Private Equity Spotlight: Chris Cathcart on Cultivating Entrepreneurship in PE

I am super excited to be here with my friend, Chris Cathcart. Chris, thanks for joining us today.

For those of us who don't know your story, I'd love to hear it for our guests here.

I went, that's odd. He shared with my sister and I that he was starting his own business. It was one of those things where maybe I was young enough not to think about the risk involved, but just to me, it was hugely exciting. He's still running that business today at 75.. I don't know why I have to drag him out of his chair, but just sort of who I grew up thinking about and just loved the nature of entrepreneurial endeavors.

For me, my first job out of college was working for entrepreneurial medical technology companies, helping them navigate FDA reimbursement policy. I think 80% of that industry, the companies are fewer than 50 employees. You start thinking about all of those things, and what makes America great is the success and the breadth of small businesses and entrepreneurial businesses in our economy. For me, it's always just been a ton of fun and a passion and part of my DNA, working with entrepreneurial companies. For me personally, I went back to business school.

I was one of those rare birds. I came out of a liberal arts background, and so I was a rare bird that I wanted to go to finance class, wanted to go to accounting class. It turns out I like them. Don't tell anybody, I really like accounting. For me, that experience was hugely important for me to build some of the quantitative or hard skills.

Then I was taking business school as an opportunity to learn those things, fill out the aspect of my career that I didn't have. I intended, I think, ultimately, to go and use those skills to be an entrepreneur myself. Before I did that, I was going to go be an investment banker and had a summer internship and a full-time offer, and was this close to accepting it. It was a little firm called Bear Stearns. My friend and now partner here at Halifax called and said, hey, we have the opportunity to stand up an origination strategy in the lower middle market.

At the time, it was pretty novel, and then also work with our founder in raising capital. I went, wow, this would be awesome. I had an entrepreneurial aspect of it for myself and standing up a new function, but also the opportunity to work closely with entrepreneurial businesses. I always joke, it's just how good an investor I was that I turned down the Bear Stearns offer and came to Halifax. It really was an opportunity to leverage what was in my DNA, the passion for working with entrepreneurial companies, and it's been a heck of a lot of fun being here for now 17 years.

They're like, what? What?

Don't do that either.

We'd know you better if we knew this about you. What would be one of those?

If I'm going to describe myself, and I think many people know many of those things about me, but for me, the first and foremost and most important thing about who I am is my faith. I'm a faithful Christian, and I bring it up in this context, not to mention who it is or who I am, but I think it also has a real bearing on, again, why I'm doing what I'm doing. I don't want to go too big with it, but I do think that entrepreneurialism, capitalism more broadly, massive force for good, for human flourishing, and I think about what we do and who our constituencies are. If you looked at our website, our mission statement, we all collectively put it together, and certainly I was part of that. We take seriously the responsibility to serve our constituencies, so certainly our management partners.

You think about what we can do to help them flourish, and then their teams, and of course, by extension, it impacts their communities. We take very seriously the responsibility to serve our LPs. My mother was a teacher for 25 years and has a pension. We don't invest on behalf of her state, but I'm really glad they have smart PE professionals investing capital on her behalf. Teachers don't make a ton of money, so to be able to have support post-career through their pension, I think, is hugely valuable.

I would love to see the stats. Sean, you may have some of these, but the number of scholarships that have been supported for academic scholarships in high schools and colleges as a result of the work that private equity does, and then we have our own constituency here, our own team. We have 20 people here at Halifax that were contributing to their flourishing. For me, it's very oriented towards my faith. To me, it's a very easy extension, very fulfilling for me to be able to be that close to what's really important to me, and then be able to manifest that and be a part of that and use whatever few gifts I've got toward that end.

It's pretty exciting, and I'm passionate about it. I mentioned family. My wife is the saint. She's an incredible partner to me, but apart from her decision-making around men, obviously not picking a spouse, and we've got three great kids, the thing that people know about me now is I have a nine-year-old, a seven-year-old, and I have a two-year-old, and I joke that I'm the oldest dad since Robert De Niro. at this point.

I joke with my LPs, if they have any question about our alignment, we've got three college educations to pay for, we're motivated, we're very motivated, and then I mentioned the Wake Forest thing. I'm a huge, passionate, super fan. It's a little bit like being a Cubs fan, though, where everybody's second-favorite team. A Cubs fan without the World Series title, not threatening to anyone, and I feel a little bit like that 80-year-old Cubs fan right before they won the World Series, talking about the great days. I kind of do that, too.

I was at Wake during the Tim Duncan era, so I wistfully long for the return of those days on the hard court, but those are the three things I think that people should know about me.

There was a time in our history when we played basketball and we were quite good, fingers crossed on the future.

