From the Desk of Ara Barikyan | Issue 04 | 20 October 2024

A Short one this week but quite an insightful one..

M&A Front Lines

• Mom, Dad please meet private equity

Thought Leadership

• Going off coal will sadly never happen, unless...

Mom, Dad please meet private equity

I recently read an article from the Wall Street Journal about how private equity is making waves in the HVAC and plumbing space. According to PitchBook, there have already been more than 800 deals in this area, with PE firms looking to roll up these mom-and-pop businesses into larger entities. The idea is to consolidate operations, cut down on costs by sharing a single back office, and scale up for growth. It’s definitely an interesting move, and PE is likely to see some decent returns here.

But let’s not get ahead of ourselves. While this strategy seems like a good idea on paper, the reality is a bit more complicated. These businesses are easy to get into—barriers to entry are basically nonexistent. That means new competitors can pop up pretty much overnight. When it comes to HVAC and plumbing, anyone with the skills and a truck can start their own company. So, where’s the lasting advantage? Here are a few that come to mind:

1. Bulk Buying Power (Economies of Scale)

• Consolidating a bunch of small businesses under one roof means you can buy supplies and equipment in bulk at lower prices. It also allows for a centralized back office to handle admin tasks like accounting, HR, and scheduling, which keeps overhead low. This is one of the few advantages that can help keep costs down and profit margins up over time.

2. All-in-One Service Experience (Cross-Selling Services)

• By rolling up companies in different service areas (e.g., HVAC, plumbing, electrical), there’s an opportunity to offer multiple services to the same customer base. A homeowner needing an HVAC repair might also need some plumbing work done, and bundling these services together makes the business more attractive. But let’s be honest—cross-selling is great, but it’s not a magic bullet. It only works if customers are open to the idea and your teams can actually deliver on all fronts.

3. Bigger Brand Presence

• When you combine a bunch of smaller players into one larger company, you get a more recognizable brand. This can help attract customers who want the reliability of a big name rather than a local one-man show. However, it’s not a guarantee—brand recognition in the trades doesn’t necessarily mean customers will flock to you over the guy who’s been fixing their AC for years.

4. Access to Capital for Growth

• With private equity backing, there’s more cash to fund expansion or buy out competitors. That’s something smaller, independent shops just can’t compete with. But again, capital alone isn’t enough to solve all the challenges in this industry. It takes more than just money to grow successfully.

5. Training and Workforce Development

• Scaling up allows for better training programs and career development opportunities for technicians, which can help attract and retain skilled workers. In an industry where finding qualified labor is tough, this can be a big plus. But let’s face it: skilled tradespeople are not interchangeable, and a fancy training program can only go so far if your competitors are also vying for the same talent pool.

The Big Question: Who’s the Buyer?

Here’s where things get tricky. While scaling up HVAC and plumbing businesses sounds great for growth, the exit strategy isn’t so clear-cut. These aren’t exactly businesses that attract strategic buyers like tech startups do. The natural buyer pool for a multi-regional HVAC and plumbing roll-up is limited. Sure, you could sell to another PE firm or attempt an IPO, but these options don’t come with guarantees.

And with barriers to entry so low, there’s always a risk that new competitors will spring up and undercut the bigger players. It’s going to be tough to maintain an edge in a market where the competition can multiply at any time.

Going off coal will sadly never happen, unless...

While scrolling through some recent data, I stumbled upon an eye-opening graph that challenges the conventional wisdom around energy transitions. In the history of humanity, with the exception of whale oil, we have never fully transitioned away from any energy source. Instead, we've consistently added to our energy mix, resulting in the highest-ever demand for oil, natural gas, coal, and even wood. Despite growing efforts to move toward renewable energy, the global demand for hydrocarbons is expected to continue growing due to population expansion, rising living standards, urbanization, and new sources of demand.

This reality paints a sobering picture for anyone who believes a complete transition away from fossil fuels is imminent. It is indeed an admirable goal—one that I, too, wish we could achieve sooner rather than later. But the challenge lies in the practicality of the shift. For a world increasingly powered by electricity, relying solely on solar and wind would be risky. These sources are inherently intermittent, making them unreliable for providing a consistent baseline of power. And when you’re talking about global power needs, that’s not something we can afford to gamble on.

The Secret to Sustainable Energy Transition

Replacing base load power isn’t as simple as just switching out one energy source for another. It needs to be cheaper per megawatt (MW) and, most importantly, it must be reliable. If we are truly committed to phasing out fossil fuels, then we need to face the fact that not all forms of energy are created equal.

That's where uranium comes into the picture. While it may sound controversial to some, nuclear power is arguably the only viable energy source that can offer both the economic and reliability advantages required for a large-scale transition. One kilogram of enriched uranium yields significantly more energy than fossil fuels, as shown in the data below. When compared to coal, natural gas, or even the most efficient petroleum, nuclear energy stands in a league of its own.

This graph clearly illustrates how 1 kg of uranium can generate vastly more energy than any traditional fuel sources. The difference is not just marginal; it's exponential.

Why We Can’t Rely Solely on Renewables

The problem with renewables like solar and wind is not their potential but their intermittency. The sun doesn't always shine, and the wind doesn't always blow. While battery technology has made leaps and bounds, it still isn't at a stage where it can store the vast amounts of energy needed for long periods. Without a reliable base load power supply, we run the risk of energy shortages—something that could have catastrophic effects on economies and living standards worldwide.

Navigating the Fine Line

As someone deeply invested in sustainable energy solutions, I understand that advocating for nuclear energy may not sit well with everyone. The word "nuclear" still conjures fears rooted in historic events. But it’s important to recognize that modern nuclear technology is vastly safer and more efficient than it was in the past. Furthermore, innovations such as Small Modular Reactors (SMRs) and advancements in waste management are making nuclear an even more attractive option for the future.

The key is to remain realistic while striving for sustainability. It's about balancing our hopes for a greener future with the reality of today's energy landscape. We should push for more solar farms and wind turbines, absolutely—but we should also invest in nuclear as a practical and long-term solution for base load power.

The world is indeed looking to move away from fossil fuels, and we may get there someday. But if we are to reach that point, our energy strategy cannot ignore the numbers. It’s time to embrace a mixed approach that combines renewables and nuclear to meet the world’s growing energy demands.

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