Private equity investments likely to drive future capital market activity in the Building Products & Services sector

Guest blog by John Stephan, Head of Global M&A and PLC Advisory Services at BDO LLP (CPA Associates)

The third quarter of 2021 onwards saw recovery in the M&A markets, with deals completing apace. Completions were up 23% on the previous quarter with a broadly even rise in activity from trade and private equity buyers. The trend was evident in the Building Products & Services market but another notable dynamic was the listing of companies in the sector on AIM and the main market.

CMO Group, Lords Group Trading and Likewise Group all listed on AIM within a few weeks of each other in the summer.  SigmaRoc did a £260 million reverse takeover of Nordkalk, a limestone company. Stelrad announced a successful IPO earlier this month, Marley was preparing to float and Eneraqua Technologies has proposed a listing. So why are Building Products & Services companies turning to the capital markets when there are plenty of trade and private equity buyers in the M&A market?

Understanding the role of private equity in Building Products & Services

Private equity has long been keen on the Building Products & Services sector. When the COVID-19 pandemic first hit, private equity funds largely stalled deal making activity and focused on reviewing and shoring up portfolio companies. They also reconsidered how to build value and how best to deploy their vast levels of investment funds.

From Q3 2020, private equity investors stepped up a gear and really started to spend. The proportion of transactions involving private equity jumped from 22% in 2019 to 32% in 2020, the highest level in a decade. The influx of private equity cash was likely triggered by a growing awareness of the sector’s growth potential as the UK government doubled down on its infrastructure and housing commitments to bring back the economy after COVID-19.  

Even before COVID-19, private equity investors had been targeting the sector because Building Products & Services companies offered interesting possibilities for growth through consolidation and value creation. A classic example of a private equity target is a traditional, family-run business where there is potential to create value by introducing more professional processes or by investing in automation and other forms of innovation.

Key Capital Partners supported CMO Group’s purchase of Total Tiles and artificial intelligence pioneer Peak to diversify routes to market. Cairngorm Capital has used its platforms of Grant & Stone Group and Independent Builders Merchant Group to consolidate a fragmented merchants market. Now merged, the £500 million turnover business continues to buy with three further bolt-ons added in late October of this year.

A further major play for private equity in the market has been the acquisition of partial divestitures or ‘carve outs’ from corporates. Examples included Inflexion acquiring Marley from Etex, Clayton, Dubilier & Rice buying Wolseley UK from Ferguson, Newbury Investments acquiring Primaflow F&P from Travis Perkins and HIG Capital acquiring the Plumbing and Heating division from Travis Perkins.

But having driven value from carve-outs and taken advantage of rapidly changing dynamics in the industry to put businesses on a strong footing, private equity will seek to realise their investment within a few years, as part of their natural investment cycle. The question is who will buy?

So what comes next for a private-equity backed business?

Thoughts first turn to trade, a natural home for complementary businesses, with the potential to drive synergies and cross-sell. But for larger private businesses, strategic rationale has to be exceptionally strong to convince corporate shareholders.  If anything, the recent emphasis for large listed corporates has been realignment of their portfolios through carve-outs and they are unlikely to buy these businesses back again.

The secondary buy-out is another solution. For example, having pursued a highly active buy and build strategy, Inflexion sold Huws Gray to Blackstone Group earlier this year. With this next level of investment, Huws Gray was able to make the transformational acquisition of Grafton’s merchant businesses for £520 million in July and is steadfastly completing further bolt-on deals.

Another option to weigh up, and proving successful, is listing in the capital markets. For Key Capital-backed CMO Group the listing provided a partial exit while raising funds to support the company’s ambitious growth plans. The listing is expected to raise the Group’s profile with potential supplier partners and with the vendors of prospective acquisition targets. It should also increase the ability to attract, recruit and retain key employees with further incentivisation through equity ownership and long-term equity incentive schemes. Now the £53 million turnover business, which has only recently started to deliver profits, has an enterprise value of £140 million.

Stelrad is another example of a private equity backed business seeking a listing to fund major expansion. The radiator manufacturing business, backed by Bregal Capital, floated at a market capitalisation of £274 million earlier this month, and plans to use funds to diversify into other low carbon heating products and enter new geographic markets.

Further recent non-private equity backed listings have been equally successful. Lords Group Trading raised £52 million and is trading on a forward multiple of 13.9x EBITDA while Likewise Group transferred from the International Stock Exchange to AIM, raised £10 million and now trades on a forward multiple of 23.6x EBITDA.  Brickability, which listed in 2019, is expected to almost double its profits to £28 million next year and trades on a multiple of 12x. Last month, Brickability won the “AIM transaction of the year” award for its transformational acquisition of Taylor Maxwell recognising how the company harnessed AIM to fulfil its ambition and growth potential.

Why we expect the capital markets to list more Building Products & Services businesses

While trade and secondary buy-outs are generally the first exit routes to be considered in the investment cycle, the capital markets can provide clear advantages for a growing business with ambition. High visibility and share incentive schemes help recruit and retain staff in a market constrained by skills shortages. Greater brand visibility can provide advantages with suppliers and open doors with acquisition targets. Certainly, the businesses which have listed recently appear to be thriving.  

Inflexion-backed Marley had confirmed plans to go ahead with a listing on the London Stock Exchange this autumn, aiming to raise £75 million and execute an acquisition strategy in the roof integrated solar panels market. Most recently Eneraqua Technologies, a UK-based heating and hot water systems provider has announced plans to raise £12m from placing new shares on AIM. We expect to see others follow. Just as the private equity sector has helped push the sector forward, we’ll see the capital markets play their part in the investment cycle, setting the scene for significant expansion in the coming years.

If you’re weighing up your options and wondering if listing could be right for your business, get in touch with our highly experienced plc advisory team, who are able to provide an IPO readiness assessment and expert advice on the full range of possibilities.

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