Doug Horn and Mohit Kansal, Clairvest | Strategic Collaboration and Structure in Business

In this episode, we have a fantastically thoughtful conversation with Doug Horn and Mohit Kensel with Clairvest, a leading private equity firm headquartered in Toronto. Enjoy.

Today, we're very fortunate to be with two of the best of the best in private equity Doug Horn and Mohit Kensel. With Clairvest, Doug and Mohit, I'm personally very excited to have you all with us today. So Doug and Mohit, let's just jump right into this. Here. Today. Can you share a little bit about the history of Clairvest and where you all focus as a firm?

So it's been around for about 35 years. Our founding was a little different to most private equity, most private equity, it's lawyers, investment bankers, that sort of type. We were founded by entrepreneurs, so some of our founders are kind of the most successful kind of entrepreneurs of the day.

Folks who founded pretty big and successful businesses like the four seasons Motel Group, which we'll all be familiar with, Barrick Gold, large mining companies, large retail companies, et cetera. And their slogan back then, which is largely the same today, was Buy entrepreneurs for entrepreneurs. So we look to back entrepreneurs and help them achieve their vision and their success. So that's where we started 35 years ago and doing the same thing today. About halfway through our history, we started raising outside capitals and today look and feel like your typical private equity firm.

But I always highlight three things as being a bit different. The first, as I mentioned, our founding is from entrepreneurs. About a third of the money is our own, so we manage about three billion, or capital, or so about a billion is from us. So eating our own dog food, we typically hold for longer, not taking undue risk. And, you know, it's growing the investment, not necessarily collecting fees that drive our incentives.

The second, we do a lot of minority deals, about half our deals are minority, and third, we focus on certain industries. Not everything which you alluded to. Sean and I spent a lot of time in the gaming or gambling sector, as well as facility services, and I could talk for a long time about those. But, you know, we focus on select industries, and Doug does as well.

They know their industries inside and out, and typically they're looking to us to help build the resources and build the scale so they can achieve new heights. So it's a bit more of a collaborative approach. And we've learned over time that having economic control really doesn't mean anything if you're in business with the right. People who've got high integrity, have an incredible amount of expertise and know-how, and, importantly, they know the industries inside and out. So they can make the best decisions that are both in their economic interest, but also in the interest of the company. We'll go along for that ride and benefit alongside them as we help them scale up and build more capacity within the company.

I'd say at the end of the day, this approach is just a much more collaborative approach working with entrepreneurs than a very top-down sort of private equity control mindset.

And even if you have control, really, the only rights you have are kind of buy, sell, hire, fire. Everything else in between, which is so much more foundational, is how do you work together to get to a common objective? I'd love that perspective. And then Doug, maybe one thing I'd be curious to get your thoughts on. Both from understanding your own vantage as investors at Clarivest. But also things that business owners should think about in terms of how they should think about developing their own businesses. What would you say are two or three of the most valuable traits in a company that you and your colleagues look for when considering an investment in a company?

And, by design, things that entrepreneurs should think about when building and growing their own companies.

As we help build these companies up, we're looking for management teams that know what holes they have in their organizational structure. Those holes are aligned to where the strategic growth plan is. And making sure that you've got the right people in the right seats that are going to help you execute that plan day in, day out. The second is processes. And this is one place, quite frankly, that we do help our teams quite a bit as they go through corporate maturation or corporate adolescence, whatever you want to call it, you know. As companies scale, it's a balance between maintaining that nimbleness, that entrepreneurialness that you find in companies that have started from nothing and have grown up. But also as you scale. Inevitably, you need to add some processes and some accountability to be able to really double, triple, quadruple the size of your company. And the third one, which is really just our marker for whether it is a good business or not, is profit.

And so there's a whole host of KPIS and financial metrics you can look at. At the end of the day. We're looking for growth, we're looking for operating and cash flow margin, and we're looking for capital intensity. And the interplay between all of those to understand whether this is a good quote-unquote business or not.

And how did you take that on, and what was your kind of mindset?

