APi Group：规模化安全服务——[Business Breakdowns，第204期]

I’m Zack Fuss, and today we are breaking down APi Group, a leading provider of life-safety and specialty services to buildings and construction projects. While it’s not necessarily a household name, the services the company provides play a vital role in the buildings where we live and work.

What started as a small plumbing company in the 1960s has evolved into a global leader in fire protection, security, and building services. With more than 100 acquisitions under its belt, APi Group has strategically built a business that exceeds $1 billion in EBITDA and has a market cap exceeding $10 billion.

The evolution of the business has come via an intentional shift from one-off construction projects to a recurring-revenue model, generating a steady stream of income by providing essential services like inspections and maintenance of fire systems, elevators, security cameras, and more. Today, more than 55% of its revenue is recurring in nature, with a near-term target of exceeding 60%.

The business has enjoyed this success under the guidance of its CEO, Russ Becker, who has been with the company for more than 20 years. Russ started as president of one of APi Group’s subsidiaries in 1998 and has been leading the company since 2004. He eventually led the business through its debut on the public markets.

To help us break down APi Group, I’m joined by Adam Wyden and Chadd Garcia. Adam is the founder and portfolio manager of ADW Capital, and Chadd is a portfolio manager at Ariel Mutual Funds. Adam and Chadd will share their insights on the company’s competitive advantage and go-to-market strategy, including its unique decentralized management structure and strong culture.

We’ll also explore the pivotal role of Sir Martin Franklin, the renowned investor whose track record includes prior successes with public companies such as Jarden, Restaurant Brands International, Nomad Foods, and Element Solutions. Martin brought APi Group public via SPAC in 2019. We’ll discuss his involvement in the company’s strategic direction and his unique incentive structure, which aims to align his interests with those of its outside shareholders.

All right, Chadd and Adam, thank you so much for joining us to discuss APi Group, a business that came public via SPAC and has grown its EBITDA, I think, almost fourfold since. Just to kick things off, could you give a brief introduction to yourselves and how you got involved with this particular business and investment? Then we’ll dive deeper into the business from there. Perhaps, Adam, you could go first.

My background is that I launched my own investment partnership in 2011. We’ve done some activism, but I think over the course of our career, we’ve gravitated toward owner-operated companies.

I was invested in a company called Diamond Resorts, and the vice chairman of Diamond Resorts is actually the father-in-law of Martin Franklin’s son. He directed me to APi Group and said, “These guys are builders of businesses. They had great success at Jarden, and they were super excited about this opportunity.”

That started my interest, and I guess the rest is history. We’ve been invested since late 2019, and it’s been a great ride.

I work at Ariel Mutual Funds. I’m on our growth front and run our Focus Fund, which is a legally nondiversified mutual fund. We have around 15 positions in that fund, of which APi Group is one of the larger ones.

I was involved with 2 other Martin Franklin companies, Element Solutions and Nomad Foods, so I got to understand how he views things and how he runs the businesses that he takes private, brings back, and then eventually takes public.

When APi came out, I was a little late to it. I knew it came out, but I put it on the back burner. During COVID, I took a hard look at it and took a position in late 2020 or early 2021.

APi Group, at the most basic level, is this life-safety and services business. I think you guys will both give great perspective on the deeper aspects of the business and the culture, but perhaps just to kick things off, could you give a basic overview of what this business represents? Then we’ll come back to how it came public, the importance of the partnership with Martin Franklin and his team, and how the business is differentiated on a go-forward basis.

The business is broken down into 2 divisions. The first, and in my opinion the most interesting part of it, is the safety-services division.

The characteristics of this division are that it’s high in recurring revenue, high margin, and has low capital needs. The services that they provide are often statutorily mandated, so they’re doing inspections of critical systems in buildings.

Their activities include inspecting and servicing fire-protection systems, commercial plumbing and HVAC systems, fire alarms, closed-circuit security cameras, and access control. They recently added the servicing and maintenance of elevators and escalators, which should be pretty interesting for them and drive some nice cross-selling opportunities.

The industries they’re in are highly fragmented. If you look at fire safety, APi is the largest player, with perhaps 10% market share. There are a couple of public companies and a handful of private-equity firms, but for the most part, these businesses are family businesses.

If you look inside a typical one, they’re looking for a handful of large projects a year. These projects can run between $150,000 and $1 million. An example would be a building that gets built and a firm that installs the sprinkler system within that building. It would be a nice large project for them, and they might have 10, 15, or 20 of those a year.

Afterward, they would hand the business over to the owner. The owner would need to find a firm to do the statutorily mandated inspections. Those inspections would happen 1 to 4 times a year and would run $1,000 or $2,000 per inspection.

APi believes that every dollar spent on inspection leads to $2 to $4 in high-margin repair work. While most of the highly fragmented part of the business is focused on taking down large projects, APi’s focus is on completing a high number of inspection jobs that lead to high-margin, small projects.

The other division is specialty services. This is more construction-related installation and services, and it often serves critical parts of the infrastructure. Think about servicing and maintaining natural-gas distribution pipelines, installing fiber-optic cable, doing work on data centers, maintaining manufacturing plants, and installing wastewater lines.

The specialty business probably has deeper roots within APi. The company was founded as a plumbing company by Ruben Anderson and a partner in the early 1960s. Ruben’s son, Lee Anderson, joined the firm after graduating from West Point and serving in the Air Force.

They completed several acquisitions before 2000, mostly in ancillary construction services. Ultimately, they got into fire safety, and then they lived through the Global Financial Crisis and survived it. They really appreciated how much nicer it is to have recurring revenue than project-based revenue, so the focus after the financial crisis was to increase the percentage of recurring revenue throughout the business.

As a follow-up to that, what percentage of the business today is recurring or reoccurring in nature?

55% plus.

And on the conversion of a dollar into $2 to $4 of repair work, can you elaborate a little bit on that dynamic and how it works out?

I’ll give it to you from my perspective. I live in Southwest Florida, and we go through air conditioners quite a bit. Whenever I have to put in a new AC, it’s expensive, and I get multiple bids.

But when an APi serviceman comes and does routine maintenance twice a year, any little deficiency he finds—which they always do, and which probably runs $1,000 or $1,500—I just pay to have it fixed.

I think you have that dynamic with large buildings, too. If you’re going to install a half-million- or million-dollar system, you’re going to take a lot of bids and negotiate hard. But when somebody comes out and does the biannual inspection that they have to do, if they see a corroded pipe or a fire panel that doesn’t work, it gets fixed.

So, prior to coming public, I understand this business had done well over 100 acquisitions. You’re highlighting the financial profile of the business today, but what is APi Group? How big is it? What do the revenue base and profitability look like?

The business looks a lot different than it did when it went public. There were actually 3 divisions: specialty, an industrial segment that they merged with specialty as they were pruning assets, and the life-safety segment, which originally had the fire-safety business and HVAC. Most recently, they moved HVAC into specialty.

I look at it in terms of what the EBITDA contribution is. Obviously, the margins of each segment are a little bit different, but I think it’s safe to say that the business this year will probably make about $1.1 billion of EBITDA, maybe a little bit more.

The capex is funny because they buy and sell trucks and equipment, but we think net capex is about $65 million on a net basis—gross capex minus asset dispositions. You should think about it as $1.05 billion or more of EBITDA and about $800 million of free cash flow on a, call it, $10 billion market cap.

From an EBITDA-contribution basis, we think that most of the capex is actually on the specialty side. The capital requirements in safety are relatively low. It’s just buying trucks, small machine tools, and things like that. It’s not a super-capital-intensive business, which is what we like.

Over the life of APi Group, as they’ve continued to divest and close the more capital-intensive business lines and fire safety has become a larger percentage of the business, the capital intensity has come down materially.

On an EBITDA basis, I think it’s probably a 90/10 contribution, plus or minus, in 2025 between the life-safety segment—which would be fire alarms, security monitoring, and related services—and the specialty-services segment. The specialty business is more capital-intensive, but it’s in the telecom space, where they’re doing pipeline-integrity testing, and it has recurring revenue as well.

The business looks very different from when the company went public. Even over the last 5 years, there’s been a real emphasis on making the life-safety segment bigger through acquisitions. They bought Chubb, which was a carve-out of Carrier. They bought another business called S&S, and another business called Elevated Facility Services, which is in elevator-service maintenance.

They’ve basically sold or shut down other businesses in the specialty and industrial segments. Over the last 5 years, I think the asset transformation has accelerated meaningfully, and prospectively the company will continue to emphasize the low-capital-intensity, high-recurring-revenue parts of the business.

The way we look at it is that this is a business that trades at an 8% free-cash-flow yield, should grow organically roughly mid- to high-single digits, and should be able to continue acquiring small mom-and-pop or even medium-sized businesses at 5 to 7 times EBITDA.

It should also be able to acquire what I would call medium-sized businesses at, pick a number, 10 to 12 times EBITDA in the fire-alarm, security-monitoring, and elevator segments.

If you think about business quality here, obviously moving to a more recurring or recurring-in-nature business is paramount. I think they’ve done a great job since the SPAC combination in achieving that.

What is it that makes this a defensible, durable business? What are the drivers of organic growth?

It’s mostly volume, with some price and then product mix, and that’s at the safety-services division, where a lot of the organic growth is happening.

The safety business has a lot of project work from the Chubb acquisition. They found 55 or 60 branches at Chubb that were losing money, so they’ve been pruning a lot of contracts at Chubb to stem that. They’re down to maybe fewer than 10 money-losing branches at Chubb.

The organic growth has been hampered by their efforts to increase margins and get out of bad business. What you’re seeing in organic growth at APi is happening in the safety-services division, and this is really driven by growing their inspection revenue.

