In the realm of private equity investment, the fire safety market may not possess the glamour or allure often associated with cutting-edge technologies like AI and ML. You won’t find flashy buzzwords or high-profile tech launches dominating headlines. However, the sector exhibits several attractive qualities which provide the ideal conditions for a private equity buy-and-build opportunity.
In this article we will highlight what makes this market an attractive hunting ground for private equity investors and what makes a potential acquisition target attractive.
What do we mean by fire safety?
The fire safety market can be broadly segmented into three key product/service areas. The first is the active fire safety market, which involves the use of equipment to actively suppress and/or combat fires. This includes smoke alarms, fire extinguishers, and sprinkler and suppression systems. The second segment is the passive fire safety market, which encompasses the less visible but equally critical elements, such as fire doors, ducts, fire-resistant glass, and compartmentation. These products ensure that fire doesn’t spread uncontrollably. The final segment could be classified as ‘organisational’ fire safety, and includes emergency lighting, fire plans, fire risk assessments and fire safety training.
Why is it an attractive sector?
Size and Fragmentation
The total size of the UK’s fire safety market is worth several billions of pounds annually, and includes a wide range of companies spanning from one-man-bands to industry behemoths like Chubb and Johnson Controls. In total there are more than 2,500 companies active in this market. This large but highly fragmented market provides opportunities for consolidation through buy-and-build strategies. Examples of buy-and-build strategies are Churches (Horizon Capital), CWS Fire Safety (Haniel), EA-RS (Rockpool), Fire Holding (DBAG), London Security, Marlowe Fire & Security (Marlowe Plc), Obsequio (Beech Tree), Presto (Adelis Equity), Spy Alarms (Phoenix), Walker Fire and Writech (Waterland). Other UK-based PE-backed fire safety businesses include ABCA (Trimountain Partners), Alpine Fire (Westbridge), BB7 (BGF), BWS Standfast (Sonmarg Capital), Checkmate Fire (YFM), Fieldway (Foresight), RGE Services (YFM), Senseco (Foundation Investment Partners), TIS (Key Capital Partners), Triangle (BGF), and Trinity (Warburg Pincus and Macquarie).
In terms of market maturity, the fire safety sector is characterized by consistent, albeit modest, annual growth rates. Our work in the sector suggests that the market is likely going to grow at 4%-5% p.a. over the next three to four years. What distinguishes this sector is its robust resilience, especially in economic downturns.
The enduring stability of the fire safety market can be attributed to the recurrent maintenance demands placed upon fire safety components, many of which hold life-critical significance. Regardless of economic fluctuations, landlords and property owners consistently allocate resources to ensure the upkeep of these essential safety measures.
The segment of the market which is more affected by broader economic downturns is product installation, intrinsically tied to the cyclical new build construction sector. Nevertheless, it’s vital to note that the predominant share of the sector’s revenue and profitability is generated in the dependable maintenance sector (e.g. scheduled maintenance, small works and call-outs).
Market Drivers (Legislation)
The Grenfell fire in 2017 has led to a transformation within the industry, with far-reaching implications expected to drive further growth in the years to come.
A series of pivotal fire safety reforms have emerged, driving increased expenditure on fire safety. Notably, Building Regulations now mandate the installation of sprinkler systems in all new constructions exceeding 11 meters in height. Furthermore, the newly enacted Fire Safety Regulations, effective since January 2023, impose rigorous standards. For buildings surpassing 11 meters, fire doors must undergo quarterly inspections, while structures exceeding 18 meters are subject to monthly checks of detection and suppression systems. These legislative changes not only fortify safety protocols but also generate substantial demand within the fire safety market. Our table below highlights the key legislative changes which have been enacted post-Grenfell.