And when we were both coming up, maybe if you saw 100, you're like, whoa, it just shows the maturation of the business. And I always found it so hard to process, you couldn't read 1000 Sims in a year. And so you needed a yardstick of. here's what I'm looking for. And through pattern recognition, it just got better and better and better.

And I'm curious, what are some of the important traits that you look for in a company that will say, you know what, this is a really good company, or B, has the foundation to become a really good company, which is probably even more important these days.

There's several, but I think that's one of the great advantages that we get to know management. But as I think about the really successful investments, they've had really incredible leaders in the C-suite, entrepreneurs, founders, management teams. And I think they certainly have been very strategic thinkers. They have a great facility with the numbers. They know the various parts of their business, how they're impacting change, how they're dealing with change, how that's going to inform their decisions going forward.

But I think a core of some of this, then, is also the team they assemble around them, which I think is a great leadership quality. We actually were with a management team this week. I had dinner with them on Monday night, and I was really struck as I was talking to a number of them and listening to them talk amongst themselves. They talked about, specifically, they'd say, you know, I have these really great skills, but she has a totally different set of skills. And together, we were able to attack this problem in a really novel way.

And it struck me that the leaders of this business had assembled a team who were certainly talented, certainly smart, certainly hardworking, but they were complementary. And the sort of the quintessential, the whole is greater than the sum of the parts. By the way, it helped, they seemed to really like each other too. And those things are probably not unrelated. But it was really, I thought, another excellent real-time example of terrific leadership.

And, by the way, the proof is in the pudding. The business is superbly excellent in so many ways. But I put that leadership capability, the management team, it's sort of the top of the list. And then we've seen it, obviously, partnered up with these folks over time. So I think to me, that's the number one that I can point to from my seat, the number one quality that I've seen that makes businesses truly special.

I experienced that firsthand, building this company here, because in the early days of any company as an entrepreneur, it's like on your shoulders, and you feel the weight crushing it. And then eventually you say, oh, I'm going to bring in really good people, and then they do their thing. And you're like, well, this is pretty amazing. And then, similarly, as I even think about all the management meetings I was in, when I was in PE, the one thing I'd always look for is, is the CEO the only one talking? And then, if so, you got troubles, or you're going to be calling blue wave.

a lot for recruiters.

It's kind of a good segue here in terms of, as we look at the evolution, while we were in the early days of PE, it was in some ways, buy low, sell high, let's be candid. And it was still really hard because there's so much information asymmetry. It was so hard to get the data. So you were making a lot of gut kind of decisions because you just couldn't get the data to fill in the gray space. But as the industry has matured, so much of it is taking what is maybe a really good company and turning it into a great company.

And in part, what that then does is create jobs and creates value. And there's this selfish altruism that's been created as this industry of private equity has become a huge engine of the economy. And part of that now means you've got to create the value. So for Halifax and for you and your team members, how do you all think about creating value and what are some of the resources and support that you bring to your portfolio companies to help them be all they can be?

And I think one of the things in the way Halifax executes its strategy, that word is really important to us. We want to set up a strategy with entrepreneurs to, as you rightly pointed out, Sean, amplify the growth of these businesses. Build on the foundation, successful as it's been, and in all cases, they've been wildly successful. But how do we then take them to the next phase of growth or the next growth over the next three to five years? Typically, what we're finding is that it's really important to invest heavily in the platform to support that growth.

The growth initiatives, I think, get a lot of the headlines. They're important, but you can't do that without investing in the people and the systems to support that. This will be music to your ears, Sean, right? I mean, this is quintessential Blue Wave stuff, but it's really important. As a quick aside, I think there's a lot of misunderstanding about what private equity does.

And maybe there are strategies out there where it's cut costs and lever up and all those things. At least in the lower middle market, and specifically at Halifax, it's far more about investing in the people, meaning a lot of times adding people, and it's certainly about adding systems. I give kind of an interesting example. When I got here 17 years ago, one of the very first things I did is I set up a little survey and had conversations with many of our portfolio companies and also our prior portfolio companies at the time. In one of the conversations I had with a really successful entrepreneur, and our partnership with him was extraordinarily successful, he was very, very thoughtful and a very novel model that he was exploiting in his industry, but he said something that was really impactful to me.

He said, Chris, before my partnership with Halifax, look, I was a manager. I was a manager of my business, but I was also a husband and father. So I was making decisions, at least deep down in my heart, I was making a decision about how I invest a dollar in my business, or is it a dollar that goes in? the college fund? Said another way, that's a very expensive decision.

