A new report from Focus Advisors showed private equity firms have invested more than $9 billion in the collision repair industry in the last five months alone, despite interest rates that are significantly higher than even a year ago. Private equity now collectively manages more than $400 billion in assets within the industry.
One of those private equity firms is Kinderhook Industries, which in March announced it became the lead investor in Kaizen Collision Centers, in partnership with Jacob Tilzer and LNC Partners. Founded in 2013 by Tilzer and headquartered in Scottsdale, AZ, Kaizen has 48 locations across Arizona, Colorado, Southern California, Iowa, Nebraska and Nevada.
Kaizen is Kinderhook’s 30th automotive/light manufacturing platform investment. The firm's portfolio also includes Repairify, parent company of asTech, and Continental Auto Parts, an aftermarket collision parts distribution company headquartered in New Jersey.
Paul Cifelli, managing director at Kinderhook, said the firm was approached in summer 2023 by its lending partner, Twin Brook Capital Partners, about investing in Kaizen. Kinderhook already had experience in the collision repair industry; it previously owned ProCare Collision, growing it from eight to 45 stores in four years before selling it in 2021 to Classic Collision.
Cifelli said Kinderhook was interested because Kaizen had a good footprint in markets with strong demographic growth and a lot of remaining opportunity for consolidation. In addition, Vince Brock, a Kinderhook executive who had been CEO of ProCare when the firm owned it, was looking to get back in the collision repair game.
In general, Cifelli said private equity firms see collision repair as an industry with a "tried and true strategy" and a strong outlook.
"Places where you’ve got real strong organic tailwinds, coupled with opportunities for M&A [mergers and acquisitions] are good for private equity interest," Cifelli said.
Increasing severity and vehicle complexity are driving up the cost of repairs.
"Those will continue going up, so it will continue to be more and more expensive to repair, so you've got built-in inflation for the next few years at least," Cifelli said.
Firms interested in investing in collision repair shops are looking for great cycle times and CSI scores. If a shop has a list of DRPs, that can prove its ability to operate in that world.
"PE is really focused on operations, and having those scores that are important to insurance companies be above the averages," Cifelli said.
Geography is also key -- some markets have more population growth than others.
"I would tell someone starting a [collision repair] business to go somewhere like Texas or Florida, places people are moving to," Cifelli said. "That leads to congestion and traffic, which ultimately leads to collisions."
Other Recent Investments
In Focus Advisors' report, it said of the $9 billion invested in the last several months, the biggest chunk was $4.6 billion by Caliber Collision, which issued new debt to refinance existing debt and fund a significant dividend for current shareholders.
Crash Champions also refinanced a significant piece of its debt and brought in an additional equity investment, which it is using for more acquisitions.
The original private equity sponsors of VIVE Collision, Garnett Station Partners, sold to a larger private equity firm, Greenbriar Equity Group. Similarly, Center Oak Partners, original private equity sponsor of CollisionRight, sold the company to Summit Partners, a much larger private equity firm.
Classic Collision, after less than five years with New Mountain Capital, announced a recapitalization with new sponsor TPG Capital, the private equity arm of the $220 billion global asset management firm TPG.
The Investors
Focus Advisors said the private equity sponsors that have recently entered the industry or increased their positions have mostly replaced smaller firms. TPG Capital’s acquisition of Classic Collision introduced one of the world’s largest alternative investment funds to the industry.
Large firms see an opportunity to accelerate their growth as the availability and cost of their capital vastly exceeds smaller players and independent shops, Focus Advisors explained. Another reason is that increased revenues -- driven by higher labor rates and calibration -- have positively impacted EBITDA margins, making them more attractive to lenders and new investors. And there's also the ongoing attractiveness of arbitraging acquisitions. Buying strong single shops and small MSOs at five to seven times EBITDA while raising capital at valuations of 12 to 14 times allows this new capital to effectively leverage their superior capital into faster growth.
Early private equity investors take more risks when they acquire platforms and then add more MSOs and single shops. They are supporting management teams that may not have proven themselves in operating at a much larger scale or buying and integrating multiple targets in a shorter span of time. The playbook for these earlier investors is pretty much the same with a few variations.
As early investors succeed in launching platforms, their acquirers are buying with expectations the risks have been reduced. The predictability of cash flows has increased. The management teams are more proven. The costs of acquisitions and new locations are more stable and the direction of consolidation is more clear. And the very large private equity firms are able to write much larger checks -- in fact, they need to write larger checks given the size of their funds.
More Private Equity Investors Waiting in the Wings
Focus Advisors said it tracks more than 120 private equity firms that have examined the collision repair industry, and its team has had conversations with more than 100 of them over the past 12 months. Some are already well-informed; others are rapidly coming down the learning curve. Successful growth and exits by other PE firms are driving much of the interest.
For many of these prospective investors, the nuances of the industry often surprise them. There are substantially different challenges in collision repair from the more conventional strategies that have worked so well in other industries. Among those challenges is the fact third-party intermediaries -- insurance companies -- heavily impact the flows of business through DRPs. In addition, the skill sets needed to create profits reside in a technical workforce that has been in short supply for a generation.
With more than 80 MSOs with five or more shops that Focus Advisors has identified in its proprietary database, there is no shortage of candidate platform targets, depending upon the appetite of PE investors. While there are relatively few $30 million revenue platforms, there are many in the $15 million+ range. The true scarcity is management teams that are capable of rapid unit growth and attracting the skilled technicians required to staff their platforms.
Conclusions
Focus Advisors offered the following conclusions to its report:
More private equity firms will make initial investments. Focus Advisors expects the industry will see many new private equity firms entering the market in the next five years. Some will invest to build and flip. Others will buy and build for the longer term.
Independent MSOs will find attractive partners. Independent MSOs with strong management teams will continue to find willing capital partners at attractive values. Targets with a stable and growing base of technicians will attract more attention and higher values.
Exit opportunities with larger sponsors will increase. Well-developed private equity-sponsored platforms will continue to find large acquirers, either through consolidators growing by merger or very large private equity firms seeking to buy out early private equity investors.
Abby Andrews