Private Equity Spotlight: Value and Vision with John Caple of Hidden Harbor

business best practices, and real-time trends.

I'm Sean Mooney, Blueways founder and CEO.

In this episode, we have an awesome conversation with John Capel, partner with Hidden Harbor

Capital Partners.

Enjoy.

I am very excited to be joined today by John Capel.

John, thanks for joining us.

I've been looking forward to this conversation.

We've been working with you and your firm for all these years.

It's the first time we've had the opportunity to sit with you on this podcast here and have

a great discussion.

It's kind of fun, right?

We don't talk about this stuff very much in day-to-day.

We're talking about driving value creation and EBITDA and all that kind of stuff, but

kind of sitting back is an awful lot of fun, so I'm looking forward to it.

And maybe to jump right in, John, I'd love to hear a bit more on your story so we can

share it with the listeners, kind of how you came up, how you got into private equity,

what drew you to this industry, given all the places you could have gone in life.

You know, after business school, I actually was in management consulting.

So I was at Bain for six years in the Atlanta office.

Really enjoyed that, learned a ton.

I did a bunch of private equity work during my time there.

So I spent about six months in London working for most of the big private equity firms in

the city.

And then in Atlanta, worked for a number of the big Southeastern private equity firms

doing cases.

And I really enjoyed working with private equity.

It was much shorter, right?

So you'd get a SIM and you'd have a couple of weeks to come back with kind of a strategy

assessment on the business.

So it was very fast-paced.

And the private equity firms were a lot of fun to work with, right?

Corporates, oftentimes the answer is sort of the simple part, and then the hard part

is how do you actually affect change?

How do you get people on the same page?

It's a lot of that stuff.

With the private equity firms, it was like really simple, like what the heck is the answer?

And that's all I need.

And so it was both interesting, fast-paced, and really engaging.

And so it started with me really enjoying that.

And then prior to business school, I'd been in investment banking.

So the finance part of it was something that kind of came naturally to me as well.

And as I thought to next steps beyond Bain, I was talking to a number of different private

equity firms.

And HIG Capital, like most people know, was my first private equity job.

What most people might not know is that most of the early people at HIG were from Bain

and Company.

Yeah, yeah.

John Baldock was there.

Doug Berman was there.

But then they had a real history of hiring reasonably experienced consulting people.

And so coming in through consulting is not the traditional path to private equity.

So I took a little bit of a different path, and they were one of the firms that sort of

understood the skillset that I brought and then didn't have, right?

So on the one hand, assessing a business, driving a CEO, all that kind of stuff.

I was really good at that.

I didn't know how to negotiate a CA, much less a purchase agreement.

So I had this very mismatched kind of skillset coming in, and they understood that and understood

kind of the one to two-year pathway of learning to negotiate purchase agreements and debt

documents and all that stuff.

And none of that is rocket science, but it's something you need to learn when you don't

know it at all.

And so that was a great place for me to land.

with right before Blue Wave had similar streaks.

There was a lot of Bain streaks, there were some L.A.K. streaks, more of the consulting

quadrant.

I came up through investment banking, and when I joined all these consultants, I go,

oh, man, you guys have a better skillset.

All the really critical stuff they were really good at.

Yeah.

We have a mix here at Hidden Harbor.

We have, of our five partners, three of us kind of came up through consulting, two more

through the traditional investment banking paths, and they both work, and it's actually

helpful to have a mix of those skillsets, I think, and it's served us well.

They're complementary, and the Venn diagram overlaps, but they're separate strengths.

And so for me, it was that whole concept of the grass is always greener.

And so they were wowing me with PowerPoint, but boy, could I bedazzle them with Excel.

That's exactly right.

investors where they really got how to see value, and then also probably earlier on,

fundamentally, because of their value orientation, how to create it.

And so I learned a ton at HIG.

It was a great place, and both HIG has continued to be successful.

Frankly, the HIG spinouts have been hugely successful, so clearly there was a lot of

good things going on there.

I think the investment process was just first class, and I think one of the things HIG is

very good at is not falling in love.

And so I remember back to my time at Bain, we'd be working on a deal for a private equity

firm, and you could see it in their eyes.

