The Rusty Lining
Private equity (PE) investors have entered the home improvement market and there’s no indication they’re leaving—indeed, evidence suggests the trend is growing. Because of this, I took a deeper dive into what’s caused that entrance, what it’s looked like thus far, and what we may expect as PE firms’ portfolios and ultimately influence in the space grows.
My take is largely optimistic, as PE presence has so far been a source for growth and optimization. Also, in looking at other industries that saw PE investment, there’s reason to believe that this type of funding will elevate home improvement as a whole. However, before you get to reading, I want to take this page to discuss some of the less savory parts of how some PE firms operate.
Bankruptcy
A big fear you’ll hear in circles familiar with PE is that a business’s chance for bankruptcy increases. A 2019 study from California State Polytechnic University found after reviewing 484 public-to-private leveraged buyouts over a period of 10 years that their bankruptcy rate was 2% higher than a control group of non-PE companies. The recent bankruptcies of the PE-backed J. Crew and Hertz only serve to highlight that point. But the study, the only one of its kind, evaluates public companies, of which there are very few in home improvement.
Private companies are handled much differently by PE firms, and so I hope the trend doesn’t appear in home improvement.
The Sell Off
Something else that may worry business owners, and perhaps rightfully so, is that a PE firm that investments or acquires them may only be interested in the short-term. It’s a common play in PE to buy a company and sell it a few years later. Here’s why: PE firms target purchases on growth potential as it compares to risk, which often looks like an underperforming company. And so that company is purchased, improvements and investments are made, and revenue grows. At that point, a sale makes the most sense in order to maximize profit for the investors.
EverCommerce, a home improvement services conglomerate, was a roll up—something you’ll hear more about in my special feature. The company was formed largely through acquisitions made possible by PE firm Providence Equity. In 2019, Providence sold a majority of EverCommerce to Silver Lake, another PE firm.
Staff Cuts
PE investors hate risk and love profit, so when they enter a business the first thing they’re going to do is aggressively lower the one and increase the other. Too many expenditures is a risk. Sometimes that means employees are a risk.
Luckily, existing evidence suggests home improvement is pretty safe on that front. While PE buyouts of public companies on average result in a 13% reduction in staff, purchases of private companies conversely on average see 13% increases in staff, according to a study from the University of Chicago.
Wage Cuts
In that same University of Chicago study, researchers found that among all businesses purchased by PE firms worker wages fell an average of 1.7%.
Depressed wages is my biggest fear for the home improvement industry. But, considering the industry’s labor shortage and the difficulty I’ve seen in attracting workers, I’m hopeful that wages will actually increase.
Hoping For Optimization
Home improvement is an industry full of experience and talent, but it also has problems. It’s inefficient, technology deficient, and lacks sophistication. Jobsite know-how eclipses business know-how, and capital resources are limited. Too many home improvement businesses couldn’t operate without their owner. With PE money coming into the industry, even if the firms end up leaving, my hope is home improvement is elevated in management, reputation, and in its ability to provide an essential service.
