Kian Capital Partners LLC is chasing add-ons in contiguous Southern states for its new platform, Nashville-based HVAC distributor Team Air Distributing Inc., the firm’s principal Jordan Lee told The Deal.

“Sunbelt is where we’re seeing the highest growth in terms of where population and GDP is shifting over time,” Lee said. “There’s growing household formation, renovation and remodel activity — those are big drivers for this business.”

Kian, which acquired Team Air Distributing last week, will look to deepen the platform’s presence in Tennessee via acquisitions in markets such as Nashville, Chattanooga and Knoxville, while entering new markets in states such as Georgia, Kentucky and the Carolinas.

The firm wants to add on family and founder-owned businesses with $10 million to $50 million in revenue. In addition to geographic expansion, Kian is also targeting businesses that could add additional product lines in adjacent services such as plumbing, refrigeration and electrical.

The Atlanta-based firm, which recently closed its third fund, typically invests $7 million to $30 million in family- and founder-owned companies with $3 million to $12 million in Ebitda and $10 million to $100 million in revenue.

Founded in 1990, Team Air distributes commercial and residential HVAC equipment and parts from manufacturers such as American Standard Heating & Air Conditioning and Mitsubishi Electric Cooling & Heating in Tennessee.

A large portion of Team Air’s business is focused on distributing products for recurring services such as replacements, retrofitting and remodeling, which was part of the attraction for Kian, according to Lee.

Moreover, the Environmental Protection Agency’s October rule phasing out hydrofluorocarbons, which is expected to slash production and consumption by 40% in 2024, will shift more customer spend toward replacement from repair of HVAC and refrigeration systems over the next 18 to 24 months.

“We don’t really expect that to start bearing fruit from the phase-downs until the middle of 2024, but it should lead to a significant uptick in unit volumes in the back half of 2024 and through 2025 to 2026,” Lee said.

On the organic front, Kian will invest in or Team Air’s back office infrastructure and plans to open new branches in Team Air’s existing markets such as eastern Tennessee where the company only has one sales representative.

“We think we can triple or quadruple the revenue opportunity [in eastern Tennessee] annually if we make a reasonable sized investment in building out branch infrastructure such as new sales resources and new distribution facility,” Lee said.

The HVAC market has been a hotspot for private equity consolidation, with investor enthusiasm for contractor services spilling over to other parts of the category’s supply chain, including distribution.

Recent deals in the HVAC distribution space include Investcorp SA’s acquisition of Dallas-based heating, ventilation, air conditioning and refrigeration parts, equipment and supplies distributor Shearer Supply Inc. in April and Novacap Investments Inc. platform Master Group’s acquisition of Valley View, Ohio-based HVAC distributor Refrigeration Sales Corp. in March.

Sponsors have been rolling up these distributors to capitalize on a fragmented market benefiting from strong consumer demand for professional contractors, gain more control over the supply chain or as a way to back the segment without paying exorbitant multiples amid soaring valuations for HVAC services.

“There’s still an enormous amount of fragmentation both on the services side as well as on the distribution side, but there are more dollars now that will flow into distribution over time,” Lee said.