The fire and life safety protection services market has proven to be resilient during an era of slow business services dealmaking. Private equity firms continue to transact with each other and even an occasional strategic buyer.
PE Hub’s ongoing companies-for-sale coverage has shown that the fire safety market has seen deals consistently selling at multi-year high exit multiples of 18x to 20x EBITDA, representing an elevated range for a service-focused market historically valued at the lower double-digits. Firms such as KKR, New Mountain, Gryphon and Riverside Company are doing deals for scaled fire safety platforms that are commanding deal premiums on the upper-end of that range.
The broader professional services market that fire and life safety falls under has seen deals ranging from 9.9x in the lower 25th percentile to 17.7x in the upper 75th percentile, according to SIPA privateMetrics data.
To learn more about what’s driving high valuations for fire safety deals, PE Hub turned to David Sweet, a managing director at JPMorgan focused on commercial and residential services.
Sweet’s group served as financial advisers with William Blair to Apollo on the large-cap PE firm’s May acquisition of a minority stake in residential HVAC, plumbing and electrical services group Apex Service Partners, a national service provider operating 75 brands across 46 states.
Sweet offered his insights on fire and life safety PE deals and deal drivers, and also shared the firm’s outlook for dealmaking in that market for the year ahead.
What is JPM’s outlook for H2 B2B and B2C fire and life safety protection dealmaking? Are mid-market deals still happening between private equity firms and some strategics?
We are seeing a heightened interest in commercial services with continued interest across residential services across market segments. Against the backdrop of rate hikes and shifting consumer strength and sentiment, there is a defensive and revenue-stable nature to commercial services companies that is attractive to many investors.
Both the private market and public markets are increasingly coming into play for fire protection and safety, coupled with security and integration. The path to go public has become the base case for many companies that have reached $500 million-plus EBITDA.
In the private market, we’re seeing barbell deal size patterns. For example, $100 million EBITDA or less companies are compelling because they offer an opportunity for an investor to really move the needle via M&A and scale up to a path to exit that is underwritable. Conversely, some investors are focused on large-scale businesses that have an established platform that is public market exit ready. Investors are deciding if they want to buy small and grow, or buy big and exit.
There are several scaled fire safety and security alarm integration platforms in the $500 million EBITDA ballpark. We use the term ‘battleship defensibility’ for those, given their market leadership, regulatory-mandated driven demand, growth and profitability profile.
What are some of the fundamentals of valuing a mid- to large-cap private equity-backed fire safety platform? We’ve seen deals regularly fetch up to 20x EBITDA.
Valuation is driven less by size and more by business composition. The 18x-20x EBITDA valuations have consistently been achieved by highly recurring platforms with route- and density-based scale benefits with meaningful exposure to testing, inspection, maintenance, and integration services. These are regulatory-, code- and security-driven and often occur on a recurring and scheduled frequency.
These valuations are also consistently achieved for platforms that are $25 million in EBITDA and larger, which are being invested in as platforms to build upon – which ties back to that barbell pattern I referenced earlier.
The addressable market is very large, extremely fragmented, permeant in nature, and has structural demand drivers to growth which support multiple ‘winners’ at the local and national level – making the category highly sought-after by private equity.
Fire safety and security system integration are about tools and people. They are contractually recurring. There’s a cadence that’s driven by state, local and federal regulatory policies. Critically, AI is an enabler of service but cannot replace the broad service provided by a fire code-regulated business. AI helps with route co-ordination, contract pricing and placement but the sector still requires highly skilled, certified individuals.
What’s the rationale behind add-on deals for fire and life safety platforms, and what does that market look like?
The add-on market is huge. The total addressable market is $150 billion, which consists of fire safety (50 percent) and alarm systems (50 percent). Every single building in the US has a requirement to have this service or system deployed. This constant demand enables fire safety firms to expand to become alarm monitoring and multi-faceted service providers, and vice versa.
Historically a commercial building would have one control center on the fire side, and someone else who managed the security alarm. Now many of these companies are becoming the owner of the whole control center – providing a one-stop fire and alarm solution for their customers.
M&A is a big focus for driving that type of integration, and the tail of smaller (sub-$5 million EBITDA) local providers that can be acquired is near limitless.
Are PE firms still building fire safety platforms from scratch or has the market largely become consolidated and very scaled on the mature business side?
We have seen an increase in investors wanting to be the first source of institutional capital for these firms, helping them to grow and professionalize, and then packaging them for sale.
Demand for these assets will stay strong and we expect to see continued interest from private equity and strategics alike. These are assets in forever service categories.
Is private equity the most likely buyer of fire safety platforms or in the case of a strategic buyer, is there a bolt-on attribute or a magnitude of scale that would warrant a strategic sale?
A challenge for a strategic buyer is that a PE bid is often coming in at a similar level or higher than a strategic bid, and that’s largely because the quality of the business being acquired has all those long-term, defensible attributes with the public markets providing a standalone path to exit for the scaled platforms.
The market is huge and continues to grow. There are multiple ways for parties to win and to get to successful exits. The aperture is getting more realistic to public exit routes based on success in the private route.
Editor’s note: This story is part of PE Hub’s ongoing series of Q&As with PE thought leaders. For more, see: