The story of the car wash sector is a similar one to that of the dentistry and HVAC sectors. The industry is a highly fragmented one, and companies are relatively easy to scale with clear and quantifiable synergies.

Here’s why:

• For such companies PE firms do what they do best — they bolt on smaller players to bigger players, with ease of scale and quantifiable synergies, which allows for lenders to up loan amounts through add-ons
• For larger players costs are more easily streamlined. Bulk purchases of equipment, chemicals, and materials create meaningful discounts that make managing costs easier in a roll-up strategy, than they might be in other industries
• The industry offers strong EBITDA margins. While it’s not an apples-to-apples comparison, Mister Car Wash — a public company and much larger than most PE-backed car wash businesses — showed LTM EBITDA margins of 30.9% in its latest earnings
• Low costs. The industry has become increasingly automated, as older car-washing bays are replaced with automated tunnels which require fewer employees to operate
• PE firms can expect a decent exit. Car washes often sell for mid-teen multiples
• The sites are often funded with sale-leasebacks, which makes the process significantly less capital intensive. This also makes the economics of a new greenfield site more attractive by shortening the sponsor’s payback period and increasing their IRR

"The combination of these attributes make scaled car washes good private credit investments” said Harpreet Anand, portfolio manager and partner at Oak Hill Advisors, in an interview with 9fin.

As another source summed up: “There is good and bad but generally it is a nice space.”

Car washing as a service

Car washes today operate akin to another sector much enjoyed by private credit lenders…software.

They offer memberships. You can sign up to one in one location and use the services in another. And experts say you should wash your car up to every two weeks, but those costs can add up — that’s where the appeal of a discounted membership emerges.

The move to the subscription model — which emphasizes membership programs for discounted rates on services, the impact of Covid — where consumers focus more on cleanliness, and a more efficient experience driven by tunnel systems, has driven more consistent demand.

That helps to create a stickiness among a customer base that is primarily consumer facing. Private credit lenders tend to avoid the consumer sector, preferring instead the more reliable cash flow streams of healthcare, business services, and tech sectors. That consistency is particularly appreciated by creditors, who can sometimes be less comfortable with volatility than their PE-counterparts.

But OHA’s research has found that car wash spending is nearly half as volatile as broader consumer discretionary retail category and that it has held up this year despite broader consumer challenges, seeing single-digit growth YTD.

Location, location, location

Location is key in the car wash industry, with lenders saying that an aggressive and hasty race to scale leads to suboptimal placements, and lower earnings.

“That real estate has to be very carefully selected. Are you in a neighborhood with many cars? What is the average car value and median income of the area? What retailers are nearby? All of these things really matter, so the real estate aspect is very important,” Matthew Fields, managing director at Oak Hill, said in an interview with 9fin.

The economics of the brownfield and greenfield sites (i.e. newly established locations as opposed to purchased pre-existing businesses) are important here, because most PE-backed strategies rely on them since they are typically more profitable than buying existing and often aging assets.

“If a chain is willing to sell off older and less profitable sites, there’s a reason that those are less profitable, so an operator that’s focused on the right sites, the right density, and the right network won’t just buy sites because they’re available,” said Fields.