2023 M&A in the National Capital region and the defense & government market has been driven by private equity. In this episode, we sit down with the leaders of one of the game-changing private equity firms in the market – Bluestone Investment Partners. Joining us are John Allen, Managing Partner, and Eric Wolking, Partner, to discuss the creation of this differentiated firm and how they are investing in the Defense & Government market.

Hi, hello, and welcome to Beyond Strategy, an ACG National Capital Region podcast focused on the leaders that drive innovation, enhance understanding, and achieve market clearing outcomes in and around the DC area. I am Andy McEnroe of Raymond James Defense & Government Investment Banking team.

I am Jenn Wappaus of the Infinity Group at RBC Wealth Management.

After a two-month hiatus, we are excited to dive back into conversations with some of the most impactful executives, dealmakers, and leaders in the national capital region. Jenn, what better way to start than to sit down with one of the difference-making private equity firms of 2023 in Bluestone Investment Partners. Today we've got John Allen and Eric Wolking.

Bluestone is a middle-market private equity firm focused on investing in well-positioned product and services companies in the defense and government market. The firm takes a collaborative approach to working with its management teams by combining the insights, experience, and operational expertise resident within its investments with the resources and relationships that Bluestone's partners bring to bear.

John Allen is a co-founder and managing partner of Bluestone Investment Partners. John has spent more than two decades in private equity and investment banking focused on the middle market, aerospace, defense, and government sector. He has been involved in more than 150 mergers and acquisition transactions with a wide range of companies, including some of the biggest names in the market, such as CACI International, General Dynamics, Lockheed Martin, ManTech, Raytheon, SAIC, the Carlyle Group, and Veritas Capital, just to name a few.

Eric Wolking is a partner at Bluestone and brings more than 20 years of experience in the government technology and services industry. Most recently, Eric served as the CEO of GAAP Solutions, from its acquisition in 2013 until its eventual sale in 2017 to Systems One Holdings. Prior to GAAP, Eric worked at Stanley Associates and CGI for over 13 years as a senior executive in various positions, helping the company to grow from 18 million in annual revenue to over 800 million in annual revenue.

I really enjoyed talking to John and Eric today. What really stood out to me was that they were really big on that M&A works and their relationships. Especially John, just kept coming back to M&A works, M&A works, M&A works. You know that, right?

I do know that. Now, let's hear from John Allen and Eric Wolking of Blue Stone Investment Partners.

We are thrilled to be joined today on Beyond Strategy by John Allen, Managing Partner and Eric Wolking, Partner at Blue Stone Investment Partners. Thank you both for being here.

Thank you.

Thank you.

Before we dive into the creation and execution of Bluestone, I'd like for our audience to learn a little bit about what drives each of you. Many folks in our audience probably know you, but what I'm focused on are what are the core values and goals that you set out to achieve for yourselves as leaders and how do they apply to Bluestone?

Thinking about this answer ahead of time a little bit and what drives me, and I would say it's probably a lot of our team is, it's people. We are in a relationship business like you are in a relationship business. We are in a great industry that is filled with spectacular people, tremendous leadership. We have fund investors that drive us. We have long-standing relationships in this industry. That's probably been a huge differentiator for us, a big key to any success we've experienced and I've experienced personally, both at the office and in my personal life. It's all about relationship.

We wake up every day trying to do the right thing for the people that have helped us have achieve success, for the people that placed their confidence in us by investing in our funds. That's really what drives us. If you do the right thing by your relationships, we believe that it's going to lead to business success. We have lots of examples. Certainly, I do throughout my career where I've invested in a relationship and those individuals have invested in me and it's led to a lot of mutual success. It's about the people and relationships that drives me.

Certainly, we're going to want to pull that back and talk about your career here in just a moment, John. Eric, if you were to define your goals, your underlying core values, what would they be?

Certainly as it relates to what we do here. When I originally came to DC, it was because I wanted to go into politics and I wanted to work in government. I realized that wasn't the right path. Once it came to the opportunity to work with these businesses and with executives and with so many folks that have come out of the military and to work around so many mission-driven people, that really motivated me.