Figure 1: Key Legislative Changes Enacted after the Grenfell Fire
Market Drivers (Attitudes)
Grenfell has also been instrumental in reshaping perspectives surrounding fire safety, an effect which is still sustained despite it being several years since the tragedy. The catastrophe has spurred a profound shift in attitudes, prompting landlords and stakeholders to allocate significantly larger budgets toward safeguarding their residents beyond what is required from a legislative perspective. For example, Building Regulations now mandate the installation of sprinkler systems in all new constructions exceeding 11 meters in height. However, some landlords are now proactively retrofitting sprinkler systems, despite no legislative mandate to do so. Similarly, social landlords are upgrading their fire detection and alarm systems to LD1 (the highest standard) despite the standards recommending a Level 2 system. Overall, discussions with market participants have highlighted that there is a heightened awareness around fire safety post-Grenfell and while changes in legislation have prompted spend increases, landlords are spending above what is required from a legislative perspective to ensure the safety of residents.
What are the characteristics of an attractive target?
Maintenance services (e.g. scheduled maintenance, small works, call-outs etc.) are typically more profitable than installation services. They are also recurring in nature, whereas installation is largely one-off. An appealing acquisition target within this sector should ideally derive a significant percentage of its revenue from maintenance services. This strategic focus ensures a steady stream of recurring income. Additionally, possessing installation capabilities can prove advantageous, serving as a practical lead-generation mechanism for maintenance services, thereby bolstering long-term profitability.
Active fire safety has several advantages over passive fire safety. With the exception of fire doors, there is little opportunity for scheduled maintenance in passive fire safety. Furthermore, passive fire safety is more exposed to the cyclical new build construction sector. Within active fire safety, alarms and extinguishers have a higher proportion of revenue generated through recurring maintenance services than sprinklers. Sprinkler installation projects can range in terms of profitability and can, in some cases, be loss-making. Nevertheless, due to the cross-sell potential, a comprehensive suite of active fire safety services, coupled with fire door maintenance, is a compelling value proposition. Furthermore, diversification into electronic security services aligns well with this strategic vision. Not only does it tap into cross-sell potential between the two service lines, but it also unlocks opportunities for delivering high-margin and recurring monitoring services to customers.
Since legislation specifies that all buildings require some degree of fire protection, most fire safety companies have a diverse mix of clients from a wide range of end-sectors.
However, there are specific end-sectors which are more attractive than others. For instance, the data centre market is an exceptionally attractive sector, characterized by robust growth and an inherent demand for rigorous fire safety measures. It’s worth noting, however, that the intricate nature of data centre fire protection necessitates specialized expertise which not every company has.
Conversely, the landscape of high-street retail presents a somewhat less attractive proposition. The sector contends with cyclical ebbs and flows, compounded by the decline in some categories of traditional brick-and-mortar retail.
High performing companies in this sector should be targeting EBITDA margins of 20% plus. Profitability in the fire safety domain is intrinsically linked to the efficiency of technicians. Well-run companies invest in cutting-edge field service management software for optimal route planning and workforce scheduling, thus ensuring a high revenue per technician. Beyond this, they deploy sophisticated software solutions to streamline stock replenishment, driving improved first-time fix rates and enhancing technician productivity.
The ideal management team will have a track record of successfully acquiring and integrating other companies. Buy-and-build is the fastest route to growth in this fragmented, sticky and relatively low growth market.
Customer service and responsiveness form the bedrock of client satisfaction. The ability to swiftly connect with the right individuals and resolve issues in a timely manner remains a central theme in the industry. Poor service is often the main reason for churn in this otherwise sticky industry, where gross value churn rates at well-run companies should be in the single-digits.
Navigating the labour shortages plaguing the industry necessitates a robust model for technician recruitment, training, and retention. Keeping involuntary employee churn rates low, through competitive salaries and by providing opportunities for learning and development is a key factor in scaling a fire safety business. Furthermore, companies that reduce reliance on contractors ensure a consistent level of service delivery, although contractor use can keep fixed costs lower if installation project revenue ebbs and flows.
In the realm of accreditations, the British Approvals for Fire Equipment (BAFE) certification is the essential prerequisite. Any appealing acquisition target should boast BAFE certification for at least one service, affirming its adherence to rigorous industry standards.
Fairgrove has extensive experience in the fire safety sector advising clients through the provision of commercial due diligence and growth strategy services both in the UK and Europe. If you would like to learn more about the fire safety sector and Fairgrove’s experience please reach out to Paddy Woods Ballard, Oli Lestner or Jonathan Jacoby.