Private Equity Spotlight: Building Partnerships and Value with Chris Gibson

Today is a great day. We get to be here today with Chris Gibson. Chris, thanks so much for joining us today.

We've got some NHL showdowns going down right now, and we're almost becoming sister cities as we start growing into each other, even though we're many hours away.

at the end of the day. You got firsthand experience in working with those folks, how they ended up doing things, the strategies they put in place, how they executed on them. And even though you're one step removed from being on that side of the capital stack, you really got a flavor of everything that they did to really create value and drive these businesses forward. And it always just piqued my interest. And that interest was, hey, I really want to be on that side of the table and be able to pull the levers that these guys do to create value, but doing it in a more intimate setting in regards to working directly with business owners and C-level suite management teams and really kind of having a say or an opinion in regards to how this kind of business moves forward.

So doing leverage finance, not only in my hometown of St. Louis, but with stints in kind of New York and Chicago before coming full circle, is really kind of how I ended up here at Compass Group. And so, from the leverage finance world in banking, I ended up getting into a family office and doing direct investing in lower middle market companies for them, which is how my partner and I, John, came together, as we were actually the largest LP. the family office was in his first Compass Group deal. And shortly thereafter, him and I decided to lock arms to really kind of form Compass Group equity partners and drive this business forward.

So been around since 2016 and it's been a great eight year ride and used to be two guys working at it from their homes. Now we're in an office with over 20 people. So it's been a fun journey to say the least.

And then, lastly, something we'll delve into a little more deeply, the notion of kind of where you originally came up in leverage finance. I think some of the best private equity investors have come through that route, in part because you get this innate appreciation of this now back in vogue concept called cash flow.

And if you don't have good cash flows, I think you're just fighting with one hand tied behind your back. There's an inability to really kind of take advantage of opportunities as they present themselves at the end of the day. And if you don't have the cash to do that, you're really missing out at the end of the day. And I think it makes for a great investment if you can kind of make sure that you're not passing up those opportunities because you're maybe hamstrung by cash flow or a capital stack that maybe is over levered. The meaning of cash flow to me is twice as important as EBITDA.

But of course I did. I think if there is one thing that if people, for all intents and purposes, would like to know about me is, I think that there is something to say about doing private equity in the Midwest. Midwest private equity firms, I think, are overlooked. But I also kind of think that that has a little bit to do with just us being in flyover country. But if, given the opportunity for us to get in front of a business owner and take our Midwestern mentality, the culture that we're brought up in, that's ingrained in us, we're just people first at the end of the day and realize that people are what drive businesses forward and we can make that connection.

It's funny. I always kind of say to people, I show up to management meetings in khakis or blue jeans and maybe a collared shirt. And that right there, I think, puts a lot of our potential partners at ease. You're starting conversations with where'd you grow up and what's your family like, and kind of things of that nature. And that makes an instant connection with these folks that, I think, puts them at ease.

But then you have to be able to bring value, in the sense that you need to be able to talk to these folks about their businesses in a way that you are educated. Because I think by really having them let their guard down with, let's say, this, Midwestern mentality is the first step. But then the second step is really kind of trying to create that environment where they perceive you as value add. And the only way that you can do that is to talk to them in an educated manner about their business, about their industry, in a way that they can relate to. If you can do those two things, you're building a strong partnership right out of the gates with these guys, I feel like.

And that culture, I think, still pervades those parts of the country today. In Nashville, it's the same thing. This is fundamentally a farming area and still is, even 15 minutes away from our offices here in Brentwood, Tennessee. And it's that mentality where you have to collaborate, you have to work together. And I think it's so rooted in that.

And then you think about a private equity partnership, it's like a marriage. You are going to be hand in hand for the next five years. And so that really, really resonates.

But if you can't make the connection on that kind of blue collar basis, it's really hard for someone to come in and say, Hey, I want to professionalize your business because I've got this white collar mentality. And maybe you read a couple textbooks that kind of said, this is what we should be doing. And I've never really kind of worked in a blue collar environment and rolled up their sleeves and kind of things of that nature. And so it's all about to us building rapport and building trust with the people that we invest in. And if we don't have those two things, I think that it's an investment that's kind of doomed for failure.

And so my specialty was painting things safety yellow for safety infrastructure and lugging things. I never got to drive the forklift, though. And so it was always an aspiration. They never trusted me.

