Episode 132: Eugene Polevoy of Blue C Capital on the Independent Sponsor Model and Alignment-First Deals

Episode Transcript   

 

Shiv Narayanan (00:09.676)

All right, Eugene, welcome to the show. How's it going?

Eugene Polevoy (00:11.829)

Good, thanks for having me.

Shiv Narayanan (00:13.964)

Yeah, we've known each other for some time. So why don't we start with your background and the firm and let's go from there.

Eugene Polevoy (00:19.979)

Yeah, sure. So my background, I started my career far away from finance as an automotive mechanic, a family-run business that my family used to have. went to, I guess I went to law school by the strong influence of my mother, but I never practiced law and ended up in M&A at BMO. for three and a half years and then I joined ONCAP, which is Onex's lower middle market fund here in Toronto. I spent six and a half years there, decided that I wanted to do a roll up of a size that didn't fit ONCAP. So found another PE partner that was willing to go to that size, which was Imperial, spent two and a half years doing that roll up. We exited for 16.4 times EBITDA and took that money and... some other kind of you know money I had over the course of my career and started the firm I run now with my with my business partner here in Toronto called Blue C Capital.

Shiv Narayanan (01:23.211)

And one of the things that's unique about your journey is just approach of being almost like an independent sponsor. And can you talk about that and how that's different from what other firms are doing?

Eugene Polevoy (01:33.727)

Yeah, yeah, let me maybe lay out the land a little bit for some of your viewers. might be less familiar with the different versions of it, but you know, typically in private equity, you have a dedicated fund that you raise money for and you have what we call full discretion over what you invest into. And then on the complete opposite end of that, I would say is like a search fund model where you're to buy one business. You raise a little bit of money to support yourself to find that business. And then when you go find it, you take an active role. take probably a lot of debt and try to get a lot of economics as sort of the operator of that business. We are neither of those. We're something in between. And so we don't operate any of the businesses we acquire or we invest into. We also do larger deals. The deal we ended up closing north of 100 million US, which is a large, I would say any of my two prior firms could have, or would have done that deal in that size range. But we don't raise a committed fund. Instead, we find the opportunity and then once we're happy with the deal and we think it's worth putting our own money into it, then we go round out the rest of the capital with some family offices and some investors that know us and support what we do.

Shiv Narayanan (02:41.134)

And then walk us through the economics of that. Like how much capital are you investing? How do you look at hold periods or return on investment capital? Are there IR benchmarks that you're trying to kind of clear, help us understand that?

Eugene Polevoy (02:54.825)

Yeah, so I think the beauty of the independent sponsor model is it has a lot of flexibility, both on the economic side and on the hold period side, which you just mentioned. You mentioned kind of hold periods a little bit, I think. Number one, we set the terms of our economics based on a couple of things. What we think we can get from investors, but also how appealing the deal is. We have a pretty high bar at Blue C to do a deal in terms of We don't pay big multiples and we like to get into good industries. And so by that very nature, it's very hard to accomplish both criteria. And then from an economics perspective, know, private equity, typical models, two and 20. My partner and I are not as concerned about the two, the two being the management fee. And we're much more concerned about upside, which we think aligns us even better with our investors anyways. And so, you know, without getting into specifics, we are heavier on the carry and much lighter on the management fee. Also because a lot of the money that we invest comes from me and my partners. The management fee is kind of feeding our own pocket. doesn't do much for us. Whereas the carry model is what we're really gunning for.

Shiv Narayanan (04:03.405)

And how does that change how you're looking at these companies in terms of growing them or what type of benchmarks you're trying to clear? Can you expand on that?

Eugene Polevoy (04:11.923)

Yeah, so maybe I'll get into a little more detail on the hurdles because that will probably help address what you're asking. Every private equity deal has two key metrics that you're looking at. One is IRR and one is multiple capital, MOC. IRR is time dependent, MOC is not. And so we, know, in private equity, you also have like an 8 % preferred return to the LP before there's any carry distributed.

Shiv Narayanan (04:16.929)

Yeah.