They were in love.

And there was nothing you could tell them about their baby that would convince them

not to buy this company, right?

They were just truly in love.

And I think one of the things that HIG was so good at was not falling in love.

In fact, it may be the thing that they're the best at is they don't fall in love, and

it's a really important skill to learn, because when you fall in love, you make bad decisions.

I mean, sometimes you make good ones, but about companies, you probably make bad decisions.

And so how did your time at HIG then kind of lead you to Hidden Harbor?

It was a period of enormous growth for HIG.

So when I joined HIG, the core buyout fund was $300 million.

I joined the Bayside kind of distressed fund, which was $500 million, by far the biggest

fund they'd ever raised.

A couple, three, four years later, we raised Bayside II, which we kind of combined with

the middle market fund.

We raised $3 billion.

And it was then off to the races, and they were raising European funds.

And so I tell people, you know, my first day at HIG, Sammy and Tony took me to lunch.

It was this tiny place.

And fast forward five, six years, it was really an enormous place.

And I got an opportunity at a firm called ComBest Partners up in West Palm Beach.

They had just brought in a new partner, this guy, Pete Kite.

Pete, you probably wouldn't know him, but he was actually an entrepreneur.

And he had started a business that eventually became a company called CheckFree, which he

took public, but then sold for $4 billion.

And I was really excited about the fact that ComBest was going to be a place run like a

business, right?

Like, we're not just going to be a funky private investment firm, but we're going to try to

run this like a business.

I was extremely attracted to that, and I really liked Pete and thought he was a great guy.

And so that's what sort of convinced me to move kind of up the road to West Palm Beach.

And it's interesting.

I think a lot of people when they were maybe more tangential to the private equity industry

think private equity, New York, San Francisco, Boston, Chicago.

And what I think a lot of people don't realize is a lot of the roots of private equity are

really in this one corridor along the East Coast of Florida.

And there's just some really, really kind of strong foundations there that have kind

of led innovation in the P industry for years to come.

So the genesis of value investing kind of in the U.S. in the private equity side was

really, frankly, South Florida and L.A., right?

It was originally Sun and HIG in South Florida and then Platinum and Gores in L.A.

And you know, Platinum and Gores kind of out of Drexel kind of heritage and us, both HIG

and Sun were founded by guys coming down here.

So it really was very much that way.

Now it's become a much bigger space, but it is amazing.

When I came down here, it really was just Sun and HIG.

Tribest was a little place.

There was one or two other small ones, but it was really just Sun and HIG.

Now there are literally 40 private equity firms with offices in South Florida.

And so not just some senior partner down here, but real people.

And it's become a real community down here.

So it's certainly changed over the 20 years I've been here.

And in some ways, I imagine catalyzed by COVID is everyone kind of got the opportunity to

say, you know, in Florida, they have this stuff called the Sun and not the fun per se,

but actually the Sun in the sky that shines and you get this thing called vitamin D and

they have this thing called no state income taxes.

And it's been amazing how these really, really awesome business builders have voted with

their feet by going to places like Florida, like Nashville, here where I live, like Texas

through that whole kind of metamorphosis.

When I was going through this whole kind of life decision around, do I do Blue Wave or

do I stick with this pretty good gig as a partner of a P firm?

One crazy choice, one smart choice.

And you can probably decide which one was which.

I don't know.

In retrospect, it seems more clear than the other, but not up front.

But I was thinking through the whole idea and here I am, I grew up in Texas.

I was going to go do two years in New York and then move back to Texas.

And then I met a nice girl from Connecticut.

20 years later, I'm like, I am still here.

And I just realized over time that it used to be, you had to be in these big city centers

because you had to go to Midtown Manhattan to do the management meeting, to see the company.

You had to go sit in your lawyer's offices.

And then this thing called the internet came up.

And then it was more about going to see the companies where they were.

It's like, you know, you don't have to be here.

And in some ways it just makes things more hard, more expensive, difficult.

And not taking anything away from New York or California, because they're still amazing

epicenters of commerce and capitalism.

But at least as I thought about it from my personal self, I was like, you know what?

I can change the equation on a number of fronts.

