John Huhn, Compass Group Equity Partners | Unlocking Success: The Power of Persistence in PE

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I'm very pleased to be here with John Hume.

Thanks for joining us today.

And I think that engineering degree actually helped me because it gives me a little bit of that analytical mind. And I think a little bit differently than the other 15 or 18 people in our office that all have finance or economics and math and degrees of one sort or another. So, anyhow, right after school, I was a little bit more entrepreneurial and did a variety of things, and again, that was an area that gave me a lot of experience. On the operational side of businesses, I joke a little bit that I think I'm a little bit add as well.

The next thing to do so? Over a period of time, I had quite a few businesses and quite a few entrepreneurial activities, but ultimately got into doing some strategy and consulting work. And that was typically driven by large corporations. Going through M&A in one sort or the other, so that was my first introduction to real M&A activity.

And we would help large corporations go through a reorganization or building a new strategy of that activity. And as a result, I learned a lot about M&A and ultimately went into corporate development. So I worked with a small, publicly traded company. Small in the big picture world of things, about a billion dollars in size, and did corporate development that included strategy and M&A around the world. And after that, I spent a little time with the family office, launching a program here.

That led to my launch of Compass Group in the private equity world, and I think you might know, I started in the independent sponsor world. So I did that for a period of time. And then we raised our first formal Commingled fund, starting a couple of years ago. So that's a little bit of a twisted path, but that's how I got into private equity and certainly love it. It feeds my entrepreneurial interests from the early days, where I always have a new project or a new business to work on. Feeds. My add that I can always be working on something else.

I never get bored and it's really been a great ride, so love what I'm doing.

So I love hearing that. One of the other questions, John, that I really like asking is this question of we'd know you better if we knew this about you. So how would you answer that?

Of course, some of them were successful enough, but it made me realize that the startup and the growth of a business is really the hard part. And it's trying from all aspects, on your personal psyche, on your relationships or marriage, if that's where you are, on the financial side of things, all that. And it really got me going to the point where I decided, Hey, I'm going to buy businesses instead of build them from scratch. And so all that experience has also allowed me to be both a seller of businesses that I had started, a buyer of businesses. Experiencing the struggles and successes of owning a business.

So oftentimes I'm able to relate a little bit to maybe a target company or a business that we're working with or talking to. Because I've been in their shoes and I understand what they're going through a little bit. And, as you know, doing what we do in private equity. You not only have to be good at building a business and thinking through strategically, but you also have to build your own business and build the firm here. And so I think I'm very fortunate to kind of have a little of all that in my background. And I think we're lucky here at Compass Group that we've built a great team of people to be able to really grow. So that background was never planned, it was never expected. But I think the best of us try to use what we've learned and apply it where we are.

Than I did in 20 years in private equity, in terms of the actual day-to-day kind of pace. And the highest highs and the lowest lows. Seven times a day of building and growing one individual company. And I think if I were to ever go back into private equity, I would be so, so much better for it. And so I love that you've had this.

That's great, so you've had this kind of amazing experience. And road to private equity, you've built your own firm, you're building the business of private equity like a business, and so you're an expert now, looking at all these different companies. And I think what our listeners would find really interesting from this kind of really broad set of experiences and perspectives you have. And now, as an expert investor in companies, when you look at a business for the first time or get the first exposure, what would you say?

Are two or three of the most important traits in a company that you look for? When thinking about? Is this company attractive? is this a good company? or, as importantly, could it be a really good company?

We want to go out and find out about an industry and understand that industry well. And so the number one thing we're looking for is a business that is ready to capitalize in a market that we think is attractive. So, you know, there's that age old question, do you want an A management team in a B business, or an A business with a B management team? And I'd like to say that we want the business that's an A business, it's in the right market.

It's got tailwinds, a rising tide, you know, rises or raises all boats, you know, that type of theory. But then the second thing very close behind is we're in the people business. And if you have great management and great people, regardless of what they're doing or how they're going about it. Great people can make a business from good to great, and we really look at those two things. If we can find a good business in the market that we believe in, with good management team that will hold their team accountable and wants to continue to build and grow.

