Last year, M&A activity largely followed other business cycles, which experienced historic oscillations in response to the COVID-19 outbreak. So a white-hot start to the year came to a screeching halt in March, only to pick up some midyear as virus cases leveled out and as new pandemic protocols normalized. By the end of the year, M&A activity resembled a fairly normal year. We spotted some bargains among the transactions, but mostly we saw healthy sellers getting fair prices that ignored the pandemic, at least for the purposes of valuation.

 

That momentum from the end of last year, paired with increasingly positive news on virus containment, leaves us an optimistic outlook for 2021. To give a little more insight into why, here are five predictions for what we expect to see in the year ahead, both across the general market and specifically within the HVAC industry.

1. Accelerated M&A Activity

Across the Market: With the way M&A activity began to heat back up at the end of 2020, we expect the full-year activity for 2021 to meet or exceed 2019 levels.

In Your Industry: Several key events from last year (pandemic, western wildfires) have put a sharper focus on opportunities in the essential services industries, particularly HVAC for necessities like air circulation and filtration.

 

 

2. More Large Transactions

 

Across the Market: Private equity investment accelerated through the 2010s and there are hundreds—if not thousands—of sponsor-backed companies nearing the end of their expected hold periods. As the year unfolds, given the lack of activity in 2020, coupled with previously planned 2021 exits, expect a surge of PE-owned company sales.

 

In Your Industry: Dozens of sponsor-backed HVAC companies are in the later stages of their hold periods and will likely transact in the next 1-3 years; many would have exited in 2020 were it not for the pandemic. The recent acquisitions of Turnpoint Services and Service Champions are just the beginning.

 

 

3. Fourth-Quarter Frenzy

 

Across the Market: When we look at recent history, we’re confident that the new Biden Administration’s tax policy will spur sellers to act, leading to an even greater increase in deal flow in the second half of the year. There is historical precedent for this outlook. In 2012, following Barack Obama’s reelection, we saw a similar trend, as sellers worried impending tax increases would cut into sale returns. In Q4 of 2012, Craig personally closed more, larger deals in tighter timelines than he otherwise would have imagined possible.

In Your Industry: We don’t see this activity limited to any one industry. Expect motivated sellers across the market.

 

4. Increase in New Industry Participants

Across the Market: The increasing availability of private equity capital will lead to several newly recapitalized businesses that in the years to come will be hungry for acquisitions.

 

In Your Industry: There’s been a steady move of private equity money toward the HVAC industry and other essential services—even among firms with no prior experience in the space. They’re drawn to the historic stability of the industry, as well as the sharpened focus on air circulation, filtration, and other essential services with the pandemic. This can generate some great valuations, even if the results are not quite so conclusive.

 

5. The Pandemic Continues to Play a Role

Across the Market: Over the course of 2020, valuations remained mostly unchanged, but due diligence did take on a new intensity. Most of this heightened scrutiny surrounded uncertainty about the permanence of a business’ recovery, risk of a future surge causing businesses to shut down again, increased expenses associated with PPE and sanitization, and questions on how to adjust the shutdown out of the P&L. At this point, most feel confident that shutdowns are a thing of the past; however, the uncertainty still plays a role. 

In Your Industry: The pandemic has changed some things forever. Don’t expect to stop seeing those ubiquitous hand-sanitizer pumps any time soon, just as you shouldn’t expect any slack in demand for better air circulation, more efficient air filtration systems, and other HVAC upgrades. So while this is promising for the HVAC industry broadly, look for some segments to grow more than others, particularly those in healthcare, education, and restaurant industries. 

 

More about the Authors

Peter J. Holton CM&AA is Managing Director - Facility Services at Caber Hill and is considered an authority on valuation and M&A in the HVAC industry. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Craig Castelli is the Founder and CEO of Caber Hill Advisors and is considered an authority on M&A, capital markets, and valuation. He has advised hundreds of privately held businesses, private equity firms, and public companies on their corporate development activities. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

More about Caber Hill Advisors

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