, Taxes, and Amortization),” Zureikat said. “It’s the classic private equity model where they buy up all these smaller contractors for six or seven EBITDA, and they flip them for 17 times after they’ve done all the integration work. That’s how they get their return.”
Impressive business model.
When are these exits going to begin? That is hard to say. Obviously, private equity wants to be very strategic with timing and exit when there are good conditions in the market. Of course, the fact that the HVAC market is in a bit of a flux with tariff concerns and the refrigerant transition supply chain issues could certainly affect timing. But most people see this ramping up in late 2025 or early 2026.
“The biggest driver that simmered down mergers and acquisitions in 2023 and 2024 were the high interest rates,” Zureikat said. “What is happening with the financial markets now could pressure the Fed to lower rates. That would make financing more reasonable for these buyers and could stimulate the market again.”
For the past few years, private equity has focused on the $10 million-plus revenue HVAC contractors. At this point, most of those folks who were interested in selling have sold. There are only so many of those left out there.
It makes sense that those who have been bought will be flipped to what we will call the private equity “blue bloods” — we are talking companies like JP Morgan, Goldman Sachs, and KKR.
“Those guys have a much broader approach to business. They are not just going to buy the little guys. They are going to buy these platforms that have already packed up to 10 or sometimes even hundreds of the smaller HVAC contractors,” Zureikat said.
The competition for the independent contractor is going to get even more intense. Because not only are these companies buying up the HVAC platform, but they are also going to do the same for plumbing, roofing, landscaping, and numerous other service businesses. They want to build a whole services conglomerate.
This is good news for the HVAC contractors that have sold to private equity in the recent past while still maintaining some equity in the business. This is a great opportunity to fully cash out and ride off into the sunset.
“We have always been telling people to make sure they do their homework, because it’s not just the first check that is important. It is what companies are building towards and what that second check can be,” Zureikat said.