And it sounds like you saw that and learned that a lot earlier.

I just got a job at HIG Capital, which happened to be here.

So there wasn't really any learnings there.

It was really very much, this is where the opportunity was.

And I took it and it happened to be at South Florida.

And that's worked out great.

Well, I'd love, John, maybe to drill down a little bit more into kind of your background.

One of the things I'd love to ask is, we'd know you better if we knew this about you.

What's maybe something that doesn't show up on the LinkedIn page?

I spend a lot of time fishing.

And so I love to get offshore, you know, in South Florida, it's hot in the summer, right?

Golf and tennis really actually aren't that sweet here half the year.

So I spend a lot of time on my boat catching fish between here and the Bahamas.

And so that's the thing I kind of enjoy outside of work.

I'm happily married for almost 20 years now, which is great as well.

And I don't know if there's anything else all that interesting about me.

I'm kind of a boring guy, actually.

So what do you like to fish for?

What's your like, when you catch this, you're like, yes.

So the truth is, I like being out on my boat.

Like at some level to me, fishing is an excuse to spending a day on the boat, right?

You can't just go drive your boat around the middle of the ocean doing nothing.

You got to have something to do.

And so at some level, it's that.

And I do a bunch of different kinds of fishing.

There's sort of what we call the classic South Florida troll, where you're fishing a couple

planer rods and a couple surface baits, and you'll catch dolphin, wahoo, tuna, kings,

all sorts of that kind of stuff.

I love to go over to the Bahamas.

Yellowfin tuna fishing is really fun.

You catch these, at times, hundred pound fish that just fight unbelievably hard.

It's really fun.

And then I spend a lot of time sword fishing.

I'm not as successful at that.

And that's a whole separate ball of wax.

You're out kind of in the middle of the Gulf Stream.

It's super technical.

You actually catch them with an electric rod, so you don't even reel it.

Oh, really?

Yeah.

But once you do a lot of fishing, you realize actually people think of fishing as the reeling

in the fish.

That's not fishing.

That's just reeling it in.

What's fishing is how do you present the baits the right way, be the right speed, all that

kind of stuff.

That's 95% of fishing.

Pulling it in is just like the last 5%.

I don't know how to do it.

I grew up in Texas.

I guess you could do river fishing and things like that.

I had this one formative experience.

I was doing a study abroad in Australia, which was great.

I was like, I could either go to London School of Economics or live on a beach in Australia.

I think I chose wisely.

My roommates and I, we went on a big offshore fishing thing.

We had caught like a 300 pound, at least according to the captain, like a marlin or something.

Something huge.

We were reeling this thing for three hours.

It gets close to the boat.

None of us had a clue what we were doing.

Then apparently, they get to be 300 pounds by being smart.

At the last moment, it blitzed towards the boat, turned upside down and spit the lure

out.

The captain was so mad at us.

He's cursing at us.

He's like, you stupid Americans.

You didn't keep it tight, right?

Yeah.

We didn't keep it tight.

In some ways, it was a huge blessing because we're a bunch of dumb college kids.

We were planning on taking back this huge fish in a cab.

Well, the cab would have been fine for you.

The cab wouldn't have been so buoyant.

and just have to give him this fish that he'd be able to sell at market for a lot of money.

We ruined his day.

I don't know what the rules are in Australia.

In the US, you can't sell them.

Yeah.

Offshore here in South Florida, I think this was a couple of years ago, somebody caught

a 750-pound bluefin tuna.

They claimed it was dead when it got to the boat.

Whether that's true or not, I don't know.

It doesn't matter.

You're still supposed to throw it back even if it's dead because it's illegal to catch

a bluefin tuna in these waters.

You're supposed to throw it back.

I think it's hard to believe that almost any fisherman would really throw it back.

It's like a catch of a lifetime.

They took it in and they brought it to the dock here in Whitten Beach, took a bunch of

pictures of it, put those pictures on Facebook.

Not so smart, but the dumb thing they did was they sold it.

Well, no.

It was a huge fine, yeah, but the really bad thing they did was sold it.

I actually think if they just put it on Facebook and even if Fish and Wildlife had caught them,

they would have said, hey, it was dead.