We had just a new baby in the house, we were moving houses and there were two live deals going on, all at the same time. So my life was in a spin. There wasn't much sleep going on generally and just a lot of emotions running around. So, I mean, I reflected a bit on this and thought, Okay, how did I get through that time?

How did things kind of turn out? Okay, I think my daughter's doing okay.

I would say kind of a few things, one I would say, which I think have applicability in life. Generally. Just surround yourself with people you can trust fully, whether that be my wife, certain family members, people at work, even service providers. Right? Who are the people in your group that you can, okay, offload things and fully trust them? And not have to worry, even if it's not time, it's just something you can get off your plate and not have to worry. A second thing I would say is just be honest, be truly honest in what you can do or not, and be laser focused on what matters right.

I tend to take too much on and worry about these little details. But constantly reshifting priorities, constantly thinking about, okay, what actually is going to move the needle? And setting expectations appropriately is critical. The last thing is, I know we're all working crazy hours, there's not much sleep, whether it be work, family, just even if you have to schedule it. Just taking half an hour a day for a walk, reading a book, watching your favorite TV show, just to decompress. Because then again, if you don't. When I was in the thick of it, I was like stuff. I would solve problems. Or I would have ideas during that time. Rather than being back to back to back, to back to back the entire day. So, you know again, I know this was a bit of a personal and work thing, but I think it's hopefully the learnings are helpful to the audience generally. And it, frankly, was a bit therapeutic for me to think through and say, okay, those are actually helpful things I should bring in every day of my life, really.

And so I think all of those lessons learned are things I actually jotted down. Because, you know, it's a journey, not a destination, for most of us. And I'm still pretty imperfect on these things. Well, maybe with that in mind, like we talked about, we have this quote unquote transitory economy that's going on, I'm just going to call it a recession. Oh no, oh no, it's coming.

I've been canceled. So let's just say we've got this economic transition underway. We all know it, no one wants to say it, and you know, many people believe we're in one.

But one of the things I think that the private equity industry is so good at is reframing these times of risk. Through not only the lens of how do we ensure safety and security, but then also success and opportunity? So what are some of the advice, Mohit, that you would give to business leaders about how to approach this current now, with an eye towards both safety and success?

I think, like, you know, it may be an obvious point. But a lack of decision or lack of action is in itself a choice. And probably the wrong one. So by doing nothing, you are making a conscious choice, which is probably the wrong one. I would say a few things come to mind, one, I would say, just be crystal clear on your strategy and think about your capital structure and maybe some scenarios around that.

So let me get through a few things. So one, I would say, be crystal clear on your strategy and how it's operating, right? Are you talking to your customers regularly? are you getting daily flashes on performance? If things are turning, you don't want to be a month or two or three behind, right?

Like, you know, you come across these businesses sometimes where you know it might seem like a stable business. But the metrics aren't there, the systems aren't there. And maybe the entrepreneur is not valuing it. But like to understand, Okay, oh no, like these sales are dropping off or this is happening. You need to know that to make decisions.

You don't want to be flat-footed and act late. The second thing I would say is just think through some scenarios, like if things again, not to be flat-footed. If things go bad, like, what are you going to do? how are you going to act? are you going to do this with your people?

Are you going to do this with your sales organization, with this with your marketing, and that, you know, ties to cash and capital structure? You know, if this happens, am I going to run out of cash? What's going to happen to my covenants? what's going to happen to my capital structure?

So thinking that through into the scenario planning, I think is helpful. And then the last thing which is easy to forget sometimes is it could be an opportunity as well, right? I mean, you know, we're all in a very competitive world. But you got to think if the competitors are uncertain or pulling back. And you're maybe in a strong position, or you do have some capital to invest, is okay. How do I take advantage of this situation? Maybe it's poaching some people.

Maybe it's making a really thoughtful acquisition. You know, you might have opportunities you wish you had over the past decade that you didn't since the past recession. You were probably thinking, oh, crap, I should have done that now, maybe your opportunity. So I think it's just being aware of what's going on. Being ready to act and not being afraid to go on the front foot are kind of things that come to mind.

