How strong does the future look for facilities management?
Facilities management has once again defied the general downturn in UK M&A activity. Deal volumes for the first half of 2023 reached a record 87 transactions, continuing an upward trajectory that began in 2019. For comparison, there were 85 deals in H2 2022 and 70 in H1 2022.
H.I.G Capital Managing Director, John Harper, summed up the sector’s appeal when announcing its new buy-and-build platform Andwis, describing “significant long-term growth opportunities driven by decarbonisation, changing regulation, new technology, and ageing building stock.”
UK FM M&A - Half Year Activity
Source: GT proprietary FM M&A tracker
UK M&A (including minority stakes) - Half Year Activity
Source: Zephyr - Bureau Van Dijk
Private equity accounted for 47% of facilities management deal activity in H1. This surpasses the five-year average of 42% and the 10-year average of 31%. Buy-and-build continues to be a popular strategy, and we're seeing more take-privates.
UK FM M&A - Split by Acquirer Type
Source: GT proprietary FM M&A tracker
In May, we advised Freshstream on its investment in Ireland-based outsourced services company, MCR. The company provides cleaning, security, engineering, and personnel services. It will use the investment to expand its footprint.
In March, H.I.G Capital acquired Synecore and Meesons Future. The private equity house combined these with its previous acquisition of CPS (mechanical and electrical services) and Classic Lifts to create the Andwis Group, a new family of technical service providers. The Group has already confirmed a pipeline of acquisition opportunities.
The general devaluation of public equity stock has driven an increase in public-to-private deals over the last 12-18 months. Private equity and PE-backed corporate buyers are identifying opportunities to unlock potential stymied by shareholder scrutiny.
In April, Sureserve, a provider of compliance and energy services, agreed a £212.1 million takeover by Cap10 Partners. The offer was a 38.9% premium to the last closing price of 90%.
This is a trend we expect to continue: it's been reported that fire safety company Marlowe PLC is exploring the divestment of its testing, inspection and certification (TIC) division, with a potential £650 million price tag.
Since January 2022, the SONIA interest rate benchmark has risen from below one per cent to five percent most recently, significantly increasing the cost of debt for borrowers. The addition of concerns about inflation’s impact on margins resulted in a reduction in lender appetite and, where available, debt terms becoming less borrower friendly.
Lender appetite began to return in the second quarter of 2023 (when it was perceived that inflation would improve throughout the year). However, due diligence demands remained above pre-2022 levels, resulting in a laser-like focus on a target’s ability to make and protect margin:
While there's been no return to the debt terms seen two years ago, lenders’ willingness to invest time in assessing opportunities has offset renewed inflation concerns.
Companies providing facilities management to social housing fell out of favour with investors following the introduction of government austerity measures over a decade ago. Today, local authorities are trying to reverse years of underinvestment. The resulting long-term contracts provide the income certainty that investors and debt markets seek.
Alongside regulation in areas such as fire safety and decarbonisation, social media scrutiny is another impetus for local authorities to improve housing stock. Platforms like Facebook and Twitter have given tenants a voice to ‘name and shame’ housing associations that provide subpar accommodation.
There remains a funding gap for social housing. This may produce innovative funding models in which (for example) a supplier absorbs the upfront cost of introducing renewable technology, to be repaid by the local authority over several years.
In May, Apollo Impact acquired United Living, a provider of infrastructure, social housing maintenance and construction services. The Apollo Impact platform pursues private equity-like opportunities to create positive, measurable social and environmental impact while generating attractive risk-adjusted returns.
In May, private equity firm Buckthorn Partners backed the creation of Cardo Group, a platform that supports social housing providers with maintenance, compliance, retrofit, and decarbonisation needs. The Group’s first investment was in building maintenance provider LCB Group.
In June, an affiliate of private equity firm H.I.G acquired CLC management, a UK refurbishment, electrical, and fire protection services to clients in social housing, local government, defence, hospitality, and utilities.
UK FM M&A - Target Sector Split (% share of deal volumes)
Source: GT proprietary FM M&A tracker
Hard facilities continue to attract both corporate and private equity investors, accounting for two-thirds of deal volumes in the first six months.
Fire and security deals accounted for nearly a quarter of FM transactions so far this year. LSE-listed Mitie made two acquisitions in this subsector, as did Fortus Group – supported by fresh backing from AIB Capita. EA-RS, PTSG and Senseco Systems (all private equity-backed) continued building their fire and security capabilities with one acquisition each.
Notable deals include Bellrock’s first foray into decarbonisation through the acquisition of Carbon Architecture. Meanwhile, RSK bought Richard Irvin FM, a technical facilities specialist with a strong focus on energy solutions.
In soft facilities, cleaning services continue to boom as attention to hygiene remains heightened post-pandemic. Deal volumes (20) for the first half of 2023 are close to matching those for 2022 in its entirety. We also see an increased activity in grounds maintenance services with Nurture Landscapes, a green service provider, having secured additional funding from All Seas Capital. Nurture Landscapes continues its buy-and-build strategy having completed c.50 acquisitions in its history.
The second half of 2023 saw a resurgence of activity from the Nordic, German, and Eastern European countries with a few notable acquisitions in hard and technical facilities. These included Storskogen Group’s AB (Sweden) 80% stake in AC Electrical Services Group and Sauter Automation’s (Switzerland) acquisition of M&E firm T4, and Sescom’s (Poland) acquisition of PCB Technical.
H1 2023 substantial deal volumes continue the momentum shown in the second half of 2022. The fundamentals that make facilities management a defensive sector will continue to drive transactions when macroeconomic conditions improve.
