Adam Sand and William Pauley explain why private equity is flooding the roofing industry. Roofing has predictable cash flow, a massive market, and barely needs assets to run. It survives recessions better than most businesses.
Why are private equity giants suddenly obsessed with roofing? It's not just the $100 billion market size, it's the predictable cash flow. I'm Adam Sand, CEO of the roofing business partner. Today, William Pauley, founder and managing director of Marcon Advisors, breaks down why roofing is the next gold mine for investors and why now is your moment to scale or get swallowed.
Why roofing is an attractive industry. Probably the number one criteria that drives private equity interest is the predictability of that industry, the revenue, the cash flow, all the above. Private equity uses debt to buy their businesses and they need to sell these businesses for more in the future than they bought them for today, which is how they make money. You need to really believe a few things. One, that business will produce earnings year in and year out, which is what pays the interest on the debt and pays down the debt over time. And two, the business will be around in five years. I know that sounds kind of silly, but not all businesses are built like that. So predictability is really king when private equity is looking at an industry or a company. Is roofing predictable? Because on a job level it isn't. You do a roof maybe once every 20 years, 15 years, it's just not predictable on a job level. But on industry level it is. Because when you back up far enough, let's say you have a million homes. Well, all those million homes are in different cycle of their roof life. Let's say they do it every 10 years, we'll say 20 years. It's an easier math. On a million homes, that means every year 50,000 homes need a new roof. So on a remodel, replacement, refurbish aspect, it is predictable on an industry level, but again, on a job specific, customer specific level, not predictable. What matters here is the industry is predictable. What about the other trends about how roofing stacks up? It's massive. It's like $100 million in revenue, plus or minus. You can probably get it bigger or smaller based on how you lump it in, but it's huge. I mean, this is probably the largest industry private equity has ever attacked. There is a massive install of homes and commercial buildings to maintain. When I say maintain, I mean it doesn't rely on new construction to thrive and drive this growth of 100 billion. It's just replacing and rehabbing existing install base that's out there. Roofs protect most people's most valuable asset. And in order to maintain the value of their most valuable asset, their home, their facility, their building, they need to take care of the roof. It is structurally mandatory and it maintains the value of what's inside. Increasing frequency and severity of natural disasters creates continual demand regardless of economic cycle. So it doesn't matter if this is the great recession, boom times, bust times. If people have their roof damaged by natural disasters, they need to get it replaced. And again, it's an important piece. So it doesn't matter about the economic times. A lot of people know this is a very asset like business model. You can generate a lot of cash this business. There's not a whole lot of assets. And I know we're thinking from the frame of reference of I'm buying trucks, buying equipment. But the other side of this business is they're thinking about this on an industry level. So think of like a manufacturing business where you have to invest in new expensive equipment every year, or even a heavier construction business where you're investing in much more expensive equipment on a regular basis. So from that perspective, this is a pretty asset light business model. Investors are already familiar with home services. Roll ups have been going on at H VAC plumbing, pest control. There are a lot going on. Basement foundation repair. They're familiar with home services and the drivers of those businesses. This is a very fragmented industry. That is another important component that makes it right for these buy and build place.