As of the third quarter of 2024, they had 17 quarters in a row of double-digit growth in inspection revenue. What’s behind that is the service-first culture, which is driving growth within their existing locations. They’re also getting a large benefit from converting acquired companies from being project-focused to being service-focused.

Let me give you an example of how they do this. There’s a company they talk about a bit when they’re speaking to investors. It’s a company they acquired in Boston that was led by 2 brothers. It was doing maybe $10.5 million a year in revenue via 20 or 30 large contracts and was making about a 7% EBITDA margin.

Years after APi acquired the business, the business got to $20 million in revenue, with 50% of that coming from inspections, and was making 14% EBITDA margins.

What did it take to make that change? First, before they closed the deal, they had to get a commitment from the entrepreneurs who were selling that they would be committed to a service-first business model.

After they acquired it, they needed to bring on a sales team to sell inspections. They needed to bring on inspectors to complete the inspections. They needed to put processes in place to create deficiency reports from the inspections and convert those reports into sales wins for repair business.

Finally, they needed to set the staff up so that, instead of working on a small amount of large projects, they could handle a large number of smaller repair jobs. That required a massive investment from APi in time and resources, but it also required a commitment to the service-first focus to the point where it becomes cultural within an organization.

When you’re evaluating public companies, so many management teams will talk about their culture and the importance of it. I know the CEO of the business has been there for decades, but it’s very difficult as an outsider to truly appreciate what differentiates a company’s culture.

What is it about this business that leads you to believe the culture is actually different—that they can acquire and integrate these companies and help improve them for the better through whatever the APi Group playbook is?

One of the unique characteristics of this business is that very early on, Lee Anderson created an ESOP so that employees participated in the growth of the business. Every year, I think the joke around town is that Lee’s secretary got almost $20 million from the ESOP when it converted into APi shares, or when the buyout happened.

One of the unique characteristics about this company is that, while it is a large corporate organization, there is somewhat of an entrepreneurial culture. Paul Brown’s family had an HVAC business, and they sold the business in the mid-2000s. Paul is now the chief learning officer.

What I think is super unique about this business is that when someone sells their business to APi Group, they have the opportunity to join the corporate leadership team if they can compete, deliver, and grow within the business.

Another super-interesting thing is that, because it has this decentralized business model and all these different businesses, they have what I would call a cross-functional leadership program.

You can go from being, for example, the controller of the company to becoming CFO, but if there isn’t a direct line to that position, you can go run a different business unit first. I think there are very few companies I’ve encountered in my life where a leader can go from one division to the next.

What makes it unique is, first, that you have this ownership culture. People are invested in the success of the company, and that started long before the company was even public. Second, there’s the ability to move between different roles in different divisions.

Ironically, we’re invested in a company called Parkland Technologies, and they’ve adapted a very similar structure. As you succeed in the business, if there’s not a role directly in front of you within your division, they’ll move you to the next one.

I think APi Group has fostered a culture of, “If you can run fast, we’re going to keep you moving.” That’s something very unique about the culture and why this thing works.

To that point around the importance of leadership and management structure, you’ve got what are related to Jarden, but also disparate businesses in fire safety, elevator services, HVAC, and specialty businesses. How do they manage all these seemingly different businesses to come together as one business unit?

Russ has been doing this for a long time because he’s been CEO for almost 2 decades. But it’s interesting to look at the Martin Franklin playbook, and maybe this is something he identified when he bought the business.

Jarden was a consumer-products conglomerate. It had a diversity of various products, geographic diversity, and business units run by general managers. I think the same applies to APi. You have a bunch of individual businesses, some in the same field and some related. You have geographic diversity, and they’re run by general managers on a decentralized basis.

In APi’s case, they have some guardrails in place with respect to how large of a contract or large project a general manager can commit to. If they’re entertaining a large project, they’ll have to get it approved by corporate. If it’s extremely large, it probably has to be approved by Russ himself.

Other than that, the general managers are responsible for their businesses. The company tracks the financials and KPIs of each business, and those are disseminated to all the business leaders on a monthly basis.

If you’re a recently acquired business and your percentage of service revenue is low, you can look and see who in the company has made that transition successfully. APi encourages its business managers to reach out to the ones who are successful, visit their businesses, and shadow those business leaders.

The ones who are successful can go into lower-performing businesses, audit them, and give them coaching. In the end, you have a decentralized business-management style with appropriate guardrails and a culture that’s conducive to improvement.

I’ll just add that the company established a group called the National Services Group, where they keep track of the different customers in different states.

Obviously, you have branch-level leadership, and from what I understand, each individual branch has its KPIs—whether it’s free cash flow, EBITDA, or return on invested capital—that come down from the mothership. They have branch P&L responsibility.

As the company shifted from project-level work to service-level work company-wide, there was this individual focus on each branch: “We’re trying to get from project to service within this branch. How can you do that within the confines of P&L responsibility?”

Above that, you have the National Services Group, which asks, “How can we zoom down to the individual branch and say, ‘We’re doing fire safety for Walmart,’ for example?” Walmart doesn’t pay well, but, for example, they might be doing Facebook data centers and building out a data center. Maybe that applies on the specialty side.

