HVAC deals demonstrate private equity's appetite for add-ons

Robust private equity-backed transaction activity targeting the heating, ventilation and air conditioning market demonstrates that add-ons remain a key middle-market value-creation strategy even in a record-setting year for megadeals.

Private equity firms completed 32 add-on transactions targeting HVAC services providers globally this year through June 9, up 88% from 17 in the prior-year period, according to a midyear analysis by investment bank Capstone Partners LLC. Just over half of the 77 M&A transactions in the global HVAC services market during that period were backed either by private equity firms or their portfolio companies, the report added.

"Private equity firms love situations where they can buy a cornerstone company, a platform, and then build around that platform," said Alberto Sinesi, a director at PKF Investment Banking, which is monitoring the frothy HVAC M&A market in the US.

The need to maintain, repair and eventually replace essential heating and cooling systems drives steady growth for the HVAC sector, which in the US is a large and highly fragmented market divided between scores of businesses. Consolidating fragmented markets by buying a platform company and expanding its customer base or capabilities through add-on acquisitions is a tried-and-true private equity strategy.

"They could pursue different geographies, different service lines, different types of end markets. You name it," Sinesi said.

Value creation

The global HVAC market was worth estimated at $310.6 billion in 2024, with the US accounting for $88.9 billion of the total, according to Global Market Insights, a research and consulting firm.

The low barrier to entry in the HVAC industry has created numerous investment targets for private equity, said Eliot Kerlin Jr., a managing partner at middle-market private equity firm Broadwing Capital Management LLC. The firm is an investor in Upchurch Services LLC, a mechanical, electrical and plumbing services platform that offers commercial HVAC repair and maintenance.

"A lot of these companies started as family-owned or founder-owned businesses with a truck or a couple of trucks and grew from there," Kerlin said.

Many of those founders are approaching retirement without a clear succession plan, opening the door for private equity to make an offer, he added.

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Recurring revenues tied to predictable demand for HVAC repair and maintenance give good line of sight to future earnings, another plus for private equity acquirers. Investments in technology can make field technician more efficient, one approach to boosting value. Add-ons offer another path to value creation by creating economies of scale, expanding the business’ geographic reach and enhancing brand recognition.

"You start to have more of a network referral system, so you have higher return on marketing spend. That creates competitive barriers. And as you can brand and have that marketing spend, it then creates a positive revenue cycle to gain new customers," Kerlin said.

Growth can also mean expansion into new markets, with some commercial and industrial HVAC service providers finding new opportunities in logistics infrastructure and the massive data centers powering artificial intelligence.

"Data centers right now are top of mind," confirmed Kerlin.

Add-on activity

The add-on deals intended to grow private equity portfolio companies into industry power players "continue to be a key priority for PE investors in the US," KPMG noted in its third-quarter update on global private equity activity. The firm estimated US add-on deal value was on pace this year to exceed 2024 and 2023 annual totals.

That is despite add-ons in some sectors, notably healthcare, drawing scrutiny from regulators.

The same factors driving private equity-backed consolidation of the HVAC market are influencing platform acquisitions and add-ons in a variety of industries, said Pete Witte, global private equity lead analyst for EY.

"Anything to do with the trades, car washes, pool cleaners — [businesses] where you've got stable customer bases, long-term visibility into the outlook for the business, strong recurring revenues. It just lends itself to that kind of activity," Witte said, adding that service-oriented industries also offer some shelter from the effects of tariffs and broader macroeconomic uncertainty.

While US tariff policy is putting pressure on HVAC equipment and component manufacturers who import parts and materials, HVAC service providers have mostly been spared, Sinesi said

"Tariffs have not really prevented private equity firms from making acquisitions in the HVAC space, and it is because a lot of the HVAC world is domestic in nature," Sinesi said.