Eugene Polevoy (04:39.421)

We have a higher preferred return. have, I'll disclose it's 10 % as the preferred return. What does that mean? It means that, you we're not trying to make 2X our money over 10 years or, or even honestly 3X over 10 years. We are trying to make a better return. And that, that drives exactly what you're asking, which is what are we willing to pay to get into an opportunity? And what that means is we either have to have a lot of upside. Or we have to be incredibly disciplined on price. One of the things that's, you know, unfortunately very clear these days is there's a lot of capital, a of firms chasing deals. And so it's very difficult to stay disciplined. And you just have to remember that if you do a deal that's not disciplined, especially in our model where we don't charge a material management fee, you're not really doing anything, you're sort of wasting time. So if we don't clear the hurdles that we need to clear to make a return for our investors that they find appealing, we ultimately just wasted a bunch of time and didn't make any money, which would be... You know, really bad.

Shiv Narayanan (05:38.387)

Mm-hmm. Mm-hmm. So and so how do go about that? So I get it that you don't have an exact benchmark in that way, but you're trying to get a higher return. So how do you approach your companies then once you've made an investment?

Eugene Polevoy (05:49.961)

The first step for us, I think maybe you're looking for me to talk about the kind of value creation, which we'll talk about, but it actually comes down to alignment more than value creation. So step number one, what makes a really good deal for us, first and foremost is alignment with either the management team and or the seller. In some cases, the two are the one and same where the seller continues to be the management of the company. We want to always be on the same side of the table as them. we just believe, rightly or wrongly, that if we are both holding the same common equity and have the same vision for the future of the business, whether our thesis pans out fully or not, we usually like to underwrite deals where we have multiple ways to win, there's more than one way to make our return, that if we have the same kind of objectives and the same economics in the deal, things will go well. And so that's before value creation. Value creation actually comes second for us, which is we have to be in a business where we believe there is something that can be done different, better, invest in a certain part of the business that we believe is going to grow more quickly in order to see a good return. But none of that matters if you're not aligned with management and if, because we're not active management, like we're not a search fund. We're not the ones waking up every morning, turning on the lights in the warehouse and telling the employees what to do. That alignment is incredibly critical for us.

Shiv Narayanan (07:16.287)

Yeah. So, so, and what you're saying that totally aligns with me as well as just starting with alignment with the management team, because that really informs whether or not you'll be able to deliver on your thesis. So how do you go about finding that? Like what's, what's your approach that are you pulling them into your thesis, like earlier on the investment cycle or before a deal is even closing? Like how do you approach that?

Eugene Polevoy (07:38.867)

Yeah, absolutely. During diligence, as we identify gaps or as we identify opportunities, we don't keep those in our back pocket. We actually talk about them, you know, like, hey, you're selling a lot in this channel. What is stopping you from selling more in this other more profitable, more valuable channel? Let's say just as an example. And we have a dialogue around it. And then, you know, we sort of create a hundred day plan like anybody else does upon acquiring the company or upon making an investment. But the reality is that 100 day plan gets thrown out pretty quickly. Only because you think you know the business when you're doing diligence, and you probably know it better than you did before, but you really get to know the business as you live and breathe it every day alongside your manager partners. so what we thought was the bottleneck to growth, speaking either on the HVAC experience or on the generator business I mentioned that we closed on since we started Blue C, that changed.

Eugene Polevoy (08:35.947)

In the HVAC space, I thought my bottleneck to growth was going to be M&A. And what I realized was I could buy all the branches in the world, but if I'm not managing the growth within the branch and I have no organic growth after the acquisition, I don't think I created a ton of value for anybody and won't have a good return. And so the bottleneck there is actually one of your favorite topics, I think, which was digital marketing on the HVAC business. In the generator business, the bottleneck was actually labor and sort of How do we get more labor? How do we get more aggressive, more creative in recruiting? Because we have a big backlog and the only thing stopping us from taking on more work was getting more tasks that are qualified and skilled. And so it's a combination in that business of HR and recruiting and also training, which we're working on building a training program. But every business has got its own thing. We don't have a playbook that fits every single investment because actually

Eugene Polevoy (09:32.213)

Forget about trying to fit every investment with one playbook. And investment needs a different playbook at different stages of its life, so to speak. Every company just, the bottleneck changes every day. me, if you're focused on the bottleneck from last quarter, you're probably, you either haven't fixed it, which is a problem, or if you have, you're not thinking about your next bottleneck. That makes sense.

