PE Warms To Construction-Related Sectors

The housing market may be sending out mixed signals, but buyout shops appear focused mainly on the positive ones.

New housing starts in September beat August forecasts but still fell below year-ago levels. Meanwhile, the filing of new building permits—which anticipates housing starts in the coming months—fell below both the August forecast and the September 2008 numbers, according to data released Oct. 20 by the U.S. Census Bureau and the Department of Housing and Urban Development (see accompanying chart for more detail.)

Nevertheless, buyout firms of all sizes have become more comfortable with investments in the housing industry and the related building materials sector. “I think we’re definitely seeing things stabilizing,” said Neil Simpkins, a senior managing director who oversees investments in industrial services at The Blackstone Group, which this September announced an investment of as much as $780 million in Summit Materials, a new platform created to buy companies that make building materials, including asphalt. “Things could get worse in 2010, but I don’t think they’ll get much worse than 2009 and 2008.” Simpkins noted that Summit Materials products can be used in infrastructure-related work, which tends to be more stable in a downturn than residential and commerical building.

Among other recent deals in the sector, Black Eagle Partners and Building Industry Partners earlier this month launched US LBM Holdings LLC, a platform to consolidate building products companies. Last month, Harvest Partners LLC committed as much as $200 million toward a platform of companies that distributes supplies to the building materials sector, while H.I.G. Capital made a debt investment in Coachman Industries Inc., which makes modular homes and apartment buildings. In September, Industrial Opportunity Partners bought Carlson Systems Holdings Inc., a company that distributes staplers and nail guns used to build houses. And back in July, Wynnchurch Capital bought Sencorp, now known as Senco Brands, a company that makes tools used in home construction.

Mike Hogan, a managing director who oversees building products and industrial-related deals for Richmond, Va.-based advisory shop Harris Williams & Co., said he’s seen an uptick in deals since the end of summer. He is working on four or five building materials-related deals. The industry tends to be fragmented, with many small, family-owned companies ripe for consolidation, said Hogan, adding that owners of many of these companies have been waiting for the market to rebound before selling out. “So you have this backlog of businesses where people want some liquidity.”

Hogan added that he expects the housing market to soon return to high double-digit percentage growth, to keep pace with growing population.