And he's like, what? I just, I've never seen one. I want to see the inside of a truck and can I go in and can you drive it around the parking lot with me? And he's like, yeah. It was like my six-year-old self was self-fulfilled.

finally. And it was one of the most exciting things. And I've even seen, there's these new amusement parks where you can go and operate heavy equipment. And so I'm begging to see if my son and I can do a boy's weekend and go do that. Because my wife's like, she's like, I'm not going to do it.

And one of the things that I think a lot of people like you ultimately develop is some sort of yardstick. These are the elements of value that I'm looking for in businesses to understand if it is good or can be good to great going forward. And so what are some of the traits that you look for in a company when thinking about the possibilities?

But if you don't have the right people running that company, it's going to fail. It may fail a year from now, five years from now, 50 years from now. You never know. But if the right people aren't in the right seats, it will fail. So a huge part of our diligence process is the people side of it.

It's getting to know the people up front, building that rapport, building that trust, understanding what their vision is for the future and how we can layer ourselves in there and how we're going to collaborate with each other. I mean, if I feel like I can't get into the same boat and row in the same direction with that potential partner, it's just not going to be something that's worthwhile for us. Because I need to make sure that we are kind of on the same page moving forward. Because not only does that expedite growth, it makes the process, I think, more enjoyable for everybody. And if people are enjoying what they're doing, you're going to be able to push things further and further, maybe take some chances that you normally wouldn't take because you have that trust.

So it really, to us, always comes down to people. I think we do more diligence on people than you will actually see out there with most firms. I mean, people, a lot of times in our industries, have their heads buried in spreadsheets and things of that nature. And I would probably say that we really kind of put more effort and more time into the people side of things to make sure that there's kind of that total alignment, that rapport, the ability to build a high level of trust, so we can all kind of push that business forward together and execute on the strategies that we put in.

and do they see us being value-add? And I think if you can really kind of connect a lot of those dots, which allows you to all be on the kind of same page, you can almost kind of look back and say, there's a high level of trust in the ability to execute on what we are putting together, based on not only what history tells you, but also really the bond that these people have built, with that bond being Compass Group and that potential partner, that we're looking out for each other's best interests, that we're willing to collaborate, listen to one another's views. We're not always going to agree on everything, but at the end of the day, if it's a healthy debate that leads us to that right path, headed in that right direction, that's valuable to both of us. It's one of those things, can we really rely on one another, trust one another, that we are going to take the right path together and do everything that we need to do to execute on the strategy that we come up with together. Having that open-mindedness and that ability to have that high level of trust and to listen and collaborate, I think really kind of helps out tremendously and puts us on that right path.

There's that respect of what they've accomplished as entrepreneurs. that is not easy to do and sometimes is contrary to presupposition, let me show you the way. What I really liked is next. you followed up with this, let's talk about the vision and see if there's alignment. Something that was also really unique, that I really loved when you just shared there, Chris, was maybe it's their vision that needs to inform ours versus vice versa.

Then you brought it all together and it's like, and then it's finding that alignment between the two. Then, if you can't get alignment, sometimes it's not a good fit. It's having that openness, that honesty, that humility to also listen to these entrepreneurs who have built something pretty darn special. to get to the point where you would even consider partnering with them. There was a little bit of a mini MBA master course in there that I think is really important for A, entrepreneurs to listen to in terms of how they think about finding a partner, but also B, up and coming investors.

at the end of the day. Everybody looks at everything through a different lens, but your lens is crafted and molded by what other people say and do and what you go out there and read. It's constantly morphing. If you come in and just say, listen, this is the way it's going to be, I don't see how a partnership ever gets off the ground, because it's really not a partnership, it's just a one-way street. Whereas, you believe that what you are looking at and trying to accomplish is the end-all-be-all.

When you think about that, that could be perceived as babysitting by your partner. It could be perceived as the operating partner comes in with one view, and that may not be the right view, or just because he did it right in the past doesn't mean it's going to be the right way of doing things, kind of going forward. What we found was more valuable, I think, in lower middle market businesses to business partners, to sellers, to owners, was really bringing in more functional expertise that they could tap into, because sometimes these companies, they're not big. They don't have big budgets. They don't have the ability to bring on someone in legal or someone in HR or someone in FP&A or someone in marketing, but they know they need all those things.

What we did here at Compass Group is developed a program called Compass Guides. What we do is we go out and we hire the folks that are legal experts, HR experts, FP&A, marketing, IT, and we spread those out across the portfolio. To date, I think it was last year, we had over 300 projects across the portfolio that these four or five individuals worked on with these different companies. It's not just bringing in one individual. It's bringing in the functional experts that can tap into all of these different things that really add value to the business owner.