Shiv Narayanan (09:55.374)

Totally does. I guess I'm curious like in this model where you're kind of buying almost like one company at a time or kind of funding this as an independent sponsor. How are you identifying the bottlenecks and what does your team look like? Because in firms that have a larger fund, they have operating partners and they're supporting all the investments that they're making and they kind of spread them across their different investments. I'm curious, like, what does that look like for you? And how deep are you getting with these companies? And who's doing that work inside the

Eugene Polevoy (10:24.117)

Yeah, so because we don't take on, you know, we don't have four or five investments at a time. We have two to three companies that we sort of invest into at any moment in time. To invest in the fourth, we'd have to sell one of the first three. It's being a partner of mine, his name is Sam Cogan. And I would say with the use of AI, you'd be maybe surprised at how far we could stretch in terms of analyzing data that the company produces or the companies produce. and making decisions based on that. you know, on the implementing side, it is management that implements. Ultimately, it's not us. But, you know, I would say at a private equity firm, when I was a mid-level guy or even a junior guy, I had more companies on my plate and more data that I therefore had to parse in less time per company. And I didn't have the use of AI back then, obviously, because the world's changed a lot in the last couple of years. And so today,

Eugene Polevoy (11:20.309)

you know, between two capable guys that are willing to roll up their sleeves, like both Sam and I are more than willing to open an Excel file and, you know, do analysis and build models and, and do whatever it takes. that's the capacity. Again, we're not building, you know, Blue C Capital will never be a large asset manager. It's not going to be Blackstone or Onex or anything like that. It's really meant to be an investment vehicle, to, to have more compounding and more direct growth of our capital. with some carry obviously for third party capital that we manage versus trying to manage third party capital and get more AUM and more management fees and more carry. That's not what we're trying to do. And so we're not trying to, we're not trying to, this is by design, not scalable, but that's by design.

Shiv Narayanan (12:04.607)

Yeah, that makes a lot of sense. Can you expand on the AI side a little bit? Because I'm sure other firms want to know how they can do more with less. Help us understand that because your firm is small, but you're able to get quite deep with these companies. How are you leveraging AI to be able to do that?

Eugene Polevoy (12:20.607)

Yeah. So, I would say in the last six months that's really changed our quote unquote capacity or ability to analyze. Look, AI is specifically Claude and I'm not an AI expert by any means, but, Claude, I find is so good at taking raw data, whether it's an Excel file, whether it's a zip file with a bunch of, you know, your balance sheets over the months and whatever. And with good prompts looking at, for example, we think we have a networking capital opportunity. rather than taking all the files, putting it all into one Excel sheet, looking at month over month trends, trying to figure out why, you know, networking capital is chewing up, you know, cash for us, putting raw data into Claude and saying, Hey, I think I have a networking capital issue. Identify not just is it a inventory issues and an AR issues it are we paying payables too quickly, but which specific accounts if we're loading a GL into Claude, what specific clients are not paying us? What specific, you know, vendors are we paying too quickly or differently than we were paying before? It does that in like seconds, you know? And so the, it's just a really small example of how we're leveraging the ability to analyze data without having to put it in Excel, organize it, do V lookups, know, some ifs, whatever, you know, all the formulas that we would all be using back in the day to try to get some sort of a summary of what's happening. Forget about a summary. gives me the summary. And then it says, these are your four problem accounts. These are the four. big AR items that you haven't collected in their past 90 days or whatever, you know what I mean? And so it's maybe through the mentally, I don't know how other firms are using it, but it's been a game changer for us because I could have a question at 9 a.m. about my networking capital and by 9.03 a.m. I have an answer.

Shiv Narayanan (14:08.499)

Mm-hmm. Mm-hmm. What about on the value creation side? Because I can see for things like financials or things that have a lot more data that you can kind of parse through. What about on driving more pipeline or something like pricing or M&A activity around a company like or integration work, sales playbook work? How do you guys approach that? Or how are you prioritizing the value creation playbook there when you know, firm is lean and you're trying to figure out where the highest leverage areas are.

Eugene Polevoy (14:41.099)