Certainly from a goal perspective, in addition to what John was talking about in terms of the people that we have the good fortune to work with, the fact that we get to support these businesses that are working on some of the most important missions from a national security, from a civilian services perspective, whatever the case may be, that certainly drives and motivates me.

That's outstanding. Let's dig into both of your backgrounds. Like I said at the opening, I think a lot of folks know you in the industry, but you've both worn a lot of different hats over the last two-plus decades. John, you've been focused on the government contracting market for nearly 30 years. What drew you to this sector?

Well, like Eric, I came to Washington because I was interested in policy, wanted to do some political. My guy lost his election, and so I had to get a real job, which was the best thing that ever happened to me, that my guy lost, and maybe I got out of that political cycle. I was fortunate enough to get introduced to a firm called Quarterdeck Investment Partners, which was probably one of the first firms in the defense and government technology industry, focused on middle-market mergers and acquisitions. It was a perfect place for me because really the industry, it's the intersection of policy and business, right?

Absolutely.

I certainly was able to keep that as an advocate in my interest in the political world and the policy world, but parlayed into the business side of things. Then I just fell in love with the sector. It's filled with wonderful people. The mission focus of the industry is probably a driver why there's so many great people in it, because most of the leaders in the sector were driven by the mission first. Many entrepreneurs, as you know, were the mission at one point in time.

CEOs and founders of companies, I always say were accidental entrepreneurs or later-in-life entrepreneurs. They spent the first 15 or 20 years of their career in the military, being a civilian agency employee, and then retired from that and came out and continued to serve the mission. The next thing you know, they build this company around them. I think the industry is special because of that mission focus. That's what has excited me about it, is that continuation, that focus on the mission.

You mentioned, John, your entrée into the industry as an investment banker, obviously went on to have a prolific investment banking career with a number of starts, combinations, if you will, with larger banks along the way. But what has been the biggest adjustment in going from an advisor or an investment banker to now being an owner and an investor in this community?

You really use a lot of the same skills. It wasn't as big of a leap as I might have felt it was going to be at some point in time in my career when I thought I wanted to make that transition from advisor to investor. Those years as an investment banker focused on the defense and government technology industry, those skills were completely transitional into the investing side of things.

I think other than the fact that you're now taking money and other people's money and putting it into those businesses, that's probably the biggest leap, so your risk proposition is different. You're putting capital at risk, which you don't do as an advisor. You're putting your time, your energy, and your advice at risk, and your reputation at risk, but now we're putting capital at risk. With that comes a different burden, if you will, than just being on the advisory side of things. A little bit higher level of stress may be attached to it, but the skill sets are completely transferable and it was like a natural transition.

Eric, while John came from the transaction-oriented world with investment banking background, yours was one as an operator. What was the driver for you in making that leap from executive to investor?

Thanks for the question. For me, I've had the good fortune of working with just wonderful people in my career. When I first joined the sector, I went to work for a great company, and I got to learn at the elbow of just some wonderful executives. As I went through my career and had a chance to work for just some fantastic people along the way, one of the things I really realized that was transformative to me with those relationships that I built with executives over the years.

One of the things that's been especially rewarding in this capacity is the opportunity to work with so many executive teams, and especially to work with entrepreneur founders who somewhere along the line took a risk and took a very significant risk. Maybe they took out a mortgage on their house to finance their business, or they borrowed against their retirement assets. They took a bet on themselves somewhere along the way. To work with so many people like that. One of the things I've really realized since I joined Bluestone, too, is that there's not only one way to do things well.

Certainly with the executive teams and the portfolio companies that we've invested in, I've gotten to experience that. What I would point to has been the biggest driver was the opportunity to work with more executive teams, more companies. There are certainly some things that I feel that are foundational to any business. But in government contracting, I continue to be amazed at the entrepreneurial vision that some of these folks have and how they've built their company. It's invigorating to be around and to work with some of these entrepreneurs.