The National Service Group asks, “Can we go and sell the alarm system or the suppression system?” That’s what the group does. It tries to match customer relationships with the business branches, and that’s how the mothership helps with cross-selling.

When the company makes decisions about how it wants to position the business mix, those decisions come down from the mothership to the individual regional groups.

For example, Fire Pros, Per Mar Security, and Elmer’s are some of the groups. They’ll have a bunch of different businesses that roll up into them. On the specialty side, it’s the same thing. I think there’s LeJeune Steel and a couple of other companies.

The idea is that within these individual businesses, they roll up into a larger, generally regional group. The direction comes down from the mothership: “How do you want to do this?” That goes down to the branches, where the individual managers have their own P&L responsibility.

At the top level, for cross-selling, you have this corporate group that helps identify additional business opportunities because it can see what’s happening across all the different branches. That also plays into how capital allocation is addressed broadly within the business.

To illustrate that, perhaps we can go back to the business deal they consummated with Martin Franklin’s team back in 2019. It seems like Martin was able to bring this business together at a pretty attractive valuation. If you think about the upgrading of the business quality, clearly today the public markets demand a much higher multiple.

I’d love to hear about what you learned from Martin as he was thinking about bringing this business together, and what they’ve done with the management team at APi to grow the business from that point on.

What Martin has done very well is that he basically gets very good entry multiples based on what you would call capital needs or personal needs.

What happened with APi Group is that Lee Anderson had gotten sick twice, and there really wasn’t a succession plan. There was a great corporate team and leadership in Russ, but there wasn’t really a succession plan for Lee. I think he was very worried that his wife would be stuck dealing with the business and his ownership in it.

It was very important that there was a good capital allocator and steward of his business. They had run a process twice, and I think they had come close with a large-scale private-equity firm. I believe it was Carlyle.

The plan was that they were going to split up the businesses. They were going to sell the life-safety business to Blackstone, ironically, and Carlyle was going to do a dividend recapitalization of the lower-quality industrial businesses.

I think Lee Anderson didn’t like the sound of that, and I know Russ didn’t like the sound of that, so the deal died on the operating table when Lee figured out that the business was going to get carved up.

Martin came to the table and said, “No earn-outs, no rollover equity, no carve-out. We’re going to take over your company with modest leverage, and we’re basically going to invest capital behind what we think are the high-margin and growth segments.”

As it usually works, Martin and his team went up to Minnesota, and I think Russ and the rest of the company said, “We can work with these guys.” That was the genesis of the transaction.

To give you the history, they took the company public in September 2019. It got listed on the pink sheets, went through COVID, and the stock went down a lot. They bought back a little company and got uplisted to the New York Stock Exchange in May 2020.

They acquired a small business in Europe called SK FireSafety Group, which was in the fire-protection space, toward the end of 2020. Throughout 2021, they continued to do what I would call tuck-in M&A.

Then, obviously, they went for the big mega-deal at the end of 2021. They acquired Chubb Fire & Security, a carve-out from Carrier. They took on a bunch of debt at low interest rates and raised some common equity.

It obviously wasn’t necessarily a great time to buy a business in Europe, but they’ve done a phenomenal job with it. They’ve cut a ton of costs and gotten rid of a lot of unprofitable business. I would say they emerged from 2022 and 2023 pretty strong, with low leverage.

In 2024, they had a more accelerated tuck-in M&A program. I think they put about $300 million of capital to work in tuck-in M&A, and then they bought Elevate, their elevator-service and maintenance business.

I’d characterize 2024 as, “Let’s clean up the capital structure.” They got rid of the Blackstone preferred stock, raised common equity to buy Elevate, benefited from great cash conversion, and accelerated tuck-in M&A.

That gets us into 2025, where the business is arguably underlevered. I think, on my math—don’t quote me on this—they’ve had about $2.3 billion of debt, not including cash generation in the fourth quarter. Call it a couple of billion dollars of EBITDA. As I said before, EBITDA is probably over $1 billion, maybe around $1.1 billion or a little more.

That puts it squarely under 2 times debt to EBITDA. They’re going to generate, pick a number, about $800 million of free cash flow. Hopefully, they can deploy it. It will probably be hard to deploy $800 million in tuck-in M&A, but with their Chubb platform in Europe and Asia, plus the U.S., could they get to $300 million or $400 million? Sure.

They should be able to buy $50 million or $60 million of EBITDA through the tuck-in program. Then they will opportunistically buy other platforms as the businesses become more recurring-revenue-oriented and less project-oriented.

The argument would be that they can run the company with higher leverage, probably closer to 3 times. They’re probably looking to do another $500 million of what I would call medium-sized deals.

They would be interested in buying another platform. When I think about the other platforms that exist, I would think about U.S. alarm, monitoring, and security. In Europe, they have Chubb, which is more of an alarm-monitoring business. They don’t really have a huge security and monitoring business in the United States, and that’s obviously highly recurring revenue, low capital intensity, and high margins.

