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Partnering with Business Services Companies to Accelerate Growth

Sun Capital’s Business Services Team: Daniel Florian, Matthew Garff, Rossen Georgiev, Jonathan Jackson, Jason Fisk & Matthew Joblove

Over the past several years the Business Services sector has seen an increase in investment by private equity firms. In the U.S. alone, the sector is predicted to grow at a compound annual rate of 6% between 2022 and 2026. Though companies across the sector have faced a number of challenges, including labor shortages, rising input costs, and shifting supply chain dynamics, the steady growth of the sector, continued performance regardless of economic cycle, and the opportunity to improve efficiency and operations have all contributed to an uptick in dealmaking.

To find out more about what is driving Sun Capital’s interest in the sector and how they may be able to support the changing needs of founders, entrepreneurs and management teams of Business Services companies, we spoke with Sun Capital’s Business Services team:

Business Services is a broad sector, cutting across a wide variety of businesses. How does Sun Capital define business services and how do you narrow your focus?

Business Services is quite diverse and includes companies that might appear dissimilar—everything from business process outsourcing and health and safety to education, environmental, IT, facility, residential, and transportation and logistics. The common thread is that these are all businesses providing critical services to organizations or individuals, where people and specialized expertise are their biggest assets.

Sun Capital has been an investor in middle-market Business Services companies for many years, and today we focus on the following sub-sectors:

  • Residential: any do-it-for-me services provided to single family or multi-family residents. For example: air conditioning, heating, plumbing, pest, and roofing.
  • Commercial and Industrial: encompasses a broad range of services including commercial plumbing, facilities maintenance and repair, infrastructure, environmental remediation, and restoration/recovery.
  • Transportation and Logistics: such as trucking, warehousing, and shipping service that facilitate the movement of goods, as well as supply chain management.
  • Facility Services: both soft and hard services involving buildings and infrastructure, such as security, commercial landscaping, janitorial, and pest control.
  • Business Process Outsourcing (BPO): BPO is the business practice in which an organization contracts with an external/3rd party provider to perform an essential business function, such as legal, insurance, marketing, or compliance services.
  • Staffing: outsourced staffing solutions for short-term and long-term employee placements.

What are the market dynamics and notable trends that Sun Capital identifies within the Business Services industry?

The first dynamic is fragmentation. Despite a lot of recent deal activity, there remains a large universe of small, niche companies. This market fragmentation allows founders and management teams to accelerate their growth trajectory by pursing strategic M&A expansion.

There is also ample room for operational improvement. Because the majority of these companies are smaller, entrepreneurial-led organizations, there are numerous ways we can help them enhance their operations by bringing additional resources to the table and leveraging the knowledge, experience and expertise we have gained over nearly three decades. These operational improvements may include areas such as the professionalization of digital marketing or online customer acquisition, to drive additional revenue and streamline processes.

Geographic expansion is another strategy to accelerate growth and market penetration for business services organizations. This often requires strengthening the service model and expanding customer service capabilities so companies can evolve from serving smaller, more local and regional clients to serving larger, national accounts.

There are also particular business dynamics within each Business Services sub-sector.

Transportation and Logistics is a good example. Since the pandemic, the importance of the efficient movement of goods and services to the functioning of the global economy has skyrocketed. And even as we have emerged from COVID, we are continuing to see many opportunities for growth and consolidation among companies that specialize in the delivery of goods to end markets, such as the storage of inventory, warehousing, and supply chain technology. Two of our portfolio companies, Century Distribution Systems and TTSI, are good illustrations.

Century was acquired in 2021 through a corporate carve-out. They are a global provider of digital logistics solutions and freight forwarding that helps customers solve supply chain challenges, move goods more efficiently and optimize their spending. It is a great fit with our focus on defensible, mission-critical businesses, and aligns with our hand-on operational focus.

TTSI specializes in port drayage, which is the trucking of containers between ports/rail terminals and inland distribution points. This is an important link in the supply chain, but it has also historically been a highly fragmented business. Freight volumes have been at record highs, and we see that continuing for several years, so we viewed this as a great opportunity to help grow the organization through strategic add-on acquisitions, while professionalizing operations.

How is the Business Services segment changing and how is Sun Capital adapting?

Companies in the sector have faced many of the same challenges we have seen in other industries as we have emerged from the pandemic – labor shortages, supply chain bottlenecks and rising inflation to name a few. However, unlikely most other industries, Business Services companies tend to be less susceptible to economic cycles given their mission critical service offering.

Residential services is a prime example, where we have witnessed rapid growth over the last several years via do-it-for-me home repair, remodel and renovation. Americans are spending more than ever on maintaining, improving and servicing their homes and are likely to continue to do so regardless of the economic cycles, particularly for non-discretionary, break/fix services such as plumbing, HVAC, electrical and roofing.

Similarly, environmental remediation services are highly recession-resistant because they are often driven by corporate mandates and compliance with federal, state, and local regulations, rather than discretionary expenditures, which limits business interruption.

This stability allows business services companies to better manage near-term challenges by focusing on operational efficiencies and growth initiatives. Sun Capital helps its Business Services portfolio companies navigate operational improvements and growth acceleration by leveraging our in-house senior operating professionals and internal resources.

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