What skills do you feel like as an operator were most transferable to you when you came in as a role of an investor?

Without a doubt, business development. Andy was getting to this point a little bit too with relationships. Everything has to do with relationship management. Every bit is true as an operator in a government contracting firm, whether you're managing relationships with your colleagues and your coworkers or with the executives that you're working for, or with your clients. That's same capability is especially important in private equity where we've got a multitude of different stakeholders and we've got to make sure that we're working well and we're delivering on our commitments and continuing to just achieve forward progress on some of those relationships.

We've set the baseline for what drives each of you individually, as well as provided our listeners with some background on your career. But I'd like to talk now about the evolution of Bluestone from formation to now. What is your thesis in the market and how do you differentiate in a fairly crowded private equity field?

I think the thesis came out of many years as being an investment banker. Probably the highest volume, the most frequent phone call I received was from smaller companies that weren't ready but wanted to participate in M&A some way but weren't ready. They either wanted to be a seller, but we know for obvious reasons, some companies aren't positioned and ready for a sale or certainly not positioned to achieve the objectives they have in a sale. Or they wanted to be a buyer, but they didn't have the resources, the capability, the expertise in-house to do that.

After years and years and years again, that phone call and then being a successful M&A advisor and secretary watching so many companies achieve success, build tremendous value through M&A, and become the big players. I always used the story when I was a younger investment banker, first calling on CACI, there were $100 million or so in revenue. Today they are much bigger than that: $6 billion or so in revenue. They got there probably certainly through successful organic growth, but probably completed 80 acquisitions in their history. We had this vision that M&A works in the industry.

They tell you in business school about, half M&A transactions fail. I don't think if you look from a value creation perspective or market positioning perspective, that's the case in the defense and government technology market. All the leaders have been very active M&A participants. We wanted to figure out how we could solve the question, be more responsive to that most frequent phone call to smaller company that wanted to participate in M&A as a buyer or seller.

Two, we wanted to bring M&A down to those smaller companies and allow them to participate in that success. That was really the genesis for Bluestone, which was starting with smaller businesses, helping them accelerate their growth and making M&A a big part of that. That hasn't changed since even though we're now on our third fund, we just are trying to do more of it with the greater capital access we now have as a result of the larger fund. That's really the thesis behind Bluestone, and we expect that to continue to be what guides us as we grow in the coming years.

Since this podcast is called Beyond Strategy, we have to ask, what are the central tenants to Bluestone's investment strategy and how has the strategy changed as you're now investing out of your third fund?

From my perspective, I don't know that our strategy has changed over the course of our three funds. As we've expanded the resources as we've grown our funds, where John was going earlier, that idea of bringing capital and bringing M&A and executing on M&A at the lower middle market, that is much of a guidepost for us in fund one. As for fund three, the nice thing is that now we've got the resources to really leverage and to execute on that strategy in a much more material way.

Fundamental with every conversation that we have with founders and entrepreneurs that we're talking about through the investment process is, have you considered leveraging M&A in your strategy? We now have the resources to do that, and certainly from our standpoint, one of the things that Bluestone really brings to the table for our portfolio companies is essentially outsource corporate development. When John was talking about CACI and some of these other industry leaders, they have very robust corporate development teams that are able to go out and pursue this M&A strategy. It's essentially the same as having a full-time business development team. You've got to be able to execute with those types of resources.

Bluestone is able to bring those resources to bear for the benefit of our portfolio companies. As a result of that, the vast majority of our add-on acquisitions that we're doing are proprietary transactions where they're relationships that Bluestone principles are out building and working. John mentioned it earlier, some of these relationships go back a decade and that we're continuing to work and talk to these businesses. Now as we enter fund three, we really see, and having raised a $200-million fund, much larger fund than our prior fund, we've really got the gas in the tank necessary to execute on that strategy.

I want to build off of that for just a moment. We're sitting in the Bluestone offices today, but for not much longer because you're going to be moving into new office space because of the growth you've experienced here over your three funds. You've built a very diverse team filled with operators, folks that come out of the transaction world, others that have had previous investing experience, even some that have consulting experience. How did you think about building your internal organization and how did that position you for success in the types of firms you're looking to invest in?