You know the amount of conversations that we're involved in today heading into this sort of, we think of it almost like a Goldilocks environment. Nothing's so hot, nothing's so bad yet. And so this is the market where kind of fear bubbles up. But if you're an entrepreneur and ready to kind of seize opportunities and understand how to hold together investment. But also, let's say, a focus on cost and making sure that you can live to fight another day. Those are the companies that we think are really going to succeed into the next cycle, because, listen, cycles are inevitable. They've happened once every 10 years, you know, as far as you know, people have tracked recessions.

This one has gone on for a very, very long time and people have forgotten what it feels like. But we think the kind of best small, midsize companies out there who are set up for success are going to use the next 12 to 24 months to really accelerate their market position.

And so I think all of those perspectives, every business owner should be thinking, exactly like you all just shared there. So that's fantastic, and Doug maybe leading with that and transitioning from that. One of the things that we all know, that none of us really like, is this whole constant of change. One of my favorite books for business that I give to every one of our team members is this book called Who Moved My Cheese? And it's this great parable about life changing and just changing with it.

If anyone hasn't read it, it's this great, it's probably a 40 minute read, but it's just a great parable. And one of the things that's certainly changing, not only the economy, but also the private equity industry, and it's changing with the times. Doug What would you say? Are some of the more important or telling evolutionary themes, or changes that are going to be felt and experienced in the private equity industry in the days ahead?

And it's the same for every other private equity firm. What's going to make us different when we go to market? And really understanding where we're going to play and where we're not going to play. The second thing that strikes me is the formula is reasonably simple. On how we generate returns, you grow your business either organically or through M&A.

You use debt instead of equity, and you pay down debt over time. And you achieve some multiple arbitrage, and the multiple arbitrage is, you know, it's really a function in our mind of building better businesses. With the exception that. I think. One of the things that have clouded that over the last, let's say 10 15 years, has been readily decreasing interest rates. So our view is that borrowing costs are going to stay sustainably higher for a longer period of time. We're coming out of a market where you could borrow at 2, 3, 4 5 interest rates. And you know, I don't think that's coming back anytime soon. And basically, what's happened in the private equity, certainly over the last couple years, but probably longer, is like real estate. As borrowing costs have come down, that has allowed many private equity firms to pay more for businesses.

So the last statistic I saw was that the average leverage buyout is using something like six or seven times. Debt to EBITDA in funding their transactions and keeping their debt to capital roughly constant, around 50. I mean, back in the day before my time entering private equity, but back in the day seven times EBITDA. To pay for a business used to be a good deal, and now people are using that much leverage to pay for the business. So I think that concept of generating returns from multiple arbitrage is going to come back to fundamentals, right? So how are you fundamentally leaving the business in a better state? A better competitive spot, a better financial spot? When you are done with your hold period than when you bought into it. And that is going to be the primary driver of multiple arbitrage over the next five or 10 years, in my opinion.

At least in the last recent history, I think something like 50 or 60 of private equity returns has come from that last bucket. I would argue it's mostly come from declining interest rates, so now that we've got interest rates much higher and probably sustainably. So it's going to be on us and our management teams to really push hard. To say, okay, how do I grow this business? But also how do I grow it? In a way that leaves the innate fundamentals of the business in a better spot than when we started?

Like, that gig is up. And, to Doug's point, you need to synergize, you need to create value, you need to remove the cost, you need to be thoughtful on the future. And how is that company stronger than the individual small one? So the easy money's kind of gone, the hard work, you know, fortunately, unfortunately, is on its way.

And now the business of private equity is turning into a business. But in many ways, while the company and I think the industry as a whole is evolving to fit that, I think you all very eloquently said. It's about value creation and transforming these companies. But in some ways, we are being impacted in the industry by many of the things. That happened. Kind of in the pre-Bernanke area. Prior to 2008, when there was a LIBOR, it was pretty reasonably high and you had borrowing costs and you were constrained. And so it'll be interesting.