Yeah. Look, it's, uh, you don't even need to have your own data, as you know, with AI to get some really interesting feedback for it. So for example, in the HVAC space, I'm just going to pick on that. Unfortunately, it wasn't as, as, uh, available when, I owned, uh, Frontier, we sold Frontier sort of early 2024, but we do it in the generator space as well. I just don't want to give away all the secret thoughts, but in the, if I still own the HVAC business, this is what I would do is, uh, on the marketing front, I'm trying to figure out, um, as is my cost per lead. really hot, like is my marketing effective? I need to benchmark myself. I can't benchmark myself against, you know, I can't just Google that. It's not that easy to get the data. I mean, there are some reports you'll find through Google or whatever. But if you ask Claude, you say, look, here's my cost per plumbing lead. I'm in Kansas City. This is what my promotion looks like. This is what my Google ad looks like. Just paste it in there. It actually gives you some pretty valuable data back that you could then audit to primary sources. So for example, if I'm paying $80 for a drain cleaning lead, and that's high in my market. I don't know how high is it? Is it supposed to be 50? Now that I know that it's high, by the way, I might've thought it was high to begin with. What do I change? And actually, Claude, not to disparage, know, digital marketing agencies are great, but Claude will give you the answer based on a bunch of other ads in your market that it will look at and tell you, hey, you might want to lead with a free drain cleaning. You might want to lead with a different promotion to capture more. Or by the way, maybe it's not even a lead issue. Maybe it's something that the rest of your funnel is broken. so Claude will ask you that next question the way a really smart, experienced digital marketing individual would, which, know, if you're a private equity guy who hasn't done this for a long time, you wouldn't know the next question to ask yourself or even the next piece of data to get. So it's useful, not just on just, you know, data organization, but it's, you could have a dialogue with it. At least today you can. And it's, I find it's quite good.

Shiv Narayanan (16:24.845)

Good.

Eugene Polevoy (16:38.091)

By the way, you could have a dialogue with it at two in the morning. Yeah, I was saying, you could have a dialogue with it at two in the morning if you're so inclined. I can't have a dialogue at two in the morning with an employee or with a subcontractor.

Shiv Narayanan (16:39.157)

Yes, I'm sorry. Can you beat that offer?

Shiv Narayanan (16:46.421)

Yeah, yeah,

Shiv Narayanan (16:52.415)

Yeah, and by the way, I appreciate kind of what you're saying. The reason I'm pushing on it is that we definitely leverage AI and we've been building our processes better as a business as well because our clients are trying to figure this out too and the PE firms that we work with or their portfolio companies. What we found is that there's a certain level of depth after which you can't solve the problem. So maybe there's a directional idea on like, you need to do more content or more paid media. But like when it comes time to actually doing the work and the roadmap and the execution plan and what to track and whether it's effective and the experimentation, there's all these additional steps. And that's just on the marketing side, there's more on the other areas. So I'm curious, like how do you bridge that gap in situations like that?

Eugene Polevoy (17:33.355)

Yeah, look, I think you're right. I think it helps you identify the issue and where you plan what you're going to do. But look, Claude could do a lot. It can't go into your business and record your employees giving whatever script you needed to. It could draft a script. can't actually. Or at least I'm not good enough with the eye to put a picture of my employee in there and try to make a video out of it. I'm sure some people could do it. But it's still very helpful because look, that identification phase and getting benchmarking around cost per lead in your market or getting somebody to prompt you back to say, look, do you really have a Google ads issue or do you have a call response time issue or something else down the funnel? That itself is very helpful. Now, what you do with that, you know, that acting on it, you may either want to hire some assistants or you may do it yourself. We do a lot ourselves at Blue C. we look again, the The concept is we are willing to roll up our sleeves, but I'm not an expert in many different fields. And I feel like rather than hiring experts for everything, I can at least get to some base level of knowledge using conversational AI, which is very helpful.

Shiv Narayanan (18:43.116)

And then how are you leveraging the companies themselves? Because I imagine like, if you identify certain things, you're putting that on the management teams to figure some of the stuff out. So what's the delineation there in terms of responsibilities or how much you're putting on the companies themselves?

Eugene Polevoy (19:01.267)

It all depends on who's better positioned to make it work, right? So for example, with going back to my recruiting example, right? To actually go and start interviewing technicians, I don't know how to ask the right questions to identify a good technician from a bad one, but I could use AI to give me better ideas on where to find these technicians and what types of offers I should be making them to get them into our funnel. And then our HR leader and the CEO of our business is much better positioned to actually do the interview and do the hires. So there is, you you have to think like we're very hands on, like our motto is entrepreneurial private equity. And we mean that rather than just coming in quarterly, which is what you do in most private equity firms. have a board meeting, you read the board deck and you kind of say, okay, these are the initiatives for the next quarter. We do a lot more than that. But we don't do everything. Cause as we talked about, we're not management and we're not sitting in the location of the business. And some things need to get done at location versus, you know, from Toronto. and so it changes depending on the task, right? If it's a pure data analysis, financial reporting type task that we think we need a new dashboard built and whatever, we'll do it straight from here. We'll connect to our CRM or ERP, you know, built that dashboard, give access to management, all have access to it. And then we could enjoy whatever the result is, whether that's, you know, whether there's a conclusion there or it's just good data for us to know that that's a different question. but if there's like a physical thing that needs to happen,

Eugene Polevoy (20:29.823)

like interviews need to happen in person with somebody who knows our interview well that's going to happen in the business. Hopefully that helps answer it but it's...