It's diverse in terms of some of those skill sets you talked about, but not in terms of industry focus. Everybody on the team, the bulk of their career, if not all of their career, has been in the defense and government technology marketplace. That was critical. Second was relationship that existed among the partners. I alluded to that early on what drives me.

Eric and I have a relationship that goes back 25 years when he was inside a company as an operating executive. One of our other founders of the business, Bill Strang, was my first investment banking client where I did more than just be the analyst and associate. We also had a history of working together. Bill Mutryn, who was probably the most active M&A lawyer in the marketplace, came to join our team.

We put together all the pieces we needed. You need operational expertise when you're assessing a business, when you're helping that business think through ways to grow organically, when you're helping them work through what their focus ought to be from a strategic standpoint, also not understanding risk. Somebody who's been an operator understands that you're always going to face risk, but you can essentially overcome everything with the right resources, the right focus.

I think we've just put all the pieces together. We have transactional expertise, we have financial expertise. Mike Ivey, who's been a CFO level executive at multiple companies, both large and small, was a critical element. I think if you look at it, financial expertise, M&A expertise, legal expertise, operational expertise, we felt were the pieces you need to be successful. Then put that all together that we'd all been together for a very long time and our relationships date back 20-30 years.

That's great, the trust of working with your team and the group. Having available capital can open a lot of doors for companies. When you engage with the target investment, what are the firms typically looking for to achieve with Bluestone Capital and the involvement that you bring?

Companies that we're working with, what are they looking to achieve is, they want to create value. Every company we're working with really hasn't engaged in M&A. You know it as an investment banker, right, Andy? A lot of times it's all about someone saying, "I want to get the highest value for my business." We actually think our model affords them the opportunity to get the highest value for the business. It just takes two steps, maybe.

The initial step, where we're invest in the business at an attractive valuation, but a central tenant of our investing philosophy is having retained ownership amongst the founders of those businesses, working with them through M&A to then build their company to accelerate the growth of their business. We think that, and we now can prove it with our successful case studies, they're actually going to create more value for themselves than they would in a one-and-done transaction. We're looking for companies and what they want to get out of this is they want to build their business still. They want to create more value for themselves than they would otherwise. Another important aspect we're doing is, they want to share that wealth with others.

Another thing we're typically doing is creating greater ownership paths for others in the companies that we invest in that might not have been owners before our involvement. Entrepreneurs value that tremendously. Not only are they looking to create wealth for themselves, but they love it when their team can share in that success.

John laid the foundation here, Eric, for this next question just moments ago. What is the pitch for a potential target CEO? There are a lot of capital providers out here. We were talking off-air about just the growth of the private equity community and its involvement in transactions, particularly here in 2023. How do you position Bluestone to be successful and differentiated amongst the various capital providers?

I think there's two parts to it. As an entrepreneur or founder, you've achieved exceptional success to have taken a chance and to have built your business to a point where you have multiple options. When we're sitting down talking with a CEO or a founder of their business and they are at that decision point, there's an aspect of, do you want to take the path of going with a private equity partner and thinking about the next couple of years in a partnership with a private equity partner?

The second derivative of that naturally is, why is Bluestone the right partner? There's a couple of parts to that. When I visit with CEOs, I think about it in terms of quality of life for them. Oftentimes when we're solving a problem and providing a solution, it's not always financial or economic in nature. Certainly that's an important piece of it, but there's usually some other aspect. We've had the case multiple times where the CEO or entrepreneur is looking to bring some additional resources into their company, into their executive team, possibly because the CEO is wearing multiple hats. We have solved for that solution oftentimes in partnership with the founder of the business as part of Bluestone's investment.

Are there any examples within the portfolio that you can point to where that dynamic has come into play?