It's his own capital, no clear answer about when that dollar would come back and if it would come back as $2 or 50 cents. And so for him, very expensive approach to making managerial decisions. After his partnership with Halifax, obviously his personal risk mitigation strategy was fulfilled. And now he was telling me, Chris, now I'm making decisions as a true, pure manager. And, by the way, along the way, we were solving the other quintessential problem of being an entrepreneur is it's very lonely.

You don't have people with whom you can bounce ideas. But that statement really stuck with me. And I heard that repeatedly in various forums, but the way he couched it really kind of sat with me in an impactful way. And so now, as we think about where we're spending our time, again, with a novel strategy in place to grow this business, we're spending time. Now we're saying, do you need a new CTO?

You're really good, Mr. CEO, or Ms. CEO, at working with your customers. Let's have you focus there, but maybe we amplify that, right? Maybe we get you a whole sales team that's around you.

And, oh yeah, by the way, that ERP system that you really loathe having to spend money on, maybe it's time now to give you the dashboards and the KPIs and the data to inform the decisions that you're making. Maybe it's time to make that investment, those kinds of things. And I think for us, consistently, that's what we're seeing, irrespective of who was there before us, whether it was another capital partner or a corporate entity, or they were an entrepreneur, which I think is obvious to see, inevitably we've seen that there's been underinvestment in the platform. We're going to bring that to bear here. We're going to bring some of our experience to come alongside management and certainly that shared vision, that shared strategy.

I glossed over this at the beginning, but I think if you talk to my partners, they're going to talk about this being the most exciting part of private equity today. I think you alluded to that where it used to be buy right and sell higher. I think the really exciting part of private equity investing today, it's getting that shared vision, that shared strategy with our management partners, and then executing the program to create value during our whole. By the way, we have a name for that. We call it our value factors program.

The reason we even have a name for it is it's so ingrained and so repeatable and so regular in terms of the challenges and the opportunities we're seeing when we make these investments.

Every single one of them went meaningful up, because even if we wanted to buy low and sell high, that arbitrage was gone, and it came down to, no, we're going to buy high. If we want to sell higher, we're going to have to create value, and for that, you need lots of people, and you need lots of new resources. You need fuel. At the same vein, if you're a lower middle market founder, you're so constrained, not the least of which is behavioral economics, because you're like, oh, my gosh, I've worked my whole life to build this thing. It's all tied up in this company.

I got to pay for food, water, shelter, and college, which is bigger than all of them.

the businesses are in, the people that are making up the business, our investors, of course, and their communities. It all comes back and I think is self-reinforcing and is really a unique and special opportunity to be a part of that. I agree with you. Over the last 10,, 15, 20 years, it's become very evident. Even as probably there were folks that were doing that before, but very evident today that the value is going to be created by investing in these businesses and creating value together with these management teams.

No. If you were getting things 100% of the time, we'd all be retired. And bored.

But for you and your team members and your portfolio companies, what are some of the top value creation opportunities that you're thematically engaging with your port co-leaders? And, as a proxy, this is probably something that other business leaders should be thinking about as well.

But in the land of scarce capital and in the land of balancing risk and reward, they're making decisions to say, well, you know what? I'm not going to invest here right now because I'm investing over here. But in a world where they have the freedom to make decisions as a pure manager, they are going to invest in their platform. They're going to invest in their systems. And they'll regularly invest in people.

That's the key theme that we're consistently seeing. We saw it last year. We saw it the year before. We're going to see it now in real time as we're looking at investments and in the future. To me, it's thematic in that it is consistently an area where business leaders have not invested in their businesses in a way that unlocks value or allows you to unlock value.

I'd say the other thing related to that that's maybe not as obvious, is it's clarifying. That's the other thing that we oftentimes are seeing is there's inherent complexity in these businesses. when we arrive. And if we can, again, back to this creating a strategy, shared strategy together, even before we make the investment, we're coming alongside management team. We're talking about their vision.

We're adding our experience and thoughts and resources. We're contemplating a new strategy for the business. And inevitably, it's going to be part of clarifying the mission, removing the complexity that has developed over time, such that then we've got clear opportunity. Okay, here's the strategy. Here are the five pillars that make that strategy up.

They're going to be aspects of platform building. They're going to be aspects of growth and repositioning the business, but very clear. And then that allows you then to be singular in your focus of what are we ultimately aiming to do by the time we're finished with our season with the business and for the entrepreneur to think about the next phase after Halifax. It's back to those core themes of sitting with management, building an honest strategy, creating a strategy for the business, and then executing on the key elements there.

The cycles are going to come and go, but those core maxims that you're talking about are foundational and timeless.

I mean, go back to the conversations we had in the dark days of COVID in early 2020.

. Those were obvious risks. But what I think has been consistent since that time is the number of risks and the seemingly haphazard nature of the risks. They're coming at us from many different directions. It makes it really, really hard to, as an investor, underwrite those things.

