HVAC Heating Up with No Signs of Cooling Down

 The Rising Deal Trend of Private Equity in the HVAC Sector

 By Paul Marino

The private equity “(PE)” industry is increasingly drawn to the heating, ventilation, and air conditioning “(HVAC)” sector.[1] Traditionally, private equity funds have targeted technology, healthcare, and finance industries for their growth potential and scalable models. However, in recent years, the HVAC industry has gained significant traction among investors. With rising demand for energy-efficient systems, smart home technology, and new government regulations on environmental standards, the HVAC sector is ripe for consolidation and growth.

This is the first of a series of articles on industries in the trades and/or service sectors attracting interest from PE. This article examines why PE firms are eager to buy into the HVAC industry, the factors driving this interest, and the potential impacts on the sector.

As more private equity firms enter the HVAC sector, the industry may witness significant transformation. For HVAC business owners, this trend presents an opportunity to grow and modernize their businesses. For consumers, it offers the promise of better, more advanced HVAC solutions. However, it will be essential to monitor the impacts on prices, service quality, and the availability of skilled labor to ensure the sector remains healthy and competitive.

Prior to starting my “real-life employment”, I was fortunate to have a great friend (little league teammate) whose dad, and then brother, owned an HVAC company and I was able to secure gainful part-time employment as an errand boy (odd jobs, etc.) and then a (very) junior mechanic. [2]  During this tenure at a residential and commercial HVAC company, I learned a lot about the trade.  I also learned a lot about myself; for example, installing air handlers in attics on 90 degree summer days was not fun and even less fun was installing furnaces in sub-basements in new builds during the middle of January when it was so cold you had to blowtorch your boots to warm them up.  Ultimately, I learned that, as far as I was concerned, staying in school and making money behind a desk was a better career path; or so I thought.  Today, after surveying the landscape of deals in the HVAC space, maybe I was wrong. 

In fact, based upon the increased enrollment in vocational schools and trades schools, many young people agree.  And to that extent, trade school programs have grown over the last few years which also aligns with the enrollment at community colleges focusing on vocational programs (e.g., nursing, hospital techs, mechanics, HVAC, welding).[3]  In fact, year over year, trade schools/vocational trade schools saw a marked increase in matriculation (over 15%).[4] 

While I am sure there are a number of reasons why young adults are returning to a more traditional career glide path (for any readers under the age of 40—there was a time when people made a good living without going to college—just ask your parents and/or grandparents), I suspect articles like the one recently published in the Wall Street Journal, about tradesmen making millions operating and thereafter selling their business, explains it thoroughly.[5]  To save you time, I’ll surmise it for you: If you own a company performing a trade that has recurring revenue (service contracts), that business moved from a lifestyle to enterprise business. Or in other words, PE has assigned a multiple to your profits.

As a reminder to those wondering if their business is ripe for PE buyout, PE is attracted to industries with reliable cash flows, growth potential, and opportunities for consolidation. The HVAC industry checks all these boxes.

Further, as our dear friend and colleague, Drew Brantley from Frisch Capital reminds us:

Today, capital providers are trying to find industries and business models that have both downside protection and a low capex operating model that allows a business to flex up and down easily based on demand or macro influences. HVAC and mechanical service companies are a perfect business model for private capital. Between installation and regular replacement cycles every 10+ years, to regular recurring service work, HVAC provides a sticky and consistent customer base regardless of the macro economic conditions. 

While there has been a lot of consolidation in the HVAC industry over the last 10 years, HVAC still remains a highly fragmented industry with multiple niche end market industries in which you can service, and both commercial and residential focuses available.” 

To that point, here are the primary reasons private equity firms are interested in this sector:

1. Steady Demand and Predictable Cash Flows:

HVAC services are essential for residential, commercial, and industrial buildings. As buildings age, HVAC systems require regular maintenance, repair, and replacement, creating a steady stream of demand. This stability is appealing to private equity firms looking for reliable returns. Additionally, the COVID-19 pandemic has increased the demand for better air quality in commercial buildings, adding a new layer of growth potential for HVAC companies.

2. Fragmented Market with Consolidation Opportunities

As Drew points out above, the HVAC industry is highly fragmented, with thousands of small and mid-sized businesses operating in local and regional markets. This fragmentation presents an attractive consolidation opportunity for private equity firms that can acquire multiple smaller companies and create larger, more efficient, and competitive entities. By consolidating companies, private equity firms can achieve economies of scale, streamline operations, and build market share more quickly.

3.  Growth in Energy Efficiency and Green Technology 

Consumers and businesses are increasingly seeking energy-efficient and environmentally friendly HVAC systems. This shift, driven by both consumer preference and government regulations, has created new demand for advanced HVAC systems. Recently, regulation was passed by the EPA switching from the Main R-410A refrigerant we have been using for the last 20 years, to the new R32 or R454-B. So all new units have to use one of these two new refrigerants. This is creating a new opportunity to replace older equipment and driving profits in the HVAC space.[6]  PE firms recognize that by acquiring HVAC companies, they can tap into this demand, introducing energy-efficient solutions to customers and capitalizing on the “green” market.

