In 2021, the pandemic did little to dull the attraction of a sector that benefits from strong recurring revenues, public sector contracts, increasing order books, non-discretionary spend and regulatory-driven demand.
UK facilities management M&A volumes totalled 125 deals, the highest number in a decade. This marks a 29% increase on 2020 – a year in which deal volumes also appeared pandemic-proof – and a 37% uplift on 2019.
There were 59 deals in the second half of the year, compared with 52 in H2 2020, and 44 in H2 2019. Headlines included APi Group’s £2.2 billion acquisition of Chubb from Carrier Global Corporation – a move that will expand its global footprint.
Sector spotlight – best and worst performers
The most active sub-sector in 2021 continued to be fire and security, accounting for 31.2% of all transactions. At the other end of the scale, only 1.6% percent of all deals involved catering.
So what’s influencing transactions in the best and worst-performing sub-sectors?
Fire and security – a safe bet
Fire and security M&A was boosted by two tailwinds, in particular.
Tailwind 1: New UK fire regulation
In July 2021, the Building Safety Bill was introduced in the House of Commons. As well as the creation of a Building Safety Regulator, it proposes that building owners will need to demonstrate that they have effective, proportionate measures in place to manage safety risks – or face potential criminal charges. Facilities management companies that can help estate managers adhere to the resulting regulations have been (and will continue to be) in high demand.
In Q4, EA-RS Group acquired Crane Communications, a fire and security audiovisual equipment supplier based in Northern Ireland. This was the group’s fourth acquisition in 2021 after it secured acquisition funding from Rockpool in February (a deal we advised on).
In Q2, we advised Trimountain Partners on its investment in fire and security firm ABCA Systems. This is one of the UK’s pre-eminent fire and security experts, providing installation and maintenance across a broad range of fire and security systems.
Tailwind 2: Move from labour-led to technology-led models
The security services sector is increasingly migrating from manned guarding and labour-led models to technology-led, mobile and remotely monitored service models. This trend has been accelerated by material increases in wage inflation due to a shortage of labour as a consequence of Brexit and COVID-19.
A smart bolt-on –in H2, the SmartWater Group acquired Tag Security Holdings. The acquisition is its first following investment from Freshstream in March 2021 (which we advised on). This allowed the group to expand its portfolio of technology-led service models to meet the important security needs across new sectors and geographies.
Catering – hit by home working
While overall M&A volumes haven’t suffered from the pandemic, the shift to home and hybrid working has affected catering. Many companies in this sector are considering how to evolve by embracing technology.
In July, French food services group Sodexo acquired Foodee, a restaurant aggregator for businesses with changing workforces. Its services include an app that allows workers to click and collect local restaurant food from a designated point in their building.
Private equity still dominates M&A
Private equity’s (PE) appetite for facilities management continues to grow. In 2021, it accounted for 46% of deals, compared with 44% in 2020, significantly up from the five-year average of 29% in the 2015-2019 period. It has been particularly active in fire and security, attracted by the growth opportunities highlighted above.
PE’s eagerness to invest, unprecedented capital supply and access to cheap debt have driven up valuations, in some cases out pricing trade buyers.
Cross-border activity hops the pond
Around a fifth (22%) of UK deals involved international buyers. This marks a return to pre-COVID-19 levels of international activity. International interest dipped during 2020 when travel restrictions prevented international buyers from travelling to the UK.
In 2021, there was increased activity from US buyers, which were responsible for 36% of cross-border deals, compared with eight percent in 2020 and five percent in 2019. They are telling us that the UK is more attractive now that it is free from EU regulation, while still remaining a strategic stepping stone to mainland Europe. US buyers are also looking for non-domestic deals amid concern about potential tax rises under the Biden administration.
Three key trends in facilities management
The year has got off to a strong start with our facilities management M&A team busier than ever. We expect to see the following three trends in 2022.
1 Rise of proptech (property tech)
As mentioned earlier, we expect certain parts of the facilities management market to move from labour-led to technology-led models. This approach isn’t limited to fire and security but all areas of building management.
In Q4, PE house Sun Capital Partners acquired Bellrock, which uses technology to deliver improved compliance, lower costs and increased quality. The investment will enable Bellrock to continue its focus on disruptive technologies such as advanced automation and data analytics.
2 Environmental, social and governance (ESG) and renewable energy
The second half of 2021 saw the COP26 climate conference and the publication of the UK government’s net zero strategy. Buildings are responsible for 23% of UK greenhouse emissions, according to the Climate Change Committee. Facilities management services that can help estate managers reduce emissions and switch to renewable energy alternatives will be expected to play a major role in achieving the new decarbonisation targets.
In Q2, PE-backed Albireo Energy, an international energy services and building automation provider, acquired Chartwell Controls, a design, engineering and installation group specialising in through-life provision of building energy management systems (BeMS). We advised on the cross-border deal, which gives the newly merged company the scale and reach to help estate managers respond to new government regulations and increasing energy costs.
3 More specialisation by consolidators
Historically, there was a trend for the creation of end-to-end facilities management groups. The pandemic has prompted companies to examine their core competencies and divest non-essential divisions. In the same vein, consolidators have moved away from the goal of total facilities management (TFM) towards specialisms in either hard or soft services.
Bidvest Noonan, one of the most active acquirers of 2021, is focused on cleaning and security. Its deals for the year include security and cleaning firms Axis (which we advised on) and Cordant Services, as well as cleaning firm Amber Support Services.
A winning formula for 2022
Throughout the pandemic, facilities management M&A has successfully ridden the storm and we expect it to do the same in 2022. The winners this year will be those that take advantage of the sector’s strong tailwinds while still observing the fundamentals of good dealmaking.
The use of contractors is common across the facilities management (FM) sector so it was especially concerned by the additional administration and complication required by the new rules. In April 2021 HMRC promised a light touch for the first twelve months of IR35, but we’re now seeing compliance reviews initiated across the market. And it looks likely that we'll start seeing more and more of these reviews in FM.
One problem for FM is apparent widespread misunderstanding of the questions asked in status assessments. Responses may be influenced by individual contractors and businesses often don’t have the capacity or capability to understand the nuances required themselves. For FM businesses, this specifically includes areas such as whether the worker funds costs before being paid, or if there’s insufficient provision of own equipment and vehicles for business use. Inaccurate answers in any of these areas can generate incorrect results on employment status checks.
There's a fine line between getting an inside or outside IR35 result, or even an undetermined decision. It is often in contractors’ own interests to be considered genuinely self-employed and an inaccurate result is more likely when contractors are completing their own assessments with little or no checks being made by the engaging entity.
It’s important to ensure an accurate result because HMRC will always accept CEST’s determinations, providing they agree that the questions have been answered correctly and the facts can be supported.
It’s important to remember that businesses don’t have to use CEST. The only requirement is to show that 'reasonable care' is being taken to get the decisions right.
Getting your IR35 decisions right
The priority for end-users should be demonstrating reasonable care. The system you use may vary depending upon the nature of your business and number of contractors you engage. A robust system in the FM sector would normally include a process to identify contractors during procurement – reviewed by individuals who understand the legislation and fully documented to support status decisions based on correct and verified information. And as with any system, the process should be tested regularly.
For more insight and guidance on IR35 in facilities management get in touch with Jonathan Berger.