Shiv Narayanan (20:37.036)

It does. It helps quite a bit. What happens in situations where you don't have enough of a talented team? Like, how much time are you spending on getting the right leadership in place?

Eugene Polevoy (20:50.549)

Well, then we hire, right? So one of the things, for example, in the portfolio company that we're working really closely with now, we have a phenomenal CEO, we a phenomenal team, 180 employees, no head of HR. And so not because somebody is not capable, but simply because there's only 24 hours in a day to hire more technicians and to deal with regular HR issues, turnover, HR complaints, know, benefits administration, stuff like that. We just said, look, we have a gap, we're missing a leader of HR. So we made a recommendation to hire one and ultimately executed on that hire and added that capacity. We always try to add very thoughtfully. And the reason we try to do that is it's very easy sitting, you know, 3000 miles away or 20, whatever, 200 miles away to think about what the company needs in the vacuum, not ask anybody, and then just add costs to the company. And so it's a very good way to shave away your EBITDA. is to kind of add too much to it. And one of the reasons why I talked about alignment earlier on our call was because you have some management teams that are not aligned. They don't have real accountability on the equity side, because they just make a salary and a bonus and that's about it. And so say hire these three people, because we think we're short there. They're going to hire four people, five people. They love hiring people because that just makes their life easier. When you have alignment and you have like a CEO that has

Eugene Polevoy (22:17.213)

equity in the business and values that equity the way you value your equity, you make a recommendation, let's hire three extra bodies and they're going to say, wait, why? Let's stage them out. Let's see if we need them. Right. And I think that dialogue, that pushback is really, really helpful because we don't, we're not the smartest guys in the room. We don't know whether we put too much, you know, we put too much sauce in the, the, in the pot. And we don't want to it's actually harder after to take it out as you know, right? Like nobody wants to downsize And so you'll often see companies doing this they hire hire hire Then they put a higher in freeze and they trim and they hire hire and they put a fire We don't want to do that. And so just just being thoughtful about it is how we think about it

Shiv Narayanan (23:01.29)

Yeah, I definitely agree that the alignment of incentives is one of the main ways in which you can actually hit financial targets because otherwise you kind of have management teams not going in the same direction.

Eugene Polevoy (23:12.075)

Well, management teams also love hiring because it makes their life easier on the margin, right? Even if you have a marginal employee that's only at 20 % utilization, that's 20 % that somebody else was doing that now. so, net-net, they're sitting like the CEO sits close to the CFO and the CFO sits close to the controller and the controller sits. And all of these guys really just want to make each other's life easier. Most people don't want to be hard asses on the people that they see every day. And so as a result,

Shiv Narayanan (23:35.936)

Yes.

Eugene Polevoy (23:41.279)

Having your private equity partner say hire, hire, hire, they're going to hire. They're going hire until there's no EBITDA left or no office space left to hire into. so we don't like that.

Shiv Narayanan (23:56.525)

No, that's great. Switching gears a little bit, tell me a little bit more on the sourcing side because this is a unique model in some ways, right? I it's different. And I would imagine you come up on competition from more established firms or firms that let's say have a larger fund size or a more built out team. So how do you distinguish yourself in a market like that?

Eugene Polevoy (24:22.109)