Yeah. I'd say a great one is with cBEYONData. cBEYONData is a portfolio company of ours that we invested in in 2021. At the time of that investment, the founder of that business, David Schmidtknecht, had a couple of different challenges that he was looking to solve for. One, he absolutely grasped the opportunity of a two-step process that John was alluding to earlier. His wife, Dorinda, unbelievable person, was ready to no longer be the CFO of the company as well. There's also a desire to bring in some additional executive leadership.

In that discussion with Dave in our earliest days, and we visited with him for three years before we finally made an investment, we helped solve that problem. We brought a CFO to the table that was a trusted resource, Gray Beck, who had worked as a CFO of one of our prior portfolio companies. We also worked with Dave to bring on board an exceptional CEO, Dyson Richards, who's done an unbelievable job with that company. We had to address, and Dave had multiple options. He had to trust us that we had the relationships that we could bring to bear to help solve some of these other challenges that had nothing to do with the financial or the economic aspect of the transaction.

We just covered a success story, but obviously being owners, investors in a business comes with challenges as well. Can you point to one time or maybe the most challenging time where you've had to manage from above, for lack of a better term, within your portfolio?

Business is hard. Every business, no matter how successful, how large, faces challenges. You can't be in business for a long time without experiencing pretty much every challenge that you can imagine. Whether it's the tragic loss of a leader at a company or the loss of business or government shutdowns, or new regulatory environments, the countless challenges a business face. We face them every day, so it's really hard to say there's one. I think what it boils down to is years of experience, understanding the industry, knowing who to turn to, not thinking you can always do it just yourself.

Fortunately, we're blessed with tremendous access to leadership and talent at Bluestone and in this sector. Every challenge you face can be overcome. Since we've been in the industry for a long time, we get the challenges that businesses face, and we're able to take a patient approach, not overreact, stick to the plan, focus on value creation. I think people coming to this industry that don't understand it, the challenge is maybe different for them. For example, our political leaders have not made operating in this business easy for quite some time now.

We invested in a company that Eric ran for us, in fact, nine days before the government shut down. A lot of people who don't live in this industry might have said, "This is a bad time to make that investment." But we're taking a long-term view. If you spend your time in this market, you know the longest shutdown at that point in time had been something like 21 or 22 days. They don't last forever. It's a blip on the screen. If you have the right leadership, which we did in this case, the right business, it had no impact on the value creation.

We face a lot of challenges like anybody who's been in business for a long time. I think it's just how you navigate those challenges. You talked about our team and the makeup of our team and the expertise and the years of experience there, and then making sure we have the right leadership at the companies we invest in. That's really how we deal with the challenges we face.

It says a lot from the experience that you all have, been there, done that. Bring us something hard. As we progress towards the end of our time today, what's one lesson your experience to date has taught you that you think every business leader or capital provider should learn at some point in their career?

We deal with a lot of smart people. I'm not sure I'm going to have life lessons to transfer to anybody. Maybe the lesson I would say is, M&A works. I alluded to that earlier. Most, if not all, of the companies we invest in, have never been involved in the M&A process. They have not been a buyer, they haven't had the resources, they haven't had the capital. Our message we take out to the companies that we're looking to invest in is that, M&A is a great tool for value creation. Yes, there's risk associated with it. That risk is manageable, but what it can do in terms of the transforming a business, particularly the size business that we start with, is tremendous. I think that's probably the one message we're processizing out there. Beyond that, I'm not sure I have any other great wisdom to spread to leaders in this marketplace.

Just to build on John's comment there, when you're dealing with entrepreneurs who've already risked something to start their business, they understand risk. It's a matter of how you describe it. When you can look and you see M&A and the fact that it can really just accelerate the growth and truly can transform the business. You've got all of the great things that come with that. You're bringing in better people to the business, you're expanding the technical capabilities, you're bringing in more client relationships. But the most important thing that I think you're accomplishing is you're building a better culture. The right type of leaders, the right type of founder CEOs truly have been able to embrace this.

