Cleaning up: 2021 facilities management opportunities

While a solid performance by this historically reliable sector isn't a surprise, facilities management hasn't been immune to the events of the last year.

H1 paints a picture of a changed sector. Interest in catering, for example, has dropped significantly, while private equity piled into the increasingly regulated fire sector, and technology-led security sector.

To know what to expect for the rest of the 2021, it's vital to look back at 2020, a year that upended normality.

2020: how it changed facilities management

Facilities management continued to be a workhorse of M&A deal activity during 2020's uncertainty. While it may not have attracted the frenzied interest of sectors such as technology and healthcare, the facilities management sector's value and volume figures for 2020 held steady against previous years.

The year closed with a total of 95 recorded deals. Total deal value stood at £4.3 billion compared to £1 billion in 2019 (based on publicly disclosed deal values), bolstered by Allied Universal's fourth-quarter takeover of G4S for £3.8 billion and Mitie's second-quarter acquisition of Interserve's facilities management business for £190 million.

This latter deal created the UK's largest integrated facilities management provider with a balanced portfolio across both the public and private sectors.

Even with these mega-deals stripped out, the numbers remain respectable, given that deal activity all but halted in Q2 2020. This pause enabled the sector to take stock and focus on internal issues, such as restructuring and cash flow.

The strong performance shows that, in rocky times, facilities management remains a safe bet, thanks to:

• the visibility of future order books
• typically long-term customer relationships and contracts
• revenues underpinned by spending on non-discretionary services and regulatory compliance.

However, what changed over the year was where investments within the facilities management subsectors were made. Across all subsectors, buyers sought haven in government-sector suppliers, regulated services and service-enhancing tech solutions. Meanwhile, large corporates sought to divest non-core assets.

From manpower to processing power

2020 accelerated the shift from labour to tech-led solutions, as the sector sought to reduce its dependence on workers who are typically on-site. The transition to cost-saving tech was already happening, but lockdown conditions added fuel to the flames as building managers grappled with the challenge of facilities management during lockdown.

In 2021, appetite for facilities management tech businesses continues to be mostly marked in fire and security, which accounted for nearly a third of deals (31%) compared to 22% in 2020 and 19% in 2019.

Take Freshstream's investment in Themis Risk, on which we advised. Themis Risk is a unique, technology-led security risk management group with access to privileged closed-source crime intelligence data. The group consists of two brands: Perimeter Intruder Detection (PID), a provider of mobile CCTV solutions for the construction, infrastructure, and vacant property sectors; and SmartWater Technology (SWT), a proprietary forensic asset-marking liquids specialist.

Other subsectors also experienced a rush to automation. Arcus FM (which we supported on their management buy-out, backed by ESO Capital Partners, in Q1 2020) went on to acquire BEMS in Q3, a building energy management controls specialist.

The move strengthens Arcus' expertise in remote monitoring of factors such as energy, refrigeration, and HVAC (heating, ventilation and air conditioning).

More regulation expected

We noted last year that UK companies were committing more resources and budget to regulatory compliance and fire-risk assessment following the Grenfell Tower tragedy. This has continued to drive activity in the fire and security sector.

2021 deals that demonstrate this trend are Rockpool Investments' provision of acquisition funding to EA-RS fire group in February and Trimountain's significant investment in fire and security experts ABCA Systems, on both of which we advised.

Likewise, we anticipate new regulation surrounding health in the wake of the COVID-19 situation. Facilities managers will have to find the budget to comply with this by either squeezing costs from soft facilities management services, or through tech-driven efficiency across the board.

An example of a firm that does the latter is Elogbooks, which sold to Marlowe in June 2020, on which we advised. Its technology platform for building managers streamlines compliance, safety and upkeep.

Private equity

Private equity appetite for facilities management assets continued its steady growth in 2020, accounting for 44.2% of deal volume in facilities management (H1 2021: 32.3% vs 2019: 41.1%), with investment values increasing dramatically.