But once you sell it, and they sold it for like nothing too, so yeah, it's super illegal

to sell fish.

You can't sell them.

Without a commercial license.

You have to have a commercial license.

Well, that's good to know.

So, as a fisherman who doesn't know how to fish, I'll remember that for sure.

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Now back to the episode.

So, John, I'd love to maybe dig into a little bit about kind of how you think about the

business world given kind of these really kind of amazing experiences.

You've worked for some of the real kind of pillars of the private equity industry.

You've built Hidden Harbor into what it is today, which is one of the most innovative

PE firms that we know of and we recognize as a top PE innovator through this analysis

and recognition program that we do.

And so I'd be really curious to think about what are some of the business traits that

you look for when you're looking at a prospective investment and thinking about, is this a really

good company or probably more importantly, could it or should it be even better than

what it is today?

world.

We're a value investor.

And so there's always a reason why things trade at a value.

And the question I think you have to ask yourself is, what are the things that are going to

cost something to trade as a value that are really hard to change versus what are the

ones that are easier to change?

And so as an example, it's really hard to change the industry you're in.

It's really hard to change the products you sell.

If you don't have quality products, if you don't have quality services, if you're losing

market share, those things are really, really hard to change.

Frankly, even if you're not making good returns, those things are hard to change.

On the other hand, there's some things that are easier to change.

They're not easy in the sense that most private equity firms are set up to change them, but

they're changeable in a reasonably straightforward manner.

As an example, we buy a lot of founder-owned businesses where the founder wants to retire.

So essentially you're buying a business without a management team, because oftentimes there's

a reasonably unsophisticated bookkeeping person that maybe does the books.

It's almost always running QuickBooks, obviously not audited, all these kinds of things, right?

And so as an example, that's actually something that's very fixable.

You can go recruit a great CEO to run that business.

You can recruit a great CFO.

You can move from QuickBooks to Sage.

You can do a lot of those things.

And so one, that's a risk we're very willing to take.

We buy a lot of less sophisticated businesses.

Oftentimes they're really good businesses.

They're run well.

Their products and services are really good.

Customers like them.

Their employees are happy.

But for a variety of reasons, they're going to be hard for a typical private equity firm

to buy.

And then we're also very focused on buying businesses in markets and with business models

that at least have the potential to trade for kind of double digit multiples.

So as an example, an easy one that most private equity people would recognize is HVAC services,

right?

Who doesn't love residential HVAC services?

Well, we have a business called Air Conditioning Specialist.

We started at $2 million with EBITDA there.

Actually a really good management team in that case, but not super sophisticated.

We've done 10 add-ons.

We've put in a ton of systems.

We've built it up.

So that's an example of a really good subsector that everyone likes.

We're able to find a reasonably small place to start and get going.

And so we're really looking for the right businesses and the right business models and

not nearly as focused on the system processes and people they have now because we're going

to build that over our ownership.

It's kind of like, as I think everything in my life, I have to think through a metaphor.

It's a part of growing up in Texas.

And it's kind of like if you're buying a house, you can't change the block that it's on.

You maybe can change the foundation, but that becomes a really big lift.

But you can do the kitchens and you can do the bathroom and you can add a pool and those

type of things where it's like, as long as you have something that has a solid foundation,

there's a lot you can do to help these companies reach full potential.

And the management team isn't like just the kitchen.

You know what I mean?

It's like it's really important, but it is something that you can go find the right set

of people to run these businesses.

And so as an example, that's something that we've had a lot of success in changing over

time and improving and we're not like firing everyone, right?

Like almost always it's, we do a lot of corporate carve outs as well, which actually is very

similar.

It's actually shocking how similar corporate carve outs are to sort of professionalizing

a founder owned business.

It's almost all the same steps.

In almost every case, we find really good people at these businesses and so it's really

a matter of augmenting the team and getting the team ready for growth, right?

Because oftentimes the businesses we buy are kind of like one location, founder run businesses.

The founder's really good, but they do what I call managed by walking around, right?

Like they started the business, they started from customer one.

They know every employee, they know every customer.

They don't need systems and reports, right?