If you have one known risk, you can always underwrite that. But when you're getting these in 2020, it was COVID. Then in 2021, it was COVID recovery. 2022 was what's normal, to say nothing of a land war in Europe. It's a very unique time as an investor.

I think that was really the nature of your question, but I'm unfortunately not terribly smart enough to be able to answer that. But I would make reference to that. It's not a terribly easy time to be an investor or a business owner.

I saw this, it was like something that came across my social media clip, and it was about buffaloes in a storm. And what happens mostly in a storm is every other animal, every other species, they kind of hunker down. And then what buffaloes do is they go towards the storm, and they march through it with this innate genetic understanding that they're going to get out of the storm faster if they walk it, and they run towards it, and they go through the storm. And that's exactly what we saw PE doing, and we see it time and time again, is you're all like, no, we're going forward. We're going to get through this, because we're going to get out of it before everyone.

And what you articulate is like, no, we're just going to stick to the basis. We're going to go onward. Let's get through this, and we're going to all get out of it faster. And the data shows that through and through as well.

You saw people running into the storm to come along and provide resources and assistance. Again, no different than what I was talking about, being able to be a partner to these management teams, keep an eye on the big strategy, but then bring the tactical issues that have to come along, just so you can get back on that path.

We probably all had Lego sets as kids and they would break and then you'd figure out a way around it. And one of the things I'm always trying to, it's this concept that you're constantly on this journey of improvement. And I try to be as introspective and retrospective as I can, without getting too much into the craze of my own internal storm in my head. But there's all these things that I wish I knew. And you know that I send these emails out to people like, I didn't know you can do that.

And I was like, this is what I wish I knew then. And I'm curious, Chris, if you could go back to 22 year old Chris and give yourself a piece of advice, what's one of the things that you would share that you wish you knew that?

And I think it would inform what I would advise myself or other 22 year olds. today. There are two things, part of which is sort of you can't get. I mean, I think it's patience and perspective. Perspective, the truth of the matter is, you only get that by being 50 and by being 75..

We'll have different perspectives, you get more experience. And so maybe the only way to really do it as a 22 year old is get good mentors, right? You have to sort of synthesize the perspective, and that's important. It's hard to do, right? You want to find people who you trust, who have the same values, alignment, who have analogous experiences.

And I think that's the way you have to do that. But the patience thing would be advice I'd give to myself. I don't think I had the maturity to look at. different seasons of my life are great opportunities to learn. I look at our younger professionals, by the way, whether they're on the investment banking side or they're in their private equity.

And maybe it's because we have this sort of in our industry, a two to three year window that each professional that you kind of go through. But the young professionals, who are really excellent, are the ones that seem to approach each of these seasons as an opportunity to learn. So every task, every deal, every day to day interaction is an opportunity to learn more about business, to learn more about their trade, to learn more about anything that they're interested in. But that's how they attack it and they want more and more and more. I gave this advice actually to a Wake Forest senior recently.

He's going to go and join a middle market investment bank that we all know well, very, very good. He knows he's going to work really hard. That was the advice I gave him. I said, listen, take this next two or three years and think about as an extension of your academic career. Fortunately, you're going to be renumerated rather than having to go the other direction.

But you're going to learn in this phase of your career. And then, the next two to three year stint, you're going to learn something more. I didn't sort of realize that until I went to business school. I was going back, I was going to pick up these and complete that, but fill in the pie chart of my personal development and stuff I hadn't gotten. And then that would have been my investment banking approach as well.

I would have done two or three years there again to learn everything I can about how businesses work. That's sort of the approach. I wish I had learned earlier and appreciated earlier. And I think for today, and I think this is true, particularly for folks in our industry where you've got a lot of really smart, ambitious, hardworking people. I see, and I was guilty of this too, a lot of happy feet.

Whereas, looking back on it, take it as this really special opportunity to learn as much as you can and have the patience to do it. That would be my counsel to myself and wish I had the maturity then that many of my colleagues do. I see it. They have it. So it's neat to see.

It can be fatiguing, and at times that also causes me to lose perspective on the mile markers and the seasons as they're turning. I love your concept of seasons because it has that concept of perpetuity, but it breaks it up into natural waypoints where you can more naturally kind of experience and reflect on and appreciate the growth and the wins in between versus this one ongoing kind of march that you're just trying to run faster and faster. It really struck me, as you were saying, that. That's a great way to think about, not only having this idea that you're perpetually trying to get better and improve and go faster and better and faster, but it's a process. It goes through these seasons and you can have these natural delineations to take a breath, look left or right and go, yeah, I got something done.

That's all we have for today. Special thanks to Chris for joining. If you'd like to learn more about Chris and the Halifax Group, 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.

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