4.  Technological Advancements and the Smart Home Market 

With the rise of smart home technology, HVAC systems are becoming more sophisticated, offering features like remote monitoring, automation, and integration with other smart devices. This trend opens up new revenue streams for HVAC companies that can offer these modernized services. Private equity firms often have the capital to invest in the technological upgrades needed to provide these services, giving the firms an edge in staying competitive.

5. Growth in Data Centers

Cooling systems are essential for data centers to ensure optimal performance, reliability, and equipment longevity. Servers and networking equipment generate immense heat during operation, and without effective cooling, temperatures can quickly rise to levels that cause hardware to malfunction, degrade, or fail entirely. Modern data centers use densely packed racks with high-performance equipment that demands advanced cooling solutions, often with sophisticated systems that manage airflow, humidity, and temperature. Effective cooling systems not only maintain stable environments but also contribute to energy efficiency, helping data centers reduce power consumption and operational costs while meeting regulatory and environmental standards. As data centers expand to accommodate the growth in cloud computing, artificial intelligence, and big data, robust cooling solutions become even more critical for sustainability and operational resilience.

6. Favorable Demographics

As the population of the US has moved away from the northeast (and other cold weather states and high tax states) and moved to low tax southern states, the necessity for climate control systems is paramount (i.e., you can’t purchase a wood burning stove to cool you down when you’re living in Shreveport, LA in the summer and solar isn’t going to help much in Montana when it is dark by 4PM in the winter—in other words—hard to disintermediate mechanical HVAC systems). In regions experiencing hotter summers and colder winters, HVAC systems are critical. Additionally, population growth, housing shortage, and the construction of new homes and commercial properties contribute to a steady demand for HVAC installation and maintenance.

Strategies and Impacts of PE Buyouts in HVAC

PE firms typically employ several strategies when they enter the HVAC space. Here are a few approaches and their potential impacts on the sector:

1. Buy-and-Build Strategy

A common approach is the “buy-and-build” strategy, where PE firms acquire a platform company in the HVAC industry, then add on smaller acquisitions to expand its market presence. This strategy can help create a larger, regional or national entity that benefits from economies of scale. For example, firms like Wrench Group and Apex Service Partners have successfully expanded their HVAC presence through such acquisitions, creating operational efficiencies and stronger brand recognition.

2.  Investment in Technology and Infrastructure

PE firms bring capital that allows HVAC companies to upgrade their technology and infrastructure, potentially transforming a local business into a modern, tech-driven entity. By implementing customer management software, automated scheduling, and predictive maintenance technology, these firms can enhance customer experience and reduce operational costs, giving HVAC companies a competitive advantage.

3.  Focus on Operational Efficiency and Profit Margins

PE firms often prioritize improving operational efficiencies to increase profitability. In HVAC, this could mean streamlining administrative functions, renegotiating vendor contracts, or implementing data-driven insights to optimize service delivery. While these improvements can lead to greater profitability, they may also come with workforce restructuring or cost-cutting measures, which can impact employees.

4. Expansion of Service Offerings

To increase revenue, some private equity-backed HVAC companies expand their services beyond traditional heating and cooling. This could include plumbing, electrical services, alarm systems, or smart home integration. By diversifying their offerings, HVAC companies can attract a broader customer base and cross-sell services to existing clients.

Challenges of Private Equity in HVAC

While PE investment brings many advantages, there are challenges as well. The HVAC industry is heavily dependent on skilled labor, and a shortage of trained technicians could hinder growth. Additionally, consolidation in the HVAC market may lead to fewer choices for consumers and potentially higher prices, especially in areas where a single private equity-backed firm dominates the market.

Another potential downside is the pressure for quick returns. Private equity firms often seek high returns within a specific time frame, leading to aggressive growth strategies that may not align with long-term industry stability. This focus on profitability could lead to reduced service quality or price hikes, which may impact customer satisfaction.

The Future of Private Equity in HVAC

The HVAC industry is expected to remain attractive to private equity investors as the demand for HVAC services continues to grow. Technological advancements, consumer preference for green solutions, and the need for efficient energy systems will likely keep this sector in the spotlight. However, for HVAC companies and consumers alike, it’s important to balance the benefits of private equity investment with the need for quality service, affordable pricing, and sustainable growth.

[1] When PE is referenced it also refers to independent sponsors—for more on independent sponsors—please see The Earnout Magazine, second edition Fall 2024 (https://issuu.com/sadisgoldberg/docs/earnout_issue_2_revised_cover?fr=xIAEoAT3_NTU1).     

[2] Real Life Employment is defined as employment whereby you actually use the money you earn to live as opposed to using the money you earn to have fun.

[3] Information obtained from National Student Clearinghouse Research Center (see, https://nscresearchcenter.org/current-term-enrollment-estimates/) (visited, 11/12/2024).

[4] Information obtained from National Student Clearinghouse Research Center (see, https://nscresearchcenter.org/current-term-enrollment-estimates/) (visited, 11/12/2024).

[5] https://www.wsj.com/business/entrepreneurship/plumbers-hvac-skilled-trades-millionaires-2b62bf6c (visited, 11/12/2024).

[6] https://www.nahb.org/blog/2024/05/new-refrigerants-hvac.

  https://www.pvhvac.com/blog/new-refrigerant-for-2025-what-you-need-to-know/.