Colonnade publishes industry commentary on vehicle service contracts.
The vehicle service contract (VSC) industry continues to attract significant interest among investors. Macro fundamentals are compelling, and the industry demonstrates growth, strong margins, and recurring cash flow. The industry value chain includes administrators, F&I agencies, direct-to-consumer marketers, payment plan providers, and specialty insurance carriers. The industry totals $33 billion at retail and comprises a large and important component of automotive sales and profitability. Since 2010, more than 40 companies in the VSC industry have changed ownership, and we expect sellers to continue to benefit from strong demand among financial investors and strategic buyers for well-run businesses in the sector. New entrants and consolidators should enjoy industry tailwinds for several years.
The pace of acquisitions and investments in the VSC industry is increasing, driven by demand from financial and strategic investors, low interest rates and availability of capital. Private equity firms are attracted to the industry by its high margins, strong cash flow, fragmentation and growth. Private equity firms are making platform and add-on acquisitions to existing portfolio companies. More and more, industry participants are considering vertically integrating, potentially disrupting market dynamics among the pure plays. Administrators, seeking to grow revenues and improve margins, are evaluating acquisitions to increase and protect product distribution, improve scale, and capture more of the value chain. Sellers and administrators are bringing the payment plan function in-house. Insurance companies, looking to preserve books of business or enter the industry, seek the acquisition of administrators. We expect strong demand for well-run companies in this industry to continue.