Gabe Mesanza, Huron Capital | An Expert Perspective on Culture, Growth and Cash Flow in Private Equity

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I was always drawn to these situations where there was a bit of an urgency to whatever I was doing. So I worked on the launch of a product at a plant. I would do different things that had even back then, doing things that had some sort of time constraint or urgency to them. And as I started looking at decisions that were being made, I worked at GM at the time, I looked at decisions that were being made. I just didn't understand them.

I said, Well, I must be the unintelligent one here. How is it that someone is launching a Pontiac Aztek and they think it's a good vehicle? And I saw all these people that are in executive ranks, they have this thing called an MBA, Okay, what's an MBA?

I'll go look at that. And I had an engineering master's at that point. I looked into it. I said, Well, that doesn't look that hard. I'm sure I can go do that.

And so I went down that path and I got into consulting after business school. And one of my final things I did at Deloitte was carve out a plant that was a former Visteon sold to another company. Then they were carving out to sell them off individually. And I was like, Wow, this is really interesting.

I just had never really understood it wasn't part of my lexicon, but part of my experience, so I kind of filed that away. So that's interesting. And then I did another consulting gig at another company and I went over to KPMG. To the Transaction Services Group, where it was purely due diligence, purely acquisition type work. And that's where I really started getting into the world of M&A.

Not really working directly with sponsors at that time. Maybe some smattering of operating partners that existed back then. But really got me into the idea of acquisitions and how to think about a company in the scope of a finite timeframe. And it really wasn't until I got into Alvarez and Marcelle that I really started working directly for private equity. And there I was doing due diligence. But then I got into doing interim management and running companies, parts of companies for portfolio, for sponsors. And wow, how interesting, right? The thing that really drew me to private equity is this very focused, very deliberate approach to what we're doing, right?

It's we're going to look at a company, we're going to understand what's going on right now, we're going to have a thesis about what the future is going to take us. We're going to deploy cash ourselves in equity to grow that company, hopefully through more acquisitions, and we're going to have a very specific focus on cash and EBITDA during the ownership cycle. And what was interesting that, you know, I had this misconception, I think, or maybe a perception of private equity that was going in. Taking a lot of debt, pay yourself a bunch of money, cut costs and sort of let the company ride. This idea that you actually have to create value within the company to be able to create equity value on the back end is something that really appealed to me, right? So I didn't feel like I was going in and just cutting costs, I was really growing companies.

And that's sort of what drove me to really focus on private equity. I still wasn't ready to come into the industry myself, so I went to work at a startup. I ran operations somewhere and then I was CEO of another company. And it was at that point I was looking, do I go back to consulting or do I do something else? And I got a call from Huron and sort of met the people there and they were very operationally focused and it just felt like the right fit.

And I really believe in what Huron was doing at the time and wanted to be part of it. So a long way of going about it. But it wasn't something that was natural for me, that my whole life I've been thinking about this topic, for sure.

That's not my focus area, right? That's where I rely on my partners to focus on those areas, and I think they rely on me, on these operational ones.

It's about laying out what the industry really is, it's about growing, it's about enhancing the value of companies versus cutting costs.

Otherwise, I just don't see how this works. There's too much cash is cash, everyone has it, all the sponsors have it.

It's not a differentiator, you just have a fund, and again, especially with founders, you need to have something that differentiates you.

You don't need all the parts.

And so there's this need that I have personally to have a very tactile approach to things right. And so I do woodworking on the side. Oh wow, I'll just get into go down these rabbit holes around 3D printing or CNC machining and things of that nature.

And when I have a need at home to do something, I'll go. I need to hang a ladder up. Instead of going to Amazon and look for something, I first go onto my computer, I design something, I print it in my 3D printer and I see if it works. Wow, maybe it works half the time, right?

And maybe the other half? I have to go back to Amazon and go buy it, but that's something that, to me is important. I like to have this idea that there's a problem, I've thought through a solution and I've created this tangible output of it. It's minor and it's silly, but it's something that really sort of feeds that engineer aspect of me and intellectual curiosity around.

That is sort of something that never goes away.

And so my skis are not hanging in the garage. As far as woodworking, there's an evolution. You go from being a rough carpenter to being a cabinet maker to being a furniture maker. I'm somewhere in the cabinet maker world, so I've built three or four basements of different houses.

I've had done all the framing done.

To get into real furniture making, not to sell, but just to again. The idea of. I have an idea of a piece of furniture that I've seen or something I've thought about. I'm going to go build it, see how it works.

We have to grow them to create a real platform, we have to add more resources around it. But you can't have talent without culture. And so that's the thing that I think is the ultimate determinant of success or failure in any company. But specifically in the timeframe that we have. So is it a culture that properly rewards ownership of projects, of financials, of of delivery or customer service, whatever that is right.