Under pressure to spend high levels of dry powder, private equity viewed the facilities management sector as relatively safe and resilient. Buyers continued to be attracted by the high visibility of contracted earnings and its non-discretionary services, as well as opportunities in technology-led services.

During the austerity phase, private equity typically shied away from public sector-facing businesses. Echoing sentiment following the 2008 credit crunch, the government is now considered a preferable blue chip client base.

This could be a driver in Aurelius' recent £27.5-million acquisition of SSE Contracting Ltd, the largest street light contractor in the UK and provider to companies such as Transport for London (TfL) and Network Rail.

International activity

Lockdown reduced the mix of international corporate buyers (excluding international PE-backed corporates) in the UK (8.4% in 2020 vs 12.6% in 2019 and 10.8% in H1 2021). This provided local players with the opportunity to scoop up domestic assets.

Brexit appears to have reduced Europe's appetite for UK assets. Interest cooled due to an expectation of diversion in regulation and the sector's dependence on a transient workforce. We expect increasing numbers of European corporates to divest their UK businesses in 2021 and beyond for these reasons.

Conversely, there has been an uptick in interest from South African and US buyers. The former are keen to invest in the UK economy because of similarities with their facilities management sector and the devaluation of the Rand.

In the US, there is an expectation that corporate taxation will increase under the Biden administration, prompting companies to diversify capital allocation by region. Brexit has also made the UK market more attractive to some, due to a lack of constraints imposed by the European Union.

Bidvest Noonan, part of South African conglomerate BidVest, has already acquired three UK businesses in the first half of this year: Axis Group Integrated Services (advised by us); the Cordant Group and Amber Support Solutions

This has significantly expanded its UK footprint in cleaning, security and soft services.

Other examples of recent activity from these regions include:

May 2021

US-headquartered private equity firm Warburg Pincus announced an agreement with Macquarie Capital Principal Finance to jointly acquire a majority stake in Premier Technical Services Group, a UK-based building compliance services provider.

This deal combines three trends mentioned above:

1 investment in regulatory compliance

2 accelerated private equity activity

3 increased interest from US buyers.

April 2021

US-based Albireo Energy, a portfolio company of Huron Capital, acquired the UK's Chartwell Group (advised by us). This was Albireo's first investment in the UK.

Chartwell is a specialist integrator in the dynamic energy management environment, with strong expertise in data centres.

November 2020

Excellerate, another South African corporate strengthening its position in the UK acquired Contract Cleaning and Maintenance (CCM), an integrated cleaning services provider across the shared workspace and commercial office sectors (advised by us)

Cleaning

Cleaning and sanitation services have never been more vital for public spaces, with regular deep cleaning now a requirement for most organisations.

This growth potential, coupled with the fragmented nature of the industry, drove deals in 2020. In March 2020, for example, ESO Capital Partners invested in rapidly growing Churchill Group, which went on to acquire Chequers Contract Services (both advised by us).

In November, Maxim Facilities Management, a provider of cleaning and facilities management services, acquired local competitor Total Facilities Management (NE) Ltd to grow its presence in the North East of England.

This trend shows no sign of slowing down in 2021, as per the aforementioned Bidvest and Excellerate's transactions and Marlowe's H1 acquisitions in water and air hygiene compliance solutions: WPL Limited, Agriteck Solutions and Musketeer Services.

A look into space

It's uncertain how much the last year will permanently change how we interact with buildings in 2021 and beyond.

It isn't unimaginable, for example, that the footprint of bricks and mortar commercial space will get smaller as consumers opt for contact-free online shopping. The flipside of this is that more distribution centres will be needed to fulfil online orders.

Likewise for office space, workers may visit offices more infrequently, but require more space between (deep cleaned) desks when they do. Separately, the rise of cloud computing means more data centres are springing up, again with unique needs in terms of HVAC and security.

The above examples show that we don't expect the facilities management market to shrink, but to evolve to service ever-changing client requirements with the added benefit off new technology-led solutions.