Australia’s lower middle market is often touted as a bountiful hunting ground, where investors can readily source proprietary deals involving family-owned businesses. But as private equity increasingly seeks out essential services that are resilient to the stresses of geopolitics and technological disruption, competition has intensified.

Fortitude Investment Partners experienced this effect last month when its pursuit of nationwide laundry services supplier Richard Jay turned into an auction featuring multiple other private equity firms. Fortitude prevailed, taking a significant majority position in a management buyout near the top of its AUD 20m-AUD 30m (USD 14m-USD 21m) cheque size range.

It didn’t hurt that Nick Miller, a partner at the private equity firm, has a 25-year relationship with Dean Milner, the co-founder of Monash Advisory, which was retained to bring the asset to market. Proximity also helped: Fortitude is one of Australia’s few Brisbane-based GPs and keeps offices only 15km from Richard Jay headquarters.

Miller believes, however, that deal sourcing in the lower middle market is most importantly a matter of winning business owner trust. In this instance, that came through his longstanding role as a director at Orange Sky Australia, a Brisbane-based charity that provides mobile laundry services to homeless people and counts Richard Jay as a sponsor.

“In our part of the market, good custodianship is often the key criteria for anyone selecting a new investor in a business,” Miller said. “These assets are not just financial means for the existing owners. They’ve spent their whole life building it. They know the people. They want it to go to a good home.”

Fortitude has operated on a deal-by-deal basis since spinning out from the now-defunct listed alternative investment firm Blue Sky in 2019. Richard Jay represents the first investment from the firm’s debut blind pool fund, which reached a first close around AUD 130m last December on a AUD 200m target. Two LPs in the fund also participated as co-investors.

As part of the transaction, Fortitude acquired Symbio, a chemical manufacturer and distributor now part of Richard Jay.

Hidden gem

Richard Jay is a second-generation family business but by no means a fixer-upper. Much of the investment appeal stemmed from the industrial distribution business model, which benefits from a two-sided marketplace with entrenched customer relationships. In addition to chemicals distribution, operations include equipment installation, maintenance, and spare parts supply.

With suppliers such as laundry machine makers LG and Electrolux on one side and end-users like hospitals and prisons on the other, the growth thesis revolves around finding new ways to connect counterparties with meaningful, differentiated service offerings.

“These kinds of businesses are hidden gems and outperforming in their markets for a number of reasons,” Miller said. “We’re of the strong view that there’re a lot more people in the market who should be using these guys. The challenge is, how do we reach them?”

Aged care and education are among the biggest customer categories currently, but Fortitude sees significant scope to expand into new areas. This includes the laundromat segment, which is growing at 8% a year, or roughly twice as fast as Richard Jay’s other core industries. Discussions with several M&A targets are ongoing.

Diversification is also considered a strength in terms of individual clients. No company makes up more than 5% of revenue, which has climbed 20%-25% a year for the past three years, according to Miller. He added that earnings – currently in the low double-digit millions in local currency – were growing even faster.

It speaks to the private equity interest swirling around Australia’s lower middle market and the deceptively critical businesses therein. Reliable laundry services can be a surprisingly indispensable and regulated space. This is perhaps best demonstrated in healthcare facilities, where the quality of disinfectants is monitored and illness outbreaks raise the stakes on speedy washing turnarounds.

“Since we’ve invested, we’ve been approached by some of the larger investors in Australia, saying ‘We really like this space. Can we have a discussion at the right time?’” Miller said.

“We feel like there’s a strong exit universe there. It’s a resilient sector and a good business that can scale. To have people come over pretty much immediately and say they’re interested – it’s a good sign of things to come.”