I would say a natural area, in addition to acquiring more elevator assets, would be the alarm and security-monitoring business. They may end up paying a little bit more to get control of one of those businesses and then do bolt-ons around that.

It’s a unique period of time for APi Group because a lot of the private-equity-backed peers have a lot of leverage. The hope is that they’re focusing on their balance sheets and managing their capital structures while APi has an underlevered balance sheet, good access to capital, and good cash generation.

Private equity has paid huge numbers for deals over the last year. I think KKR paid 22 times for a company called Marmi, which I think Russ would tell you is a piece of crap. We’re hoping—and maybe it’s just hope, maybe it’s just belief—but this is like a golden age for them because the private-equity guys are swimming in their adjustable-rate mortgages, so to speak.

As my grandfather used to say, “When chance meets opportunity,” they’re now in an enviable spot. Multiples should come down, there should be less competition for deals, and they’re well capitalized.

When you look at the way Martin Franklin participates in the upside, I know it’s somewhat atypical of what you normally see in some of these SPAC combinations. Martin has an incredible track record of value creation. Can you discuss how the structure works and how his incentives kick in?

He gets, quote-unquote, 20% upside on the founder shares. By design, as the company gets larger, the dilution gets smaller.

There were 140 million shares when it started. On the founder shares, as he executes, he gets a carry. If the stock goes from $10 to $20, there’s $10 of gain. In this extreme example, $10 times 140 million shares would be $1.4 billion, and 20% of that would be $280 million. Those shares get issued, and then the share count grows by that amount.

He only gets paid on the 140 million shares. The shares that get issued over time in connection with M&A are not subject to the promote. They did the Chubb deal and raised equity with Citigroup. They did Elevate and raised common equity. The Blackstone preferred stock got converted to common.

The idea is that the number of shares on which he gets paid goes down as the company gets larger. The shares that get issued to him are not subject to the promote. The shares issued in connection with transactions don’t get paid on. As time wears on, the quantum of dilution on a percentage basis goes down as the business gets larger.

No, absolutely. If I look at the fully diluted share count today, what percentage, broadly speaking, of the business does Martin own?

He gets paid on 140 million founder shares, but I think he has—again, I’m doing this from memory—ownership across everything of probably close to 30 million shares. I bucket Martin, Jim, and Ian all together. That’s what I would call the Mariposa team.

It’s worth pointing out that SPACs have a bad reputation because people have used them to take low-quality companies public and then dump shares on retail shareholders.

Martin uses SPACs as more permanent-capital vehicles. You pointed out that he has a great reputation at Jarden. He compounded shareholder capital at 34% a year over 16 years. But it hasn’t always been smooth at some of the other companies he has taken public via SPACs.

At Element Solutions, he got a little overextended on some acquisitions and did an acquisition with a lot of debt and preferred shares. It ended up being painful for common shareholders for a while, but he stuck with it. He didn’t dump it along the way. He stuck with it, turned it around, and ultimately got back above water for shareholders.

I appreciate why the recurring-revenue business is so strong. If you look at how organic growth has trended over the past quarters and years, clearly there’s an aspect of this business that has some cyclicality.

How do you think about the puts and takes on what is cyclical here and what is not? What is the exposure to different end markets, and what do you need to pay attention to as you continue to monitor growth in the business?

Organic growth has been the hot-button issue for the company over the last few years. In 2020 and 2021, you had a lot of inflation. When you think about the structure of many of the projects, especially on the life-safety side and, to some extent, on the specialty side, it allows for material-cost pass-through.

What you saw were very high rates of revenue growth, but not the same margin contribution. You saw 15% and 18% growth rates. Russ jokes, “Is it real revenue if it’s just material-cost pass-through and inflation?”

There was decent revenue growth in 2020 and 2021, and even in 2022. In 2023 and 2024, there was a greater emphasis on how to generate better cash generation and better margin and predictability.

You saw this on the HVAC side, you see it in the fire business, and on some level you’re seeing it on the specialty side. They’ll get out of the business if it’s not generating the right returns on capital.

Over the last couple of years, the big focus has been getting the right-margin project work and focusing the branches on getting inspections. When you get into a branch and sell an inspection, you see all the products that aren’t working.

That allows you to get what you would call service work, such as repairs. You come in and say, “The fire panel is broken,” and sell the customer a new fire panel. That’s the business that’s recurring in nature. Maybe it’s not contractual recurring revenue, but you come in and do what I would call the break-fix work, and it’s higher margin.

You’re dealing directly with the building rather than with a construction company. When you’re dealing with a project, what ends up happening is that the developer goes to a contractor. You’re dealing with a contractor who is trying to make money, so it’s more of a bid-out process, as opposed to dealing directly with the company.

Usually, you’re working with either the building owner or a property-management firm. You go in and get the inspection work. It’s a small share of wallet—$2,000 or $3,000, maybe less—and you’re dealing with that company.