But they appropriately sort of reward, that's something they're very proud of. Is it a company that develops their people and tries to find opportunities for them to grow personally and professionally, right, even if it's outside of their own company, right? I love when when I talk to people and I say, Well, so-and-so. Had this great opportunity. And we couldn't keep on growing them here just because of the size that we were.

And so I personally called someone else that I knew and found this opportunity that is, you know, immeasurable. If you will, the amount of goodwill that you get, the amount of other sort of ability to attract more talent and retain talent is just amazing you get with that.

When people, management, team or across the organization look at each other, you get that sense that they trust each other. I mean, these are all the things I think that that start to define what culture means, and culture is a very difficult thing. To put two or three words, you can use a bunch of buzzwords to define it if you will. I think you sort of know it when you see it and when you experience it.

And I definitely saw it when I joined Huron, for example. And I think I see it when I go talk to new companies that we're looking to acquire. I think they see it in us and other sponsors, right, that are out there. What the culture is of this partner, that I'm going to be in a relationship with that, to me, is the single biggest trait.

And honestly, the single biggest differentiator between success and failure is that quality of the leadership team and the culture they've developed. That's the only thing that holds everything together.

And then I think, as you know, particularly even in Covid, you know, a lot of people realize this really matters. As we, after hundreds of thousands of years, we've been tribal species being together. And then we suddenly were broken into little boxes. And I think everyone's got appreciation for it, but it's this is something that I can personally say. I went through a big evolution, not only while I was in PE, but even when I started Blue Wave. Because it's like, this really matters, and you got to get this right, and if you get that right, everything else so much easier.

And so the only thing that holds someone to your company is that culture. It's an aspect of it, but ultimately, that can be replaced somewhere else. There's always someone willing to pay just a dollar more for your services. So I agree with you. I mean, the thing that holds you there, the retention aspect of it, is fully culture.

Absolutely, and and how, you, you know. I probably didn't even do justice in describing all the different adjectives that you can describe culture, and I think everyone describes it a little bit differently. This is why it's more of a feeling than than you can really put into words, I think at least.

And your founder owner businesses, you know, whether they did it intentionally or not. It's probably often a reflection of the values and the culture of the, you know, that first core that started that company and nurtured. But it makes things so much easier, yeah.

So there's an immediate ability to connect with that founder and have them feel like, hey, we understand. At least from the outside end perspective, we understand sort of the industry, right? We're not just here as complete idiots. And then really, the work kicks off when we get to the point of an LOI. We try to do as much of the value creation planning ahead of the acquisition. And so we will go in with a plan that we develop with our third party providers or diligent providers. And ourselves and our river guides or operating partners that are external to us to say, okay, these are the things that are important from an investment perspective.

These are the things that are important to this local team, these are the gaps that exist. We all agree, in general, large buckets, that these are the things we want to go off and do. That makes its way into our financial models so that we know SG&A, for example. Am I having to build, also what resources we have to hire?

We try to pre-fund things ahead of time as well, so if we know there's going to be a big digital transformation, it's going to cost money. We try to pre-fund it so that we're not in the middle of a budget conversation. And we say, Oh, by the way, there's this massive project you have to allocate a million dollars to. That doesn't exist right now.

We have a lot of that upfront. We have a group of operating partners from the outside. That phenomenal people who are very experienced, tons of great relationships that they bring to the table really deep industry experiences. We align those guys also to our companies. And then there's an internal group that I lead that focuses on sort of the building of the company itself. If you will. So we're responsible for the value creation plan and we work with the management team. In the first 12 18 months, or however long, to really go off and deploy it.

Trusted outsiders like you guys to help us in situations where we need an extra pair of hands or a specific knowledge gap. That we have to deploy. The value creation plan. But it's all done with the management team, with the leadership. Everyone's bought in, so that when we do buy the company, there are no questions. This is what we're going to go do.

That's something that's very difficult to do. The other thing that we that we look at as we develop these maturity continuums along.

Financial excellence, commercial operations, IT and human capital. And a basic maturity continuum, right, one to five. And we also look at what do we need this company to be at in that maturity continuum along all these different metrics. For us to feel like we've done our job as an investor, and what do we feel as a company we want to build upon? Exit?

And we'll look at and say, okay, well, we have a bunch of things that we need to be leading in versus others that we just need to be baseline at. Right. If we have too many things that say we have to be world-class at, we'll probably say, well, that's not a deal for us. That's not something we can really win. Realistically, if you're doing more than three, four things in a given company, it's already too many things to focus on major initiatives. And then the other thing that that helps us do as well is to see the gaps, right.

