In Florida’s residential property management industry, private equity firms acquiring property management companies is becoming a trend. But what exactly does that mean and how could it impact your association? Read on as we break down everything you need to know.
This article is not intended to and does not constitute legal advice or create an attorney-client relationship. Board members should consult their association’s attorney to discuss the legal implications of their decisions or actions prior to proceeding.
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Does your board know how to recognize the risks of private equity acquisitions? Download our infographic to help protect your community!
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What is a private equity?
As defined by Investopedia, a private equity is an investment class where firms raise capital to acquire and manage private companies or take public companies private, with the goal of ultimately selling them for a profit.
Why are private equity firms buying residential property management companies in Florida?
With the understanding of what private equity firms are, along with their intentions, why have they set their sights on the property management industry? There are several strategic and financial reasons.
Florida’s property management industry is fragmented
The property management industry is one that is still highly fragmented, with many smaller players that have small portfolios. This gives private equity firms an opportunity to acquire multiple smaller management companies, consolidate operations, and create a larger, more efficient organization with improved margins.
“What communities don’t realize is that when private equity owns multiple management companies, boards may think they’re evaluating competing bids when in reality, they’re often the same owner bidding against itself under different brand names, with no transparency for the community,” said Keith Sensabaugh, vice president of sales, FirstService Residential’s South Region.
Property management offers stable and recurring revenue
Property management companies often have long-term contracts with condominium and homeowners associations, something that private equity firms consider desirable. Along with those contracts come rent collection, association fees, and service charges that private equity firms see as a predictable cash flow which helps for debt servicing and valuation growth.
“The goal of private equity isn’t to serve communities long term. It’s to acquire companies, package them together, maximize margins, and sell them again. That’s fundamentally different from companies like FirstService Residential that helped build this industry, stayed local, and have been managing Florida communities from the very beginning,” Sensabaugh explained.
High margin potential through operational improvements
Many smaller property management companies run on outdated systems or inefficient processes because they don’t have the resources to improve them. Private equity firms see this as an opportunity to implement technology upgrades, centralize operations allowing for more streamlined processes, and find better vendor deals to boost profitability.
Real estate industry exposure
Acquiring a property management company offers private equity firms that opportunity to participate in the real estate market without having to own the properties which provides them with a lower capital risk. It’s a more asset-light model that scales well and generates high returns on invested capital.
Ample exit opportunities
For private equity firms, they aren’t getting into property management for the long haul. Once they’re satisfied with the way the company has grown and been optimized, they will take the opportunity to sell it, and they have a variety of options. For example, they may decide to sell the company to a larger private equity firm, a real estate investment trust (REIT), a public company, or maybe even through an IPO if large enough.
“Community associations are long term commitments, but private equity ownership is temporary by design. When decisions are driven by preparing a company for resale, service, stability, and institutional knowledge are often the first things compromised,” said Bradley Dickey, director at FirstService Residential.
The impact on community associations
When a Florida property management company gets acquired by a private equity firm, the impact won’t necessarily be immediate. A community might not even initially realize it happened if the name of their property management partner stays the same, and they maintain the same property manager.
However, because private equity firms are in the business of making a profit, the changes required to make the investment more profitable will come and some could be to the detriment of the community. Because at the end of the day, this acquisition is not a long-term investment, meaning the long-term health and success of the association is not their top priority whereas for board members that serve their community, it’s their main goal.
“When private equity gets involved, boards often don’t really know who they’re dealing with or what’s happening behind the scenes. Stability matters in community association management, and that’s what we provide: consistent service, proven models, and a long term commitment to the communities in our care,” said Sensabaugh.
For the investment in a property management company to be successful for the private equity firm, there will likely be a shift toward profit over service and that could manifest in different ways. Fewer on-site staff, less personalized service, and fee increases or hidden charges are just some of the strategies a private equity firm could use to cut costs and boost margins.
Brad added, “We’re seeing the same private equity playbook repeated across markets, acquire similar firms, standardize operations, and scale fast. For boards, the risk is assuming continuity, when the underlying priorities of the management company have fundamentally changed.”
Some changes that may initially feel like they could benefit a community, such as a new technology or systems could also have a negative impact. If the transition to new tech platforms isn’t managed properly and people aren’t appropriately trained to use them, something that is supposed to make community living easier could have the opposite effect.
What you can do as a board
Get educated.
You serve on the board of your Florida condominium or homeowners association to make a positive impact within your community. You’re expected to keep the best interests of the community at the forefront when making decisions, and you should expect that of your partner in property management, as well.
To avoid being blindsided by a private equity acquisition, it’s important to understand why it happens, and to recognize that while some of the changes that can come along with it may be beneficial, in most cases, the goals of the private equity firm and the board are not aligned.
Should your property management company get acquired by a private equity firm, know the red flags you should look for. Most importantly, ask questions. Should you suspect your property management company has been acquired and it hasn’t been communicated to you, simply ask. Should you have concerns about your contract, simply ask. Should you have questions about staffing changes, simply ask.
Recognize the risks of private equity acquisitions. To educate yourself and learn how your board can take a proactive approach in an acquisition, download our Private Equity Red Flags infographic here>
At any time, regardless of whether the management company you’re working with has been acquired by a private equity firm or not, you should feel comfortable enough to ask questions. Because as the governing body of your association, you hold the important task of maintaining your own and your neighbors’ greatest assets, your homes. You have every right to expect transparency from your property management partner and expect a certain level of service.
For more than 35 years, FirstService Residential has been Florida’s leading property management partner, serving communities from Miami, Broward, Palm Beach, Naples and Estero to Jacksonville and the Panhandle. Contact us today to learn how FirstService Residential can support your community.
Download the infographic today
Does your board know how to recognize the risks of private equity acquisitions? Download our infographic to help protect your community!
Download the infographic today