For the last two decades, private equity has been a part of the pool and spa industry.
These outside investors have backed companies such as manufacturers Latham Pool Products and national retailer Leslie’s Pool Supply for years. It’s no coincidence these major players have grown at a fairly rapid rate, say observers and companies that have worked with private equity.
In the days of the housing bubble, more private equity firms entered the pool/spa space. Even builders got involved, with three of the nation’s largest selling to these backers. But with the Great Recession, those particular relationships ended, and private equity became more timid in general.
But industry observers see private equity firms taking a greater interest again, with the highest-profile example being last year’s purchase of Hayward Pool Products by a trio of private-equity investors.
Those who’ve worked with these types of investors expect these partnerships to be even better, as both the pool/spa and private equity industries have evolved over the last several years. And some see this trend not only as a promising opportunity for manufacturers, franchises and large builders and retailers, but also as validation for the entire industry and the market space it occupies.
Private equity is said to be busting at the seams right now.
Globally, this sector broke records last year when it raised $453 billion, leaving these investors with more than $1 trillion to spend, according to industry tracker Prequin. Right now, this type of investment promises greater returns than the stock market, since a thriving stock market means higher buy-in costs. All this spells greater competition among private-equity investors and higher purchase prices, according to Reuters.
And just as money has become more plentiful for private equity firms, the pool industry has become more attractive to it. The high consolidation rates among manufacturers over the last two decades means these companies generate more revenue, helping them fall within the earnings windows that these investors seek out, which generally start at the $5 million to $10 million mark, observers say.
And pool companies offer some nice perks that private equity investors have come to appreciate, says David Nibler, vice president and general manager with Big Three manufacturer Zodiac Pool Systems. The Vista-based company recently went public as part of a merger with Spanish manufacturer/distributor Fluidra. But before that, it was owned by private equity.
“We have a long product lifecycle,” he says. “The same products continue to sell for 30 years, which means that if you invest in quality and really make your product robust, it pays back for 30 years,” he says. “This is unlike the most recent cell phone, where you get about two to three years of production, and you’d better get all your money back because it’s not going to be around in the third year.”
Consumers also sign on for the long haul: Once you buy a pool, you’ve made a commitment. And the products cater to consumers on the higher end of the earning spectrum. This all makes for a stable customer base that investors like, Nibler says: “I think they looked at us through that lens and said, ‘Wow, that’s a pretty financially attractive industry.’”
And these investment firms take notice of other deals, so the recent acquisitions have helped put the industry on the radar. That’s why companies such as retail and service franchiser Poolwerx are often approached by private equity firms looking to invest. “What we’re seeing is a lot of other firms looking over the fence, saying, ‘What are these guys doing? We should maybe pay more attention to this, because these are pretty big deals,’” says Troy Hazard, non-executive director of Poolwerx, the Australian company with U.S. headquarters in Dallas. “And they give us the opportunity to leverage, and they maybe had not realized that in the past.”
There was a time back in the early 2000s when some people questioned whether private equity made sense, especially when it comes to service, retail and builders. Some thought perhaps these partnerships wouldn't work because the investing entities didn’t know the pool/spa industry.
But private equity has evolved on that front, some say, by taking a closer look at potential investments. In his experience both inside and outside the pool/spa industry Hazard has observed this firsthand. Back in the day, when he was pitching for investments for technology firms, private equity firms took something of a speed-dating approach to meeting with potential portfolio additions.
“If I go back to the late 1990s pitching for money in Silicon Valley, you would have 15 minutes in front of a private equity firm — 12 of those you’re allowed to present, then three minutes worth of questions and answers,” Hazard says. “You can’t possibly have an intelligent conversation with a potential suitor in 15 minutes.”
Now, he says, both parties take more time to learn about each other. Single conversations can last a couple hours, and decisions generally aren’t made until after several meetings and layers of due diligence over the course of weeks. They want to know the company’s key players, objectives and long-term plans.
“They’re almost presenting to us as to how they can add value to what we already have such that we can really make a determination if they’re the right suitor for us or not,” Hazard says. “That’s exciting, because it can only lead to a better partnership and a more suitable marriage — you’re not getting married on a blind date.”
Additionally, others note that private-equity firms have become less aggressive about their return-on-investment expectations. Where they previously wanted to see ROIs of 20% or more, now expectations hover in the mid-teens. And they’ve become more likely than before to keep current management in place.
Buzz Ghiz, president of Paramount Pool and Spa Systems, in Chandler, Ariz., believes this bodes well for companies that work with private equity going forward. Not only was his company just purchased by private-equity-backed Hayward Pool Products, in 2004, he and his family sold their Phoenix-area building firm, Paddock Pools, to a private equity firm. The Great Recession hit just a few years later, which largely doomed that relationship, Ghiz says.
“I think that, with the due diligence coming from private equity and the wonderful industry we’re in, which is growing, they’re going to take a much different approach and look at it and better understand the feel of what goes on in our industry. I think we’re in a whole different world than we were back in 2004 and 2005.”
The right match
Companies that are purchased by private equity stand to gain not only the financial investment. Money only constitutes one reason that vinyl-liner- and fiberglass-pool producer Latham Pool Products has partnered with such firms for 17 years now.
“One aspect of private equity that I found attractive was the opportunity to work with successful folks who could bring experience and knowledge from other industries and apply those lessons to the swimming pool business,” says Mark Laven, chairman of the Latham, N.Y.-based firm. “I think private equity was able to help us do things that we might not otherwise have been able to do without trial and error, or at least [to do them] at a more rapid pace.”
It’s true that funding from private equity opens the door to acquisitions some companies otherwise couldn’t make, Laven says. But, in Latham’s case, the added expertise made it possible to accomplish this at a rapid pace: For a stretch, the manufacturer averaged a company a year, expanding its scope from a vinyl-liner-pool company to an all-around package-pool specialist.
“[The] private equity partners assisted in the due-diligence process or the financing or integration plans for these businesses,” Laven says. “The responsibility always fell to the management team to do the work, but doing the work is only half the challenge. Coming up with the right plan is equally important.”
But private equity isn’t for everybody. Some owners want the immediate exit not generally facilitated by this model. The acquired firm must face the pressure of meeting financial goals. Then there are the revenue minimums to qualify for most investors, which take the vast majority of builders, retailers and service firms out of contention.
Still, some expect the mere attention of private equity to benefit the entire industry, if indirectly. These investors may be more willing to fund improvements and developments of new technology, where family owners and publicly owned companies may be more risk-averse and tighter with the budget.
Also important, the attention of private equity firms will likely continue to increase the pool/spa industry’s visibility and credibility as a solid investment, putting all companies in a better position when they look to sell or seek loans.