• PE division monitored roofing sector for around 18 months
• Looking for roll-up targets with CAD 10m-CAD 100m in revenue
• Sponsors invested via its Fund III; vehicle around 25% deployed

A leaky roof must be repaired or replaced, no matter what. That basic tenet of life is what prompted Toronto-based Fengate Private Equity to establish CanPro Roofing Partners, a Canadian roofing platform.

“We like the fundamentals of the market itself,” Mohit Kansal, a managing director at the PE division, told Mergermarket. “It’s growing. It’s predictable. There is a clear replacement cycle [of] 20-25 years of a commercial roof.”

Fengate Private Equity, a division of Fengate Asset Management with over CAD 24bn (USD 17.4bn) in assets under management (AUM), is also attracted to the fragmentation of the sector with about 1,000 roofers across Canada, he noted.

After about 18 months of closely monitoring the sector, Fengate Private Equity announced on 16 July that it had formed CanPro and made its first add-on acquisition by investing in Montreal-based Toiture Perreault.

Toiture Perreault’s financial advisor, RBC Mid-Market M&A, reached out directly to Fengate, according to Kansal, who joined the PE division last September from Toronto-based mid-market sponsor Clairvest Group. “I believe we had chatted with RBC ahead of time,” he said. “We were on the list, so to speak.”

The formation of CanPro and the acquisition of Toiture Perreault were made through the Fengate Private Equity’s CAD 400m Fengate Private Equity Fund III, which is about a quarter deployed, Kansal said. LiUNA Pension Fund of Central and Eastern Canada (LPFCEC), a retirement fund established in 1972 that serves members of the Labourers’ International Union of North America across Ontario and Eastern Canada, is a key limited partner in the fund.

Roll-up strategy

Looking ahead, Fengate’s value creation plan will focus on M&A. It is seeking roll-up targets for CanPro that provide commercial roof work and replacement services to government institutions like K-12 school boards and hospital networks, as well as commercial and industrial property managers, Principal David Luder said in a joint interview. The strategy follows Fengate Private Equity’s overall thesis of investing in operating businesses that service into real assets.

CanPro is not interested in roofing companies that serve new construction, which are more cyclical, said Luder.

The platform is looking for founder-owned businesses with between CAD 10m and CAD 100m in revenue. Kansal views the ideal target as a ”quality roofer who has a good reputation in the market, values safety, has good customer relationships, [and] has a good team.”

The roll-up strategy will scout for potential targets across all major Canadian markets but will particularly focus on Ontario where Fengate’s real estate unit has a strong presence. “We have a lot of connections and know how,” said Kansal, adding that the platform hopes to make one or two roll-up acquisitions per year.

Investment tickets will likely be between CAD 25m and CAD 75m, in line with Fengate Private Equity’s overall investment strategy, Luder said, with Kansal adding that co-investment partners could be sought for larger tickets, though currently this is not part of the strategy.

CanPro is flexible about founders fully exiting their businesses once they sell or retaining an equity stake, but would ideally prefer them to roll over their equity.

“There’s going to be a founder who knows the business well, has relationships and can add value, and we actually think it could be a huge edge to have,” said Kansal.

Valuation multiples for Canadian roofing companies are consistent nationwide but differ by market focus. New construction firms typically fetch less than those offering recurring replacement services, Luder said.

With CanPro, Fengate Private Equity is replicating roll-up strategies it is already pursuing in Canada’s environmental and infrastructure services sector through Ottawa, Ontario-based Inflector Environmental Services and Mississauga, Ontario-based York1; and the burgeoning data center industry through Montreal-based eStruxture Data Centers – which is now handled by Fengate’s infrastructure unit, Luder said.

Fengate significantly increased its equity stake in eStruxture last June through a CAD 1.8bn continuation vehicle backed by Partners Group and Pantheon. Fengate rolled the stakes it held in the business through Fengate Infrastructure Fund III, Fengate Infrastructure Fund IV, and affiliated entities.

Fengate Private Equity is also deploying a roll-up strategy in the healthcare technology sector through a partnership with Delray Beach, Florida-based eMAX Health.

As for exit scenarios, Kansal said he doubts CanPro will gain enough scale to become an initial public offering candidate, but a sale to another PE firm or a bigger roofing company are viable options. “You’re even seeing some transactions recently where broader service firms are getting into roofing,” he added.

Stikeman Elliott advised Fengate in its deal with Toiture Perreault. BDO Canada provided quality-of-earnings and tax services.