It's really, really hard. And I actually think the noise, the amount of noise that exists in the market from various capital sources, we'll talk about some of them, just because I think it could be interesting for the listeners to kind of understand all of the various different real and less real capital that's out there making noise. And the noise is what matters. That's the funny thing. And the use of AI to make outreach or out bounds. I actually, I'd... I posted something recently on LinkedIn where somebody reached out to one of our businesses. It's a laser hair removal business. That's all it does. And it literally says, we want to acquire GoLaser. We want to have more exposure to software companies like GoLaser. And I'll tell you how that happened. GoLaser has an app on the app store for its clients. The app is not our revenue. It's really a Zenoti app with our skin on it just so they can book their own appointments. Some AI scraper took that existence of that app to believe that we're a software company and decided to auto email us that they want to acquire us. And that's just one stupid example of all the outreach that's out there. so look, from traditional private equity funds down to search funds and everything between being independent sponsors, family offices, strategics, there are a lot of different people emailing companies in various industries. They want to acquire them. I'm sure people email you Shiv all the time saying, You know, we want to buy your business and maybe 1 % of them is credible. Maybe 99 % of them don't have the capital. They're actually brokers that aren't trying to identify themselves as brokers. They want to pretend like they have a buyer out there or they are the buyer until they do a little bit of a bait and switch. The other, you know, half of the 1 % remaining don't even know what you do. They, similar to my GoLaser example, think you're something else or believe you're something else or they haven't even looked at your website.

Shiv Narayanan (26:05.462)

Yeah.

Eugene Polevoy (26:16.971)

I have no clue what geography you're in. Don't know how many employees, like nothing. They've done no basic research. And then, you know, and then you get to the, let's say the percentage that's real. And because there's so much capital out there that has raised committed funds to invest in private companies, there's, I would say no discipline today on multiple. And I think that's the winner really is a seller. Like if you want to sell your business in 2026, I can't think of a better time since I've been in the industry for over a decade now. where you have less discipline, less diligence, higher multiples, and just people willing to throw money at you. I think it's a great time to sell a business. I don't think it's a great time to buy one.

Shiv Narayanan (26:56.076)

Even now with lower multiples or more.

Eugene Polevoy (27:00.107)

They're not that lower. They're not that lower. So I'll give you an example. I sold Frontier in 2000. End of 2023 is when we did the deal. 24 is when it closed because of HSR clearance. And we had a deal done at 16.4 times EBITDA, so strategic, that I'm sure had a lower view of multiple because they obviously had synergies with my management team. Since then, and by the way, before that there were slightly higher multiples and I thought they were coming down because interest rates were up at that time. Since then there have been multiple 18 times deals in my space. Multiple, higher multiple than mine. Maybe they were higher quality businesses, I don't know. I don't think so. I think what it is is once you have so many billions of dollars committed to a space, I'll pick on HVAC for example, there's Wrench, Apex, ARS, Turnpoint, I mean, I could keep going. There's literally, there's a graphic. If you search online, there's a graphic of all the PE backed HVAC companies out there, it's insane. They all need add-on. because they need to grow and organic growth isn't exactly going to make up the growth that they told their investors they could generate. And if they believe their platform is worth 18, 19, 20 times, 16 times, they're willing to pay double digit multiples for small assets where it's like a guy, his wife and his kid running a few trucks. It's insane the lack of discipline that exists. Maybe it's not as extreme as I'm saying right now. Maybe you need more than a couple of trucks, but...

Eugene Polevoy (28:26.463)

I've seen deals get done when I was in the HVAC space buying companies, sub 5 million of revenue, one guy doing all the sales, and it's a multiple that would shock you relative to what actually exists in this business, which is not much.

Shiv Narayanan (28:42.028)

Is that specifically in this industry because these types of companies are continuing to thrive or are you seeing that across the board in all verticals?

Eugene Polevoy (28:52.875)

I've seen it in other facility services, non-residential services. We could talk about res, we could talk about roofing, plumbing, HVAC, electrical, obviously all that stuff. non-res, just facility services, fire life safety, very hot space, very, very high multiple space. We could talk about healthcare, dental, med spa. I have a med spa asset and...

Shiv Narayanan (29:09.633)

Right.

Eugene Polevoy (29:20.895)

the multiples that some people have paid for med spa assets where one injector is 80 % of the book that can leave. And by the way, it doesn't have any equity before or after the transaction. it's a lot less likely to stay after the transaction because the owner that they were loyal to is no longer the owner. You know, that's been a real trend, but yet people keep putting, once they committed like in private equity, if you said you have a platform in the med spa space or the dental space or whatever.

