Ramstad: After Minnesota Rusco failure, private equity ownership is in the hot seat

Five to 10 times a week, private equity firms send emails to Claire Ferrara, owner and president of Standard Heating & Air Conditioning in Minneapolis, asking her to sell them the business started by her grandfather 95 years ago.

“It’s been that way probably about five or six years,” Ferrara said. “Many of them will be repeat offers, the same ones reaching back out. Yeah, it’s been prevalent for a long time.”

She has refused to sell because, at age 39, she sees a long future ahead for herself and the company. “I want Standard to be here for another 100 years,” she told me last week.

On top of that, she doesn’t believe a private equity owner can provide the same level of service as a local one.

“There are tradeoffs in any business situation,” she said. “The person I’m accountable to is the person right in front of me. It’s not someone from a different state or different region or different business. I believe that my employee and my customer really values that they can pick up the phone and talk to me.”

Our meeting just happened to be the day after news broke that a private equity owner shut down another venerable Twin Cities company in the adjacent business of home renovation: Minnesota Rusco, which, as its ubiquitous TV and radio jingles reminded us, had been around since 1955.

The Dallas company that bought Rusco three years ago, called Renovo Home Partners, shut down at least three other businesses last week. Renovo’s original private equity backer, Audax, formed the company in 2022 by combining home renovation firms in Albuquerque, N.M., New York’s Long Island, and suburban Washington, D.C. The debt used to form and expand Renovo is now held by a fund of BlackRock, the world’s largest asset manager.

When they’re good, they make their purchased businesses better. They create value by standardizing functions like accounting or by providing scale to the purchase of goods and services.

When they’re bad, you have a situation like Rusco, where the debt evidently overwhelmed the parent. And suddenly, businesses that survived various economic cycles go out of business, leaving customers and employees in the lurch.

This year, there’s been a downturn in the private equity sector as firms have struggled to raise capital, despite reaching out beyond their traditional investor base of institutions and wealthy individuals.

Nonetheless, companies like Standard are seeing more of their local competitors get bought up by private equity. The home service industry is ripe for private-equity-backed rollups because it is filled with independent contractors, many aging and looking to retire and some more interested in working a trade than running a business.

Standard for many years has been one of about a dozen contractor companies in the Twin Cities that are members of Nexstar Network, a 33-year-old organization that trains contractors and helps them develop business. Others include Aquarius Home Services, Bonfe and BWS Plumbing, Heating & Air Conditioning.

In recent years, Nexstar Network has struggled with the rise of private-equity ownership in the contractor space. The business has hundreds of members across the country who pay dues and have a vote in how it operates.

Even as private equity firms infused their acquisitions with capital and new ideas, putting pressure on the independents, they wanted their companies to remain in Nexstar to connect with the mom-and-pop owners who knew the business best.

This summer, Nexstar put a halt to the conflict by deciding to end membership for home services businesses owned by private equity. That amounts to nearly one-third of its members, who will exit by year-end.

Scadden said the private-equity-owned companies had different needs than Nexstar’s independent members. Starting a new offering just for PE-owned firms “wasn’t in alignment with our culture and our mission at this time,” he added.

Ferrara, who is serving as chair of Nexstar’s membership board this year, compared the decision to end membership for private-equity-owned firms to the one she makes every time she gets a buy-out offer.

As I listened to Ferrara and Scadden describe Nexstar’s role in the industry, it seemed a breakup with private-equity-backed contractors was inevitable because Nexstar is designed to help create the innovations and training the well-heeled investors claim to bring.

“Nexstar gathers information from the whole membership,” Ferrara said. “They figure out what’s working across the country, then help consolidate those ideas and teach us about them and help us solve problems.”

All without imposing a debt burden.