One month, it could be, hey, I need help with marketing. The next month, it could be, I need a new ERP system or CRM system. Okay, well, talk to our IT guy about that. He can put you on the right path. Hey, I'm doing a bolt-on acquisition.

It's small. I don't need a high-powered outside legal firm, and I can't afford inside legal counsel. Okay, work with Joe over here at Compass Group. He can be able to facilitate that work. What we did is, instead of really bringing in one individual and putting them in one company, we looked for the functional expertise that a lot of these companies were wanting.

We looked at it and said, almost all of these companies need help in some, which way, shape, or form. Why don't we bring that in-house and allow these companies to tap into that resource when they see needed, but don't necessarily need to burden their P&L or their organization with that person? I think it's a unique spin on the operating partner model that's pretty unique out there. We're definitely, I think, in the minority of people that do it, but we just feel like it creates a lot more value across the board to all of these companies by doing it in that way.

It's like, just get me over this hump and get the flywheel spinning, or, in some ways, they couldn't even bring in the full-time until we set the stage and got things in place because they weren't even ready. That transitory nature of needs was something that, in many ways, inspired me to found BlueWave for very much the similar reasons, just because it was just such a wide variety of things. Your approach to this makes a ton of sense from my lens.

It allows you to look at so many different opportunities. It allows you to prioritize those opportunities. It allows you to better understand what the ROI is with those opportunities, and whether the investment's big or small, you have the ability to do it. Your decision-making is driven off ROI and cashflow rather than maybe you're just being pigeonholed into kind of saying, I can only do this one opportunity because it's all I could afford, or my risk tolerance is only at this capacity, just due to the fact that I don't really have a cushion when it comes to my cashflow. If I run this thing aground, what do I have to kind of fall back on?

Cashflow to me, is king. at the end of the day. It really allows you to go about opportunities and look at opportunities and go after opportunities that I think are just not there if you just don't have that cashflow. Having that, inevitably, I think, is the greatest attribute a company can have, because it just opens up so many different opportunities.

Now that we see the clouds kind of part, they're just picking up speed while everyone else is trying to start the engine.

We should provide the roadmap or the blueprint for them to be able to kind of say, listen, I can take on that risk or I can prioritize this opportunity more than that one, because I know I've got strong cashflow to be able to do it. If I hit those choppy waters, like you were, saying, that I can kind of bust through them. It's not going to be me turning the ship back around because I knew that there was just no way that I was going to be able to get through it.

You've got to buy capital equipment that's not included in that number. That's the big one. You got to wait for people to pay you your receivables. You have to pay people more quickly. And then you also often have inventory that you're just using money to put on the shelf.

And when we talk about cashflow, this is everything that's left after all of that. And that's a lot of stuff. And so to your point, Chris, particularly in maybe high-level finance classes or investment bankers, they just want you to think about EBITDA before all that other stuff. But it doesn't include all these other things that are so essential. And I think it's a shortcoming to that measure.

So many people gloss over networking capital to a point that it's almost maddening to see from my perspective. Because that is, I mean, that right, there is the cash inflows and outflows of the business. And you have to really break down EBITDA in a free cashflow to really understand the opportunities that are in front of you and how you unlock them and the ability that you have to be able to take advantage of things. And if you don't have that, you're going to be limping along. I mean, if you're OK with growing your business, 5% a year, year over year, that's great.

That's not something that we look for. I mean, we're not big on dividends and kind of things of that nature, of kind of lining our pockets. I mean, when we look at free cashflow, free cashflow is, OK, now I'm excited because this is a dollar I could put back in the business. This is a dollar I could spend doing X, Y, Z. That, to us, is what really creates the growth in the business, is the opportunities that free cashflow really, I think, enable us, as well as our partners, to use and put to work.

How do I collect receivables faster? How do I maybe pay payables? And it turns into not a liability, but an opportunity and an asset, if you're in cashflow thinking versus EBITDA land.

And everybody, I think, at their core, understands the importance of cashflow, right? When you're a kid going to the store to buy something, you know a dollar is only going to buy you so much. But when you kind of start talking about EBITDA, people almost kind of get glassy-eyed, and they really kind of don't know what's going on or what opportunities or what value that creates. But if you kind of start talking about cashflow, of this dollar is worth this, and you could spend it on this, and that's going to create value of this, people understand that logic. Business owners understand that logic because, for so long, they have built their business working off of cashflow, cash accounting, how much money do I have in my bank account, that's how I'm going to run my business, and not worrying about, like, what are my earnings.