If we can get those two things connected, we think we have a home run and that's a Compass group deal that we'd like to do. Taking that a step further, it's very hard to assess. But when we're talking about the people we're going to work with, we're looking for people who are receptive to a partnership, who aren't saying. I did this and I did that. And I'm going to do the next step and just make an investment and get out of my way.

And instead want to hear people that said, we have done this and we've accomplished that, but we need help. And we could use your expertise and your capital to grow in ways that we've never experienced before. And if they're open to that type of partnership and feedback, we know that will be a lot easier. Perhaps that very confident executive who says, I know what I'm doing, get out of my way.

That just usually doesn't work for us because we're relatively hands on partners. So again, that's maybe a little nuance of the people we're looking to work with. But the right people in the right end markets, that's the double whammy.

And at the end of the day, life becomes a lot easier.

Why not do the things that are fun? And I think overall, my career has been based with businesses that are experiencing some sort of hyper growth, and I find that more exciting as well. Some executives are very good at improving margins or cutting costs and squeezing the onion a little bit to get things better. I'd much rather I'm a tax and spend Republican, you know? I'd much rather grow the top line and help build a business that's growing, as opposed to squeeze a business and find a margin.

But some people are good at other ways.

Number two, we're thematic, as I mentioned, we want to find businesses in areas that we understand and like, and then number three, we're looking for businesses that fit in a certain size or scope of what we do. And you know, of course, we have to check those boxes, and then finally, we're looking for a seller that is interested in being a partner.

And if they're interested in being a partner, that means they're going to be rolling over with us. And we're usually the first institutional capital that that's involved in that firm. So if we can find those things along with great people, of course, that tends to be a compass group deal. And let me tell you why that matters, or how that manifests itself. First of all, going in, we have a little bit of knowledge of the industry.

So we're often talking about what we're trying to accomplish in the business, what we think we can bring to the table. We may have swum around that business for not just months, but years. And as a result, we know executives, we know potential bolt ons. We can bring some knowledge or strategy, and as a result of that, sellers often choose us.

Our goal is not to play in an auction process, but to find a deal, not without any representation, but that is not in a formal auction process. And so if they choose us and say, I want to work with Compass, we negotiate a deal, and, of course, that negotiated deal usually is a fair result for both parties. And then we can move quickly. And that value creation happens a little sooner because we don't have to spend the first six months figuring out what this business does.

And there's a lot of private equity firms that are thematic, but there's plenty out there that are agnostic. And they find a deal and their research is 30 days while they're doing diligence. And then they buy this business and they go, OK, what are we going to do with it? And their general first attitude is, if it's not broke, don't fix it. So they sit and watch for six months or a year. And we usually can get involved in the first 30 days we have and make some changes. We have what we call a hundred day plan, which is exactly what it sounds like.

What are we going to do in this business in the first hundred days, and if we can get involved in those first hundred days? That's when a seller is probably most resilient. They're open to input and guidance, and how do we get involved and really help them grow to the next level? And as a result of all that, it's it's pretty easy.

We just say we buy businesses that are single digit EBITDA, single digit multiples, try growing them to double digit EBITDA and double digit multiples. And the math worked out pretty well. But one of the groups that we have, that that we think is important is what we call Compass guides. And those are a group of functional experts that almost every lower middle market business needs.

And we have a guide in the HR area, we have a guide in the legal environment, we have a guide in the technology transformation area, as well as a guide in the marketing strategy. And and most businesses might have an individual in those areas, but they are typically administrative, like in HR, they're doing hiring and firing, and payroll and benefits.

But if they need, help developing competencies of middle level managers to promote them to the next level. Or assessing the talent to determine who's able to take on the next step up in their career path. Oftentimes, we can bring those types of resources to our portfolio company to help create real value without saddling them with higher SG&A or overhead costs. So we spend a lot of time and energy making sure we're working with them in that regard, and then we have a fairly formal process. We call it the playbook, and it's not wildly secret it has components like communication, which is, how do we set up an accounting and reporting process?