That works really great up to a certain size and in one location.

And so then when you want to have locations two, three, four, and five, when you want

to do add ons, all of a sudden you need systems and processes, but making sure that you're

starting with a really strong foundation, as you put it, being in the right industry,

but then a pretty well run business.

I mean, just because they don't have Sage and Service Titan and a CRM system doesn't

mean they're not well run.

And so that's something we're often doing.

And even as I think through kind of the journey here at Blue Wave, we're about the size of,

or at least maybe the size of portfolio companies that I used to have now.

But when we started this thing, I could walk around and I could just had a sense for the

business.

I'm like, okay.

It would outsource my accounting in the first couple of years because like, oh yeah, I know

exactly what's going on.

Just give me my financial spreadsheet.

And then two things that I would feel is one, it starts getting more complex and you start

losing that intuition.

And then I always feel like we're on this plane that we're building as we're gaining

altitude.

And then you just read these phases where you feel the wings wobbling and you can't

gain altitude anymore.

And until you put in that next layer of infrastructure and rivets and kind of capabilities, there's

no way you're going to gain that altitude any further than what you have done.

And so what you're sharing there kind of viscerally makes me recall kind of our phases as we've

kind of come along and just knowing that if you don't do those things, you're not going

to get any more altitude.

That's right.

That's 100% right.

it's got the preconditions for kind of transformation and adding untold or unforeseen amounts of

value previously.

How does your firm then approach the value creation phase?

What resources do you bring to support your portfolio companies as part of that process?

So it starts with our portfolio operations group.

So we have 13 people in our portfolio operations group, which is a huge team for a $450 million

fund, right?

And those people kind of have two different flavors to them.

We have a whole series of functional specialists.

So we have a CIO, we have a head of talent acquisition, a general counsel.

And so our businesses aren't big enough to have those roles in there.

At the same time, in almost every business we're putting in new systems, we're hiring

people and have legal issues.

And so by bringing those resources to our CEOs, it helps them get things done.

And that's critical and critically important.

Then the next thing we have is we have a bunch of people that are kind of on the ground driving

the businesses day one.

And one of the things we've put together is what we call our value creation engine, which

is 12 standard operating procedures that we do at every portfolio company.

By the way, you can go on our website and see them.

So they're not secret and they're fairly straightforward.

Of course, we're buying pretty small businesses.

Like they're not ready for maybe some of the things IBM is ready for.

And when you see them, you'll say, wow, those are pretty simple.

But almost every business we buy isn't doing these things.

And so we then implement those in a pretty straightforward way every time.

And the goal is to get those implemented in the first year.

Our whole approach to value creation is called building teams focused on execution.

So everything we do is about those two things, getting the right team in there.

But it's not just hiring the right people.

It's how do you have the right feedback loops?

How are you communicating the right way?

What's the vision?

How are you then measuring?

Do you have an engaged employee base?

We do employee surveys across the portfolio once a quarter and it's really helpful.

And we found that everyone always said, well, do we have to do this every quarter?

Yes.

It really helps because it actually keeps it in front of you and you keep getting new

data and you're either getting better or worse.

And when you're getting worse, you figure out where you are and where your hotspots

are and it's really helpful.

So that's kind of the building teams part of it.

The second part of it is what we call focused on execution.

And so there it's really all about that word focus.

Biggest mistake companies make by far is trying to do too many things actually.

So they have a list of priorities and it's 10 or 15 long and that means you have no priorities.

That means you're not focused on anything.

You're just doing a bunch of stuff and you're almost certainly not accomplishing all that

much.

And so all of our portfolio companies have what we call a value creation blueprint.

That's the two or three things they're focused on right now.

And it's only two or three.

And we are going to focus maniacally on those two or three and get them done.

So if you sat through one of our monthly board meetings, we don't get to the financials until

page 10.

We're starting with what are those initiatives?

Where are we?

What are the leading indicators?

How are we getting this stuff done?

And so we're going to spend the first half hour at least of the board meeting talking

about that.

Then we'll get to the financials and how we're doing it.

We're still private equity guys, we care about that.

But it's actually what really matters is are you getting those core things done?

Are you making progress?