Pent-up demand for new homes, combined with low inventory, is leading to a big need for construction and building products, and private equity firms such as Clearlake Capital and Rotunda Capital Partners are showing keen interest – and closing recent deals – in the sector. Mergers & Acquisitions interviewed some of the key players, including Clearlake co-founder and managing partner José E. Feliciano.

“The U.S. housing market is expected to experience robust, sustained activity over the coming years, as the industry plays catch up to address a housing shortage after years of under-investment,” said Feliciano. “Clearlake identified this trend early on, when we co-created American Construction Source in 2018 through the acquisition of three leading regional [lumber and building materials] distributors, building a scaled platform with a national distribution footprint.”

The strategy paid off. Clearlake sold ACS to Bain Capital-backed US LBM in a deal that closed in July.

Clearlake continues to invest in the sector. Portfolio company PrimeSource Brands agreed to buy Wolf Home Products from Tenex Capital Management. Wolf is a designer and supplier of branded cabinetry, vanities, countertops, decking, and railing, among other residential building products.

Clearlake is far from alone. In June, PE firm Rotunda invested in American Equipment, Pacific Crane & Hoist and Allied Crane to form American Equipment Holdings. The three targets make and distribute cranes and hoists. Rotunda invests in businesses that are valued up to $150 million.

“Deal activity in this segment will continue to be strong for residential builders and related product suppliers who can show: diversity in their geographic markets; ability to off-site prefabricate products (to save on labor and improve quality); and high-quality management teams capable of sustaining growth into the future,” said James Rothenberger, a managing director at investment bank Meridian Capital, in an interview with Mergers & Acquisitions.

Building products and companies are attractive to buyers right now, but investing in the sector does not come without hurdles. Contractors are facing their own set of challenges, such as shortages in labor and materials supply. Rothenberger said he does not expect these issues to slow down M&A activity.

“While these supply chain issues have caused growth forecasts to come down slightly, the aforementioned M&A demand drivers are outweighing the impact of the reduced growth forecasts, causing enterprise valuations to continue to rise,” he pointed out. “Significant increases in the price for lumber, steel, glass, or wages has not been a ‘deal killer’, they have only been an area of increased due diligence and at times used to achieve small adjustments to final purchase prices. For the remainder of 2021 and at least the first half of 2022, we expect the M&A market for construction, engineering and building products companies to continue at a blazing pace.”