We look at where we want to be and where the company is right now, if we see major gaps in a lot of different areas. That also tells us that maybe in this three to five-year period, that we have not the right thing to go after.

In reality, you have to be much more practical about things. And if there's one thing that I always push back on, our third-party providers is great. You've told me I need to go do these 10 things over the next six months. No, put yourself in the shoes of the person doing it.

What are the real important things they have to go do right now, what are the things that we can wait on, and what are the things that we're? Just? We'll do it if we get to it right, that practical approach, maybe that makes us a little bit less aggressive, but I think it helps us build a more consistent business.

Who's going to own it? Why should they do this versus something else that they're trying to do again? Because you can only do three or four things at a time, so oftentimes, actually, in the last year, I can tell you. There's been two or three situations where a couple of our companies were looking to do projects and said we're going to do them in the next 12 months. And we actively said, why don't you take 18 months to do it?

Because we kind of know from experience that that was just a lot of burden to put on the organization. And when you do that, your everyday work starts to suffer. So there's the day job of selling, delivering, doing all that work. That just has to happen, regardless of what's happening out there in the world. What projects you're doing. And when you start deploying your organization to do a special project, you start losing focus on those things that you have to do well every day.

And I always tell people, you have to earn the right to be strategic, and you earn the right to be strategic by doing the day-to-day activities really well.

Is this thing whatever? this thing is going to help us get there? if not, why are we doing it?

You're not sure if it's going to hit where you are or miss you.

There's all of this kind of churn and unease, but there's still like some really good things going on. So how is you think about thematically with your portfolio companies? how do you help them think through? You know, not only being safe and get your foundation steady just in case, or to weather the potential storm that's coming, but also to say no, we're going to go find success as well.

Earning the right to be strategic is doing those basics, and so the basic is focus on cash. Just understand your cash position, because that is really sort of the lifeblood of the company. If you're struggling with cash, then you really can't think about much else. Very honestly, that is all consuming, and it leads you to short-term decisions that are often counter to the long-term goals of the company. Right? So that, to me, it's first, second, third in a crisis. Focus on cash.

And I did a number of turnaround work at A&M and that's exactly what we did right. So let's just take that as the obvious, right. Assuming your cash position is fine, this is the time to get really close to your customers. It's understanding who are your buyers, not what company are your buyers, who, specifically at the company, is your buyer.

Who is the decision maker that can really make a difference? What's your relationship with them, how often are you talking to them? What does that conversion look like from a funnel perspective? Why are they buying from me versus something else, someone else?

What pressures are they under themselves that they're seeing? That are going to get transferred one way or another over to me? Or provide an opportunity for me to provide a solution for them if you will? Why are we differentiated?

So really getting close on that. We have two or three projects right now across the portfolio on salesforce effectiveness, funnel management, pipeline management, things of that nature, conversions right from top to the bottom of the funnel. The other one is that again, assuming you're in a good cash position, assuming that you're sort of close to your customers and the revenue is still coming in. Great time to do M&A right now, despite the interest rates where they are, despite whatever. This is a phenomenal opportunity, especially for us in a buy and build environment. We're buying small companies.

We're trying to aggregate regions or groups of services together. Tons of opportunities out there for people who are getting close to retiring potentially. And they're just looking around and saying, I just don't want to do this anymore. I've gone through this in the 80s, I went through it in the early 90s, I went through this in 2001..

I went through this in 2008.

I just don't have another one in me. It's a great opportunity to have a strong company to then aggregate other opportunities there, and we're continuing to do deals. It's for us.

It's really not slowing down. It makes the assumption that you have an underlying company that is able to absorb it, that is good. And that's why, again, we focus so much upfront on creating that platform. And for us, if we don't do an acquisition in the first year, that's fine if we're building the infrastructure to then be able to. Every acquisition that happens happens faster, and your returns are higher for the acquisition, then, great.

But now is really a good opportunity, I think, for those of us who are able to.

They go out of business because they run out of cash.

The idea of cash is not something that is natural for a lot of people. And it's surprising the number of people who kind of mistake EBITDA for cash. And not being an accountant, not being a base financial person. I look at statements of cash flow and I'm like, Well, that's garbage for me. I need to know how much cash is coming in today, how much cash is going out, how much cash is coming in today. I don't really care what the math tells me.

So that's something that I think is missed on a lot of people. Because you're just never exposed to it, not wrong or indifferent, just never exposed to it.

The moment that you start adding debt to a company and you have quarterly debt payments.

It really becomes some different level of conversation. And the change to being owned by a private equity is that we really only want to put in equity or cash into a company to grow it, to build it, to buy other things, we don't want to put cash in to run the operations, right? Founders very often will do that to keep it going, which is exactly as they should do, right? But the dynamic changes.