We do this in partnership with the companies that we invest in. We're there to help and advise and facilitate some of these transactions. But fundamentally, it's the executive teams that we have at these businesses that are really driving the strategy. When you see these executive teams truly embrace it, and then they succeed on the first transaction, it's amazing how quickly they want to go and do the second transaction. They just see the power of it, the customers see the value of it, and certainly the employees of the company see the value.

Because M&A works.

Because M&A works. I like that.

We end all of our interviews with maybe the most imperative question that we ask. What is the most important thing that we should know about each of you?

This is the hardest question on the list, for sure.

It's why it goes last.

Thankfully. For me, the answer is, my life is pretty simple, pretty boring. I've been doing the same thing, in the same industry for a long time. I think it goes back to, if not the first question you asked, which is, it's really about relationships. If you look at our team, the partners have all been together for a very long time. As I said, one of the co-founders of the firm was my first investment bank client 30 years ago.

Any success I've had has come as a result of the great relationships I've had both within Bluestone and the broader industry. Certainly, my success outside of the office at home is driven by positive and good relationships. I don't get it right every single time, but I think if you sure try to put your relationships first, do the right thing, have some knowledge and some experience to wrap around that, that good things come from it.

In my case, I don't know if this is the most important thing, but building on John's point there about relationships. From a career standpoint, not everything happens in a straight line. I remember when John and I first met, he was representing a client, we met at John's offices at the time in Reston town center. I'm there with my boss at the time, George Wilson. I just moved into M&A and George was a great mentor. We're sitting there at the table, John's got his client. His client does a spiel on the company, we're there in a potential buy-side transaction, and we're asking questions, and there's a pause in the conversation. I'm looking at George, waiting for George to ask something.

I've never met a pause that I haven't wanted to fill. I just looked across the table and I said, "Well, how much do you want for the company?" George, of course, about laughed. John, because of his great grace, did not laugh and looked and there was a little bit of this, "Hey, young buck, you still got a little bit to learn here," which I didn't appreciate the time. It just seemed like a natural question to ask. If we were there to buy something, how much do you want for it?

That's when I started to really appreciate the art that all goes into M&A. The art that goes into these relationships and the strategy around it and everything. I figure if that's where my career started in M&A, and I can now work in private equity, I've had the great good fortune of an awful lot of luck in my career. I appreciate the question.

Sorry, I was trying to facilitate a pause to see if Eric would fill it.

Would fill it?

Good try.

I was about to.

Very good try.

Well, John Allen, Eric Wolking, Bluestone Investment Partners, thank you both for joining us today. Congratulations on the continued success of the firm and best of luck as we head here towards the end of 2023 and the beginning of 2024.

Thank you.

Thank you very much for your time.

Special thanks to John Allen and Eric Wolking of Bluestone Investment Partners for joining us on this episode of Beyond Strategy, an ACG National Capital Region podcast. If you like this episode, I hope you'll subscribe. You can do that how you may ask? By going and clicking the Subscribe button on wherever you get your podcasts from. I happen to get mine from Spotify, Jenn.

I do too.

Well, what I really enjoyed about this episode, not to mention that I got a chance to sit down with one of my former original bosses in John Allen, was to hear about the evolution of Bluestone and how much he values the relationship aspect of working in the national capital region and within the defense and government community.

I think it was really interesting how they talk about bringing different skill sets to the table through M&A, using their outsource corporate development that they do and really the relationships that they bring.

We mentioned in the opening how 2023 has been the year of private equity M&A, and certainly Bluestone has made its mark. What's very intriguing about their model and several others in the industry, is the fact of this outsource corporate development and finding a way to supercharge innovative businesses and help them reach the next level by bringing like-minded executives, capabilities, augmenting customer reach, and finding a way to take a company from, call it, if we're using the football analogy, midfield to the end zone.

Yeah, I like that, because M&A works, right? John kept saying it.

M&a works. Thank you to you, the listener, for joining us today on Beyond Strategy. For Jen Wappaus, I am Andy McEnroe. This will conclude the 2023 slate of episodes. We hope you'll join us in 2024. Until then, happy holidays and happy New Year.