When Lincolnshire Management’s TJ Maloney sees an opportunity, he moves quickly.
The middle market private equity firm announced a trio of acquisitions last fall, acquiring Powerhouse, a facility services provider, and two security businesses in the span of a few weeks. The strategic vision is to leverage the Powerhouse’s asset-light business model as a platform for outsourced facilities services.
An asset-light business model is one where the underlying operations of the industry have been split into “market-focused” and “capital intensive” businesses (which are separated). By focusing on technology and customer service, Powerhouse has built a highly flexible platform that enables it to pivot and scale service offerings in response to disruptions in its markets.
As the industry navigates the uncertainties of 2020, this asset-light approach is showing its merits.
The Virtues of an Asset Light Business Model
To illustrate the implications of an asset-light business model, we’re going to look at an example from the trucking industry. The traditional “regulated” trucking business had two core activities: selling loads and managing the trucking fleet. Deregulation in the 1980s allowed this industry to be split into an asset-light portion (freight brokerage) and various fleet operators.
These two businesses have different investment profiles. Freight brokerage requires minimal capital for growth; the physical assets of the business are a phone bank, IT systems, and customer receivables. Compare that with the high fixed cost requirements of operating a trucking fleet or being an independent owner-operator, either of which requires you to buy trucks or commit to long term leases.
A successful freight broker has a high return on capital and minimal debt, which accelerates with growth. Trucking fleets and owner-operators earn a lower return on capital, which is usually leveraged up with debt.
A similar pattern exists in building services. The project management layer of the building services industry plays a similar role as a freight broker, using relationships, processes, and market insights to create value. Service contractors require investments in specialized expertise, licensing, and equipment.
Growth and Resiliency Advantages
The difference in operating structure has another implication: strategic agility. Continuing our freight example, freight brokers have proven to be exceptionally agile in navigating regional downturns. The same outbound customer phone call can be redirected to another area code, with minimal changes. In contrast, a trucking fleet must maintain a certain level of utilization to support their debt service – and their unionized drivers would prefer to remain within a reasonable distance of home. Regional trucking firms struggle with economic shifts.
The brokerage business model proved easy to scale and diversify, through roll-up acquisitions and investing in adjacent services. Smaller freight brokerage firms, operating with less sophisticated systems, could be easily acquired and integrated onto a single platform. Customers, already trusting you with their path to market, were often receptive to buying related offerings such as international freight forwarding and warehousing management. Many freight brokers grew into fully integrated 3 PL (third party logistics) providers.
Freight brokerage proved to be a highly capital efficient platform capable of rapid growth. Between 2000 and 2017 the share of the US freight market managed by freight brokers climbed from 4% to 19%, according to a leading US freight broker, CH Robinson and Armstrong Associates, a logistics market research firm. This includes steady share growth through the Great Recession. Publicly held freight brokers such as Echo, XPO, and CH Robinson have delivered impressive returns over the past decade.
As we will see in a moment, many similar opportunities exist in building services.
How This Applies to Powerhouse
Taking a closer look at Lincolnshire’s new investment, Powerhouse is a national provider of the refresh, remodel, and facilities maintenance services. They simplify the process of managing these operations for large corporate customers, particularly those challenged with managing large scale, multi-site projects.
The Powerhouse business model is oriented around using technology to connect large corporate clients with a network of over 10,000 local subcontractors tasked with implementing the project. Since delivering these projects depends on contributions from a diverse array of specialized subcontractors, Powerhouse has invested heavily in technology systems to simplify the program management process. This includes a cloud-based facilities management platform (Atlas), worksite photo survey systems, and collaborative project management software. These tools give clients visibility and control over the work.
This is an asset-light business model in the sense that Powerhouse focuses on managing the customer relationship and provider network instead of delivering services themselves. This gives them agility, in the sense they can rapidly pivot their mix of services to support what their customers require. They’re not locked into selling work for a specialized workforce like other building services contractors. Given the disruptions occurring in retail and other business sectors, this is a key operating advantage.
Building Strategic Agility
Similar to the freight brokerage example, the model is also easy to scale with new services and customer relationships. Lincolnshire announced two immediate related acquisitions, focused on building security and financial services infrastructure. Security Vault Works is the nation’s largest provider of self-service kiosks and ATM machines for financial institutions. They serve 4 of the top 5 financial institutions, have partnerships with ATM OEM’s, and are expanding their presence in food services. The other acquisition, One Source Security and Sound, offers financial institutions a bundle of services supporting branch construction, remodeling, and operations. There’s a cross-sell opportunity between all three businesses.
They can quickly pivot to address new opportunities as well. Faced with exploding demand for hygiene and deep cleaning services as a result of Covid-19, Powerhouse used their platform to quickly scale and promote a relevant offering to its customer base.
While there’s plenty of uncertainty in the market, there are also many opportunities for savvy operators.
It’s becoming clear that controlling the spread of Covid-19 will reshape the near term role of office, retail, food service, and financial buildings. These changes will prompt remodeling and refurbishment projects, funded by either the current tenant or landlords seeking to refill a vacant space.
Supported by Lincolnshire Management’s team, this is Powerhouse’s moment to shine….