And so helping founders go through that transition to understand that this is something that's absolutely needed. But yeah, it's a lack of experience, that's all it is.

See how far you can take it and just see what decisions it drives you to make or not make. With that right, you might find that one of your core beliefs is that you want to pay your suppliers in 15 days. That's great, phenomenal.

But you have 30 days to pay and you're not getting any benefit from paying in 15 days, so it's a nice to have. But what would it do to your cashflow if you paid them in 30 instead of 15? Well, within the contract? It's little things like that that I think forces you to be more thoughtful.

Doesn't have to be try it one week, four week, eight weeks.

You know, the thing that was, I was just, really, this is a question that you posed to me earlier right now. And I was really kind of had to think about it. And to a comment that you made earlier about you sort of approach. Things are very kind of hard hitting. Just getting to the next level and early on, that's really all that mattered to me. I was thinking about. I worked at GM and so how do I get from this level to this next level?

How do I get promoted? What's my next thing that I'm going to go off and do? When I was in consulting, I was also, how do I get promoted? From senior associate to manager to director, senior director, things of that nature, always sort of chasing that next immediate thing. And then I achieved a lot at a very young age. But now, interestingly enough, the things that I find myself connecting with these founders on are those things in my 20s. Are those very tactical, engineering type aspects of the fact?

That I spent time supervising hourly people that I did all these things in my early days. Those are the things I find myself kind of connecting with founders a lot more now, rather than whatever I may have done, some integration planning or some other. The things that I've done tactically are the things that matter and the things I connect with. And so I wish I would have taken more time in such a hurry early on in my career to get past that. Doing things with your hands type. And that daily and hourly requirement of a business, because I think we once you start progressing in business, and especially in private equity, we lose touch with the idea that someone has to be thinking about a topic on an hourly basis. If you're in a manufacturing environment, you have hour by hour boards that are on a shop floor and people are measured. Did you achieve that output at that quality level?

In our service businesses, we think about. I try to push people to think about sort of winning the day and that means I need to win that morning. Which means every piece of equipment has to be available for the employee. When they show up, they can get what they need, they know where they're going to go, they go off and do it.

Right, so it's not like when I do a project, I have to go to Home Depot 10 times to finish it. You know, that's OK in my personal life, not OK, not OK in business. But just understanding the fact that at some point, the people who actually make money for you are thinking about things in a very discreet, hour by hour basis, project by project.

I wish that I would have spent more time in that world earlier on. Not been in such a hurry to get into more of the business side of things, to get promoted, to do all these other things. Just take your time there, right? these other things are going to come at you, but just take your time in those early experiences.

And I think that's the feedback I would give to people coming out of college now. Don't worry about where your first job is, it doesn't define your career. But just spend enough time there so that you can really get a sense of appreciation of what exactly has to happen in those levels before you move.

But like, understanding that path and where you are and that now, and being OK with understanding it while not looking past. It is something that I think anyone can.

Yeah, it's a long, it's a marathon, there's a tortoise in the hair. Yeah, I thought about my career and sort of decades. I thought about my 20s of the doing phase of my of my life, and the 30s about the practicing, and the 40s about sort of leading. I'm 47 now.

I always accelerated by two or three years at the end of that decade. I was always kind of like, OK, I'm going after the next thing. I just really wish I would spend the time.

Absolutely.

I don't handwrite, but once I handwrite it, I almost have a photographic memory about it, and so it's just a weird quirk. And so I've never been able to have take notes on a laptop, for example. I also don't like being in a meeting.

Everyone has their laptops in front of them. It's almost like a like, a sheer barrier. It's a barrier, right? I don't like having that to communicate with people, and so I used to carry a notebook everywhere.

And it was great because it got me what I needed. But I couldn't sort of refer back very easily because I would have sequential meetings of different topics and have to go chase it back to remember what day it was. So I just switched over to everything on an iPad. And I went through a couple of those e-readers and figured out I didn't like how they work. And so I decided to just use my old, trusty iPad.

And I got a cover for it that has a little bit more resistance to it, so it feels more like handwriting. I use the Apple Pen and I use an app called Good Notes that allows me to write it down, and then you can search against your handwriting. And so it's, I mean, I'm probably maybe four months into this.

Erase it and write it over again. But it's so easy that, you know, and also it allows me to do, is. I'll go back after a meeting. And I'll sometimes rewrite my notes to better reflect the actual point. That was, you know, sort of my stream of consciousness notes. So it's been really interesting to sort of edit the past, if you will, and and create something that gives me a little bit more longevity later on.

I'm a convert.

I can check that off like it physically disappears from the things to do that. That's something that again, and maybe it's an engineering mind. So they're just just enjoy.

So thank you so much for joining us today, it's really generous.

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