Whether it’s the owner directly or the property-management company, they want to know that they’re dealing with the same person. You come in and sell them the inspection. They say, “These guys are competent. They know what they’re doing.” Then they say, “You need to repair this,” and it becomes a much more familiar and recurring relationship.

Over the last couple of years, the company has really been focused on getting to an inspection-first model and not wasting time and resources on project work. There is overlap in terms of the technicians between project and service, so when you devote too many resources to a project, those are resources that can’t be used elsewhere.

What I would say, and what Russ would say, is that this pruning, or recalibration, of the business mix has really taken place over the last couple of years, both on the M&A front and in terms of bidding and internal resource development.

I think that’s largely behind us. Unless you have another huge spike in inflation or deflation, we should return to more normal reported organic-revenue trends.

Russ has been with this business for almost 30 years. He’s seen the evolution from what was really a construction business and a local-services business to one that’s a global, fire- and safety-focused business with adjacent lines that are growing.

Can you talk about how the Chubb acquisition changed the profile of what they have here and how it enabled them to have a grassroots presence in other parts of the world?

Chubb is, on some levels, an atypical acquisition for APi Group. I think Russ would also tell you that, on some levels, it was about being in the fairway.

Chubb was a very neglected asset inside Carrier because it really had been part of United Technologies and was neglected inside United Technologies. They had a fire-extinguisher manufacturing business, and the whole fire segment inside UTC was scattered all over the place.

They stuffed it inside Carrier because they thought, “It doesn’t really go into Otis. It wasn’t an elevator business. It doesn’t really go into Raytheon, which is more of an aerospace business. Let’s just put it in Carrier. They’ll figure it out or sell it.”

It was definitely an orphaned, neglected asset. APi Group did have a European business, so they weren’t unfamiliar with the business. They bought SK, which is in the Benelux region, and they had a decent business in the U.K. It wasn’t as if they were totally foreign to it.

The thing about Chubb that I think is interesting is that it’s more of a route-based business. You put a technician in a van, and he goes and checks all these different things. It’s more route-based, and it has alarm and monitoring, which, as I said, is not a huge mix in the United States.

I think what Russ saw as an opportunity was, “There’s a lot of unprofitable business here, but we’ll get the pricing right, fire some customers, and get the route density right.” Once that gets where it needs to be, they can start doing tuck-in M&A in both Europe and Asia.

For what it’s worth, I don’t think there’s as much competition in Europe. Europe is big on regulations, and I think they look at it and say, “Europe is a highly regulated place, and there’s less competition for assets.”

Maybe they can execute, or will execute, on the same business opportunities in Europe that they execute on in the United States. Does that mean elevators? Does that mean water-related businesses? There’s less competition for assets, and that’s a good place to start.

If you look at the financial profile of the acquisition, I believe at the time they acquired the business, they bought it at a pretty healthy multiple, over 14 times EBITDA, pre-synergies. They found something like $100 million or $125 million plus of savings, taking EBITDA from $200 million to more than $300 million.

You spoke earlier about the profile of acquisitions on the larger side, which pay higher multiples, but can also be used as platforms for tuck-ins at lower multiples. How do you think about the juxtaposition of those 2 capital-allocation decisions?

I’m doing this from memory, but I think they paid $2.7 billion or $2.8 billion for Chubb. There was a working-capital component to it, and then, of course, they also had to put money into it to fund the restructuring because they had to spend a few hundred million dollars to get the synergies.

The way I think about it is that they paid roughly $3 billion for the company. Again, from memory, it was doing about $200 million of EBITDA. That was during COVID, on a lower number, so I think it was €2 billion or a little bit more in revenue, at a sub-10% margin.

The idea was that you’d get the business to at least €3 billion, so maybe you call that $3.5 billion over time, by getting the pricing right and coming off COVID. The idea would be that you get the business to around $3 billion or $3.2 billion in U.S. sales.

What they said publicly at the analyst day is that Chubb would be at 15% plus margins. The business would have the same—in fact, higher—gross margins at Chubb than at core APi Life Safety because of alarm and monitoring, which is very high margin. The alarm business can get 60% gross margins. It’s crazy.

They have higher gross margins, so it’s really just utilization and G&A that are needed to get there. Can Chubb get to a 20% EBITDA margin? It should be able to.

I think it will have structurally lower growth, just because Europe grows less. It will have good pricing, but it won’t have a ton of new units because Europe is rusty and old. The pricing should be good, so it probably grows more slowly than core APi Life Safety.

I don’t know if core APi Life Safety grows at 5%, 6%, 7%, or 8%. Maybe Chubb grows at 3% or 4%. It will be slower, but the idea is that if you can get the business to $3 billion in sales in a steady state, before you even consider organic compounding, and get it to a 15% margin, that’s $450 million of EBITDA. At 20%, it’s $600 million. Split the baby and call it $500 million.

Can this thing do $500 million of EBITDA? It should be able to. Did they pay $3 billion? Yes. It looks nice on a spreadsheet, but it’s not as easy as that. I think that was the underwriting case: Where else would we be able to deploy $3 billion and get that type of return?