It's, is the cash building in my account? If it's building in my account, I know I can put it to work doing this. I know I can take these risks. I know I can look at these opportunities in a different way, because I know I've got the dollars to be able to put to work in those situations.

we get calls from every day top proactive business leaders at public companies, independent companies, family companies. So absolutely, you can use this as well. If you want to use the exact same resources that are trusted and being deployed and perfectly calibrated for your business needs, give us a call. Visit our website at bluewave.net. Thanks.

Back to the episode.

Yeah, it's great wisdom really for all. Whether you're starting up in the industry or if you've been building a company for years, it's uncommon wisdom. With wisdom in mind, Chris, here, I am a collector of advice, because I try to be self-aware and I try to fully realize that if it were up to me in life, I'd be in a lot of trouble. And so why not borrow other people's wisdom, any chance I can get? I've mentioned this before, but for those of you who've read the Game of Thrones books or watched the series, it's like the, you know nothing, Jon Snow kind of comments.

So every day I try to remind myself, and frankly, I am reminded whenever we do these episodes that like, wow, there's so much I need to learn in life. And so I'm curious, Chris, if you could go back to 22-year-old Chris and share a piece of advice in the Wayback Machine, what would be one of those pieces of advice that you'd share?

They weren't real-world scenarios, right? You read case studies, but I mean, reading a case study isn't kind of real-world experience. If I had to go back and do anything, I'd probably say that getting an MBA wasn't as important as maybe the two years that I missed of just getting real-world experience, because I think that real-world experience puts you just on a different trajectory. at the end of the day. I think it helps you advance your career faster.

It helps you build a stronger foundational base of common sense. The real world is just different than the world of books, right, that you could find in your library. You're just constantly learning more and more, every second, every minute, from peers and colleagues and things of that nature. Conversations, I think, to me, are so much more valuable than anything you can kind of read on a page. And so I think if I had to give one piece of advice to my younger self, it would be that school's great, it's wonderful, everybody needs it.

But I think there are far more opportunities out there that you're missing out on if you think that school is going to replace what you could get in the real world. Because I think it's one of those things, they are a night and day difference. And one should always kind of be looking at it from the perspective of, like, how do I grow myself? by growing my network, by growing my thinking? And you always learn more by, I think, real-world experiences than you ever would, kind of, let's say, in a classroom.

But as I reflected back on it, kind of to your point, like, what was so valuable in that time was, it was two years of experience, but we got six years of experience, because literally, we were working three 40-hour weeks that whole time. And that experience was so invaluable to development, to growth. It wasn't valuable to sleep. But just like those laps around the track, and the more laps that you can get, and the more real-world experience that you can pack into your life, particularly when you're lift off stage at the beginning of your career, at least for me, it was so impactful. And I think what you're saying is like, how do you get more of that sooner and faster, and appreciate the tangible versus the theoretical?

Getting those reps in, I think, is so much more meaningful than what you could learn in kind of a classroom. You're actually kind of doing yourself a disservice, and you're putting yourself behind, because that's two years of reps, right, if you're thinking about an MBA that you didn't get. And somebody else out there did get those reps. And if you're looking to really kind of take your career and push it forward, you have to have those reps. Because I lean on every day, things that I learned through those repetitions, all those different deals that we've done, whether it's at Compass Group or before this, you can always kind of find yourself in a situation that you can reflect back on, saying, oh, this is familiar to me.

And how did I handle it? Do I handle it the same way, or do I handle it a different way? because maybe it didn't go all that great? And I learned from that. To me, time is kind of your worst enemy.

And the more and more reps that you can get in, I think it really kind of puts you in a better spot at the end of the day.

How do you make the outcomes more narrow? In my bizarre way of processing information, it 1,000% makes sense to me. All right, Chris, well, this has been a really fun conversation. I've learned all sorts of things I wish I knew before, and truly want to thank you for taking the time to share some of the hard-earned perspectives and wisdom that you've gained over time as you've been building and leading a PE firm.

That's all we have for today. Special thanks to Chris for joining. If you'd like to learn more about Chris and Compass Group Equity Partners, please see the episode notes for links. Please continue to look for the Karma School of Business podcast anywhere you find your favorite podcasts. We truly appreciate your support.

If you like what you hear, please follow, rate, review, and share. It really helps us when you do this, so thank you in advance. In the meantime, if you want to be connected with the world's best in class, private equity grade, professional service providers, independent consultants, interim executives that are deployed by the best business builders in the world, give us a call or visit our website at bluewave.net. That's B-L-U-W-A-V-E. And we'll support your success.

Onward.