Eugene Polevoy (29:46.535)

Derm and you said you're gonna do M&A and you're gonna be a roll-up. Guess what? kind of have you have this momentum You have to keep buying even if your last five deals aren't doing that well Unless you need to go back to the market and raise more debt or raise more equity If you have dry powder you have to keep deploying it and so there's a little bit of momentum that happens Where these deals are like yesterday's deal is a total fucking shit show, but today they're signing a new SPA And so I think the beneficiaries the seller I just think

Eugene Polevoy (30:15.231)

Some of these, you one of the reasons my partner and I got out of traditional private equity, a, cause we want to do something entrepreneurial, but B, I don't believe the model of, traditional private equity works all that well, unless you're incredibly disciplined or you're really specific on your industry. Like you really know the industry, but if you're a generalist fund, you have one guy that does, you know, this industry and one guy that you're still sort of a generalist fund. I just think the highest multiple to clear an auction and.

Eugene Polevoy (30:44.361)

As long as multiples don't compress materially, hopefully you get some growth and that's going to make sense for you. But I just didn't see an immense amount of upsides.

Shiv Narayanan (30:53.985)

Right. When you're exiting these businesses, like the few that you mentioned, what's the point at which, because you don't really have a hold period the way a traditional PE firm would. So when are you deciding to actually exit? Is it just when the opportunity presents itself or you've grown into a certain point where you capture some of the value that's inside the business?

Eugene Polevoy (31:14.283)

Yeah, look, it's a combination of what you just said, which is where do we think our skill set, both as a sponsor and as a management team has maxed out and where we think the market is for these types of assets. So I'll use, I'll pick HVAC as an example. I started the HVAC. I'm going to call it a roll up. We only did three deals, but I'll call it a roll up in 2021. We did our first deal, September, 2021, second deal, November, 2021, third deal, March, 2022. Then we stopped all M&A. And we integrated, we went on ServiceTitan. We moved up properly using LSAs and PPC, which they weren't doing before these branches. And we had 33 % organic growth 12 months later, just organic growth. So I bought 80 million of revenue. had 110 million of revenue, like 12 months later. Then I thought, do I do another deal and therefore delay my exit? Like grow again through M&A? Cause I felt like I kind of squeezed the juice out of what we had.

Eugene Polevoy (32:12.025)

but I could do another deal, find another company that maybe wasn't as good at digital marketing. Didn't have our rebates with our OEMs and get more even of that way more than I, you know, more than I acquired at the time. Or I'm exiting now. And I decided to exit at that moment in time because I said, if you look back when you're trying to exit, what matters is your TTM growth, your, you know, the health of, of, of, somebody who likes buying a growing business. Nobody likes buying a declining business. We had really good metrics on growth. We had really good margins. We had, you know, we had. really good metrics on labor in terms of retention and acquiring labor. Everything was just going really, really well. And the market at the time was also what I thought, and maybe was wrong in that one element of it, was that I knew I could get a double digit multiple, like north of 15. I didn't know how far north, but I knew I'd get north of 15. I kind of said to myself, there's a science around this in terms of how you grow the business, but then there's an art in terms of when you exit. And it's not very scientific. It's kind of like,

Eugene Polevoy (33:11.527)

I feel like there's a lot of interest in the space. have 110 million of revenue in the Midwest. I think there was four strategic that would bid, and I was right, there were three at the end that bid and one ended up buying the business. I think there was enough private equity interest at 110 million of revenue that this could still be a platform business. And so I think today the CIM that we would print and give to prospective buyers for the benefit of your viewers, the confidential information memorandum is like a document that summarizes your business. that what we would print with our bankers and give to our buyers would look so good. Like if I was picking it up, there isn't anything I could really poke at. And so it felt like the you know, the windows that are back, the market was excited about the space and there was a lot of dry powder to consummate a transaction. And that's why I decided at that time that it was the right time to.

Shiv Narayanan (34:01.194)

Right, right. That's great. mean, there's a lot of amazing takeaways there. We're coming up on time. Wish we could have kept going here, Eugene, but before we end things, if there's a founder listening or another investment firm that potentially wants to connect with you, what's the best way to get in touch?

Eugene Polevoy (34:14.667)

I'm on LinkedIn, Eugene Polevoy, pretty easy to find. I have a website, it's blueccap.com, two C's. So either through my website or through LinkedIn.

Shiv Narayanan (34:26.412)

Awesome, well, we should include that and all the links in the show notes. with that said, Eugene, thanks for coming on and sharing your wisdom. Very different model than we are used to having on the podcast. And I really found it interesting to hear how you're approaching value creation and growing these businesses and generating very, meaningful exits. And I think there's a ton that the audience will learn from it. So I appreciate you doing this.

Eugene Polevoy (34:44.607)

Thanks, I appreciate the chance to speak to you.