They paid 14 times, or whatever it was, for Elevate. It was 13 times, and I think that business was going to do $50 million of EBITDA in 2024, so it should do about $60 million this year. They paid a pretty big number for that business.

They bought it because they wanted a platform against which they could do tuck-ins. In general, I look at it like buying an unoccupied building. If you can stabilize an unoccupied building, you can get it to a 12% or 15% cap rate unlevered, but you have to roll up your sleeves.

I think that’s exactly what Chubb was. It was, “We’ll pay you a big number on reported EBITDA, perhaps even a number that private equity couldn’t pay, because they don’t have the capabilities, the G&A, the savings, or the systems.”

They paid a high reported number, but I would say that even if they got the low end of my EBITDA expectations, they still paid about 7.5 times for a large amount of EBITDA. More importantly, they basically got a big platform.

Think about it: What was core APi before Chubb? They’ve done acquisitions and grown subsequent to that, but let’s say core APi was $450 million. You arguably bought a business of equal size or greater at a lower multiple than what you were trading at.

It’s very rare that you can buy a business of the same size or greater at a lower multiple than what you’re trading at. We can argue whether APi in 2022, when they bought Chubb, was trading at 10 times or 12 times, or whatever multiple you want to argue. It wasn’t trading at 6 or 7 times.

They were able to raise preferred equity from Blackstone and Viking at a very low coupon. They were able to finance it intelligently. Even in a very catastrophic scenario, it was unlikely that they would be creating the business at a higher multiple than what APi was trading at. In fact, it was almost impossible for them to create it at a multiple that wasn’t significantly lower.

It wasn’t without heartache. They took on a term loan and levered up into an interest-rate cycle. But because they financed the deal intelligently with the preferred equity, the term loan, and the swap, it was mark-to-market pain, not actual financial pain.

As you think about the United States going forward, tuck-in M&A will continue to exist, but I don’t envision them taking a big business bet in the United States unless they can create value—unless the juice is worth the squeeze.

No, absolutely. If you think about it from a relative-value perspective and try to determine how to think about valuation for the company broadly, route-based businesses with recurring revenue demand incredibly high multiples, both in the public and private markets.

There’s a list of private-market transactions in these end markets anywhere from 15 to 20 times EBITDA, obviously many of which were completed in a different interest-rate environment. But if you look across the spectrum of public and private comparables—

Let me just cut you off. APi Group is trading at under 11 times EBITDA if you include the cash flow from the fourth quarter.

The point you’re trying to make is the point that Chadd and I joke around about: Why is APi Group trading at under 11 times EBITDA when you look at FirstService, Otis, Cintas, and all of those companies?

A couple of things explain it. Part of it is simply track record. Over time, as the company continues to deploy capital intelligently, we’re hoping that the multiple gap will narrow.

To be fair, the specialty business has been unpredictable in 2024, so specialty has weighed on investors. Even though, as I said, it’s only 10% of EBITDA, it’s always the weakest 10% that gets everybody’s eyeballs.

I don’t have a great answer for why the multiple is where it is. APi Group’s multiple should continue to appreciate as EBITDA and EBITDA margins continue to improve.

Once consolidated organic growth gets reported, regardless of how gross-profit growth and margin have played out, the lowest common denominator is that, as reported organic growth improves, investors will gain comfort that the business grows organically.

Investors are probably putting too much emphasis on the incentive-fee structure and what is being paid to Mariposa. Remember, that incentive structure is only in place for 2025 and 2026.

As we get through 2025 and into 2026, the emphasis on the incentive and carry will come down. Whatever discount institutional investors are applying to the dilution from Mariposa should decline.

Over the next couple of years, it’s going to be a really interesting time for APi Group. They’re working through Chubb and getting to the other side of it. Restructuring costs will come down, cash conversion will continue to improve, and hopefully the competitive landscape for M&A will improve as a function of weakness in private equity.

As they continue to put that capital to work and organic growth steps up, the hope is that you’ll get multiple convergence. Martin Franklin will likely do things to increase value per share and will be even more incentivized to do that after 2026.

In an effort to tell both sides of the story, if the thesis does not play out as contemplated—or, said differently, what do you see as the primary risks to their not being able to execute on their plan?

I don’t actually think there’s much risk of them not being able to execute on the plan. If Chubb were going to blow up, it would have happened already. It would have happened in 2022.

I don’t see a ton of risk at Chubb. Does it grow 2% instead of 3% or 4%? It’s entirely possible, but I don’t see that as a big issue.

Russ has been running U.S. APi for about 20 years, so I’m not super worried about the U.S. fire business either. Whether they achieve the multiple in the public markets is something that, as my friends used to say, is a conversation between me, God, and the world.

You’ve seen plenty of companies that never achieve escape velocity. But by the time the promote rolls off in 2026, I think there will probably be a large universe of people who are able to own this thing.

