By: Spencer P. Cavalier, CFA, ASA, Co-Head and John C. Duni, CFA, CPA, Vice President
­Downstream Energy & Convenience Retail Investment Banking Group

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Private equity funds have been active investors in the retail propane industry for many years. Based on our transactional M&A and capital advisory experience involving many private equity groups and family offices with private equity platforms (collectively, “private equity” or “PE”), we believe private equity interest in the industry will continue and has a strong probability of increasing. The purposes of this article are to (1) introduce the different types of private equity buyout platforms and explain why a certain type has a corporate imperative to invest capital ratably; (2) describe why PE has a penchant for industries like retail propane; (3) highlight current and historical notable PE investment activity in the industry; and (4) describe the broader residential services growth thesis that intrigues many PE investors and how retail propane is considered a gateway to other residential services customers.

Types of Private Equity Buyout Platforms and Their Corporate Imperative

Let’s start by defining four common private equity structures:
• Funded Sponsor: Traditional private equity firms that manage committed capital from primarily institutional and accredited investors. We include family offices in this group from the aspect of having committed capital from a wealthy family or group of families (i.e. a “multi-family office”). Funded sponsors are the primary focus of this article.
• Fundless Sponsor: Firms that do not have committed capital and raise capital on a deal-by-deal basis from a group of investors, also often institutional and accredited investors.
• Independent Sponsor: Similar to fundless sponsors, but their investor network is typically high net worth individuals and family offices who do not have their own established private equity platform.
• Search Funds: A private equity vehicle that is capitalized by investors to support entrepreneurs and/or operating executives in acquiring and managing a single business.

There are an estimated 4,500 private equity firms in the country today, and each has defined investment criteria. Traditional funded sponsors have limited partners who commit capital to be put to work via a dedicated fund with a life cycle of 5 to 7 years. Some family offices have PE platforms consistent with the 5-to-7-year investment realization, but many have more patient capital and harvesting timelines. Due to the expectations that accompany committed capital, there is a corporate imperative to put that capital to work in a ratable manner such that harvest timelines can be met. The following graph illustrates the estimated U.S. private equity committed but uninvested capital, a.k.a. “dry powder”, ready for investment.

                                   Source: Preqin

Why Private Equity is Attracted to the Retail Propane Industry

Private equity buyout platforms tend to favor industries and companies with certain characteristics. The following table lists some of these characteristics and the suitability of retail propane companies.

                                                (1) Source: PERC data; mm = millions

Notable Current and Select Historical Private Equity Investments in Retail Propane

The following table illustrates notable current private equity investment in the retail propane industry. In addition to the investments listed below, we have frequent discussions with many private equity buyout funds that are interested in learning more about the industry for potential investment.

Propane acquisitions by the private equity platforms noted in the table above, along with several other PE funds, have increased significantly in recent years. For all of the criteria listed on page 2, retail propane has been an attractive industry for PE firms looking to establish a growth platform. Furthermore, the publicly traded propane “majors” have been far less acquisitive over the past several years, as they have shifted their near-term focus to internal initiatives and operational improvements. Private equity firms and PE-backed platforms have played a key role in filling the void left by the large consolidators and have continued to drive M&A activity in the industry.

The Residential Services Growth Thesis Leveraging the Retail Propane Customer Base

The route-based service model and local market cultural bias of retail propane companies provide a natural platform to provide additional, essential residential services offerings. Supplying propane is a personal utility that is highly serviced based and requires customer trust to provide and maintain that service. Other residential services can be built from a customer-confident service platform. Today, we see multiple retail propane companies leveraging their customer base to build these broader, essential service platforms. Services offered include the following:

                        Sources: Matrix research and third-party market analysis

The residential services sector is highly fragmented, comprised of many family and founder owned companies in multiple subsectors.  Many bankers and private equity investors view these subsectors to be in the beginning stage of consolidation, offering attractive return opportunities in any economic environment. Further, PE interest in the sector is heightened due to its stable, nondiscretionary demand drivers and recurring revenue nature.  Lastly, PE sees increasing growth as “do it for me” services are being required more by our aging population and favored by our younger generations who prioritize convenience and experiences.

                                   Source: PitchBook

Conclusion

We believe the retail propane industry will continue to be a coveted investment sector for PE into the future. In addition to positive PE criteria attributes inherent in the retail propane industry, there are many successful and proven executives available with whom PE can build a strong management team to run these investment holdings. The same criteria and operating executive presence exist in the residential services industry, which seems to be a natural complement to a retail propane platform. As usual, change is constant, and we look forward to continued involvement advising the leading companies in this evolving industry.

Disclaimer

The contents of this publication are presented for informational purposes only by Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”), and nothing contained herein is an offer to sell or a solicitation to purchase any of the securities discussed. While Matrix believes the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non‐infringement. Matrix assumes no responsibility for errors or omissions in this presentation or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.