In some ways, you have this dichotomy of private equity moving forward. But in many ways, we're going back to the future and going to see what, you know, 2006 felt like before some of this stuff. So it'll be really interesting to see things play out. I think the only thing that we can all agree on is it'll be different. I think the good news is you guys are really good at playing the hand as it's dealt.

Maybe turning the page here, going back to kind of personal interest things. And one of the things that I've always liked about my friends in the industry and business leaders in general is people's perspectives on learning from others. And so Mohit and Doug, I'd be really curious, you know what are maybe one of the things you're reading now? Or one of your favorite kind of business or personal books that you've kind of recently, or even over time ingested? And what were some of the takeaways that you had? So, Mohit, Maybe if you could kick us off there.

And I'm like, Okay, I've come across this before. In a management meeting where you have, you know, the investment banker on one side, you got the company on their side and they're just spewing stories. But like, No, what is the data telling you? What is the data? The data doesn't lie. So this idea of, in all our lives, we're surrounded by incredible salespeople, like, you know, who could spin a story? But you got to look at the data, you got to peel the onion back, you got to understand. Is it fitting? And sometimes in our job, it's easy to forget that, to be frank, because you're just so busy. And you're like, No, no, no, let me sit back. Let me really look at the data.

What is it telling me? And, you know, a lot of times it doesn't match up, so that's just something that stuck with me. And I, you know, got reminded of that last week when I was watching that, watching that on Netflix.

And so just yesterday, I was having this conversation with our new Vanderbilt interns and saying, You know, here's the difference. And if you've seen Moneyball, you know it's a private equity, is Billy Bean, you know, it's about get on first and second and third and bring it home. Venture capital swinging for fences. And so I think that that example resonates for a number of reasons, but also just the whole data intensity and analytical nature of what you all do.

So well, how about yourself, Doug? What's one of yours?

Fantastic book, but one of the key takeaways is all about the strength of North America. The strengths of the U.S, based on both the geography and the demographics of the continent that we all live on. And its implications for different industries, for people bringing manufacturing or nearshoring manufacturing, for trade between Mexico and the U.S. And other kind of themes that I think are relevant for, you know, really, skating to where the puck is going with all the geopolitical risks that's out there. The second one may be more of a narrative, but it's a book called Americana by. I'll probably botch his name, Boo Sreenivasan.

And each chapter is the story of a different industry that made America or made the United States. And you know, our CEO has this saying that we're Canadians financing the American Dream. And I read this book and it starts with the Mayflower and goes to Silicon Valley. And basically, every industry that we kind of love to talk about has been built by inventors, financiers, managers, people who took risks and really kind of built these industries up. And it's a pretty interesting historical view of really the power of U.S.

Innovation, the power of u.

S entrepreneurialism and how enduring it really is. And I find it pretty inspirational that at Clarivest we can play some, I'll bet. Small role in kind of helping, you know, create that next generation of great companies and great industries.

Setting the Table, by Danny Meyer, which is a great book about hospitality, is where I'm trying to teach our team here how to be. You know, treat you all like you're walking into the Union Square cafe whenever you come to Blue Wave.

I was like, how did I not know this? And so every day is kind of like, you know nothing. Jon Snow. For those Game of Thrones fans out there where I just like, didn't know. That's the way the world should work. So, Mowat, if you could go back in time and meet your 22-year-old self, what would be one of the top piece of advice that you'd share that you wish you knew then?

Maybe I'd been taking an outside sales rep job for a year, right? Like, you know, maybe that would have been smart. Some stuff which doesn't necessarily make sense on the resume. Or you're like, hey, you don't think about in the day to day. But just take a long term view to your career and life and not be so focused on the next step and the next step. That's what I think I would tell my 22-year-old self if I had to go back in time.

And that's one of the most valuable gifts anyone could ask for. Doug and Mohit, thanks so much for joining us today. it was great talking with each of you.

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