I think the universe of M&A opportunities is still large. The company generates cash, will buy back stock if the stock trades cheaply, and isn’t leveraged. If they don’t have M&A to do—which I find hard to believe—they’ll sell the company.

I look at the total addressable market and the end market, and I do not think fire safety is going to be disintermediated by AI. You’ve got data from industry reports showing what pricing is in the industry.

I don’t really look at this and think there’s a real operational-execution risk. I think there’s a laissez-faire attitude toward the public markets and whatnot, but I can say that about many companies in the middle market.

You’d like to think that a $10 billion market cap is a company people can own, but, as you know, the market cap that’s addressable to investors keeps increasing.

What I would say is, “Could this be a company that gets acquired by a strategic buyer or a consortium of private-equity firms?” If the company continues not to be valued appropriately in the public markets, then on January 1, 2027, I’d say it’s open for business.

For our concluding question in these conversations, what are the lessons that you can take from this investment and apply to others, either from an operational perspective or purely from an investment-playbook perspective?

When you’re investing in roll-ups and companies with promotes, I think it’s really good to buy them when they’re below the watermark.

Like hedge-fund managers, the time to buy APi Group was when it was below the watermark. We did participate, but there have been great opportunities to buy APi Group. One was during COVID, and another was during 2022, after they had levered up to buy Chubb but clearly had their arms around it.

That’s been a lesson. When you’re buying companies with these carried-interest incentive structures, there’s obviously an incentive to get the company back over the watermark.

I think the time to buy them is when they’re below it. That doesn’t mean you’re a slave to that rubric, but if you’re weighing the pendulum, buying it below the watermark has been a good thing.

On the rebalancing side, the more it gets above water, you ask yourself whether you’re aligned with the other people who may be trying to put capital to work at lower prices because they want to extend the length of the runway.

That’s why I said everything evens out in 2027. You don’t really have to think about it. This has been a phenomenal investment. The executive-management team has done a very nice job throughout a challenging period of high inflation, COVID, and high interest rates.

As Jim and Russ would say, we haven’t really operated this company publicly in a normal environment. I don’t know when that will happen, but I suspect that at some point things will be normal—where interest rates and inflation aren’t moving wildly. It’s been a good experience.

The main thing we’ve learned over the last couple of years is that there just isn’t a ton of demand for companies of this size.

You’d think that a company with a $10 billion market cap would have an investor universe, but the size of the concentric circles—the size of the addressable investor base—has shrunk dramatically.

I’ve learned this through APi Group. You think, “It gets to $5 billion, it gets to $10 billion,” but the addressable market of investors for companies like this has just shrunk dramatically.

To your point, what happens if it never trades at the multiple of the private markets? That’s the risk you have to consider, and you have to believe that you’re with people who are aligned to extract that value, either through share repurchases or through a sale of the company.

It’s one of the things we ask ourselves in any of our investments: If the multiple gap doesn’t converge and you don’t really get the true cost of capital, is the management team and board aligned with you in doing everything in their power to extract the value?

That’s the thing we’ve taken away from this experience—how high the bar has been for companies to get what I would call onto the conveyor belt.

The first lesson from an investment standpoint is that the headline can drive the narrative instead of the fundamentals.

One example is when the company reported the first quarter after closing the Chubb acquisition. It looked like APi produced very little free cash flow, and that became the headline and the narrative. That drove the stock price down for a good amount of time.

In reality, Chubb was delivered to them with a low amount of working capital, and the purchase price was adjusted down materially for that. When APi invested in the business to rebuild working capital to a normalized level, that investment simply came out of cash flow from operations.

The purchase-price adjustment offset that, and the investment that ran through cash flow from investing was lower. The narrative should have been that APi paid a discount for Chubb, not that its free cash flow was light.

As an investor, if you’re long the stock, that can be frustrating. But if you have the ability to deploy more capital into the opportunity, it can be a gift.

The second lesson is that stocks can be mispriced for a long time. Particularly in today’s market, you see stocks with high valuations that seem to perpetually have those valuations, and you see great businesses trading at low valuations that seem unable to expand their multiples.

If you’re looking for multiple expansion, make sure you have a catalyst. In APi’s case, maybe we have a couple coming up. They have an analyst day in May, where I’m sure the revenue growth they present will be strong. They’re likely to take the margin target up from 13.3% to perhaps 15%.

Then you have a capital structure that seems to be getting simpler over the next couple of years. Maybe there are a couple of catalysts out there.

Otherwise, you need to look for investment returns from earnings growth and/or share-price or share-count reduction. In the case of APi, while I would like to get some multiple expansion—and maybe we will—I’m hanging my hat on earnings growth.

I appreciate you both coming on and having this conversation. It’s often become a joke to ask what would be a private-equity-style investor doing in the public markets, but surely there’s no better opportunity than one where you’re effectively doing that.

This story has a lot of catalysts to it, and the next few years will be interesting given the carry and promote structure of the sponsor. I look forward to tracking it.

Thank you, Zack, for having us on.

Great to be with you again, Zack.