Or how do we develop a plan and track KPIS? It includes a section on people that we just talked about, how do we develop talent and implement incentive programs and tie that to value? ESG? All the things that you would want to do in a business. But we methodically go through them and check them off, and then we have a section on strategy, which is including market strategy. Working with the Compass guides that I mentioned and even talking across our portfolio to help build a written strategy of how we're going to win. What markets are we going after, what are our services, what are our products? et cetera, and then, finally, of course, operations.

How do we help build and grow their business to a level of professionalism where we would have an operational excellence? And if we can do all those things over a period of time, if we can turn all those boxes from red to yellow to green, we then very quickly can get comfortable. That we've reached a certain level of success with that business and that begins a process that we start talking about when's the right time to exit? So it's really a very organized path. Of course, it never is as easy as I just outlined.

It right, sounds real simple, you just check out the boxes and move along. The truth is, all businesses are volatile and lots of ups and downs.

It's something that we started out of the gate, like every business, one of our, we have a set of values, and one of our values is be better. And so it's taken a lot of years to continue to refine and hone that, trying to be better each and every time.

Industry, time and time again, does best when times are worse, and there's a lot of reasons for that. But I'd be curious, what is some of the top advice that you and your team are offering your portfolio companies to help them successfully manage through this time? Not only with safety in mind, but also success?

And I think most of us would say, if we have a business that we expect to grow by 18 and it only grows by 12. We're still moving in the right direction. But you might need to work a little harder, or, in some cases, work a little smarter to get to that level or target growth rate. And many of our businesses have good markets, good plans, good strategy, but you can't set and forget a strategy. The world does change and it is dynamic, so I think about it like Whitewater, right?

You call it a washing machine, I guess. The same analogy of Whitewater has rough spots and smooth spots. And when you get into rough spots, you've got to figure out how to get yourself over to the smooth spot. Or be prepared for the next rapid. And you know, a lot of businesses say, well, we had a strategy in the past, I got involved in a few businesses where the owner had a strategy.

Five years later, the strategy is not working and they can't figure it out. And as I mentioned, I did consulting in strategy. And I'd say, Well, when's the last time? You re-evaluated the marketplace and what your products and services are, and how you're going to win and all those types of things? And they had not done that, they just figured the economy was rough and the headwinds were pushing against them and hadn't re-evaluated. How to succeed in the current market. And so, you know, I think most entrepreneurs and most middle market business people are pretty resourceful. So it's just a matter of taking a step back, thinking about where the headwinds maybe are less strong, where there may be still are tailwinds. And then how can we work a little harder to still accomplish our goals, despite perhaps a little bit of a turbulent water?

And then suddenly someone moves it, and the more intrepid ones just immediately go with it. And they continue to, you know, emulate me and get fatter and happier over time. But a lot of them just keep on staying and they get upset about it and you kind of wither away. And if you just accept the change as part of it and realize, you know, let's just go elsewhere in the maze and find it. Even when times are tough, clever people who are tenacious and work hard are going to find the pockets of opportunity. And I think you said it so well of, you know, just go and go, find that opportunity.

Maybe the whitewater isn't as rough. And then, guess what, this, too, shall pass.

You know that we can't just sit here and be concerned, or we got a problem. We got to figure out so what are we going to do about that? And sometimes that is takes a little bit of blunt conversation with the leadership teams of our businesses. So okay, you've had a rough go, you lost a customer, a piece of equipment down, you know, so what? So what are you going to do to figure that out? Make it up and make things happen?

Why not do the other one versus just, you know, be a passenger in life?

And there's oftentimes a disconnect in that handoff. And so we like the fact that the premise on which we buy a business is you're accountable for delivering that result over time. So our deal teams stay involved over time. We also think that's nice for our portfolio executives because we've built a relationship with them, we've got to know them.

We don't say welcome to the team and here's your new boss. We stay with them and work with them over time, but that doesn't mean we don't augment the team. Once they're in the portfolio, I mentioned these Compass Guide resources, and we start augmenting the team, whether that be internally. Let's say they have a great leader but need a financial executive, it's quite common that we're adding a CFO to our portfolio companies.

Or maybe they need a different executive to join the team to help build and grow. But we're also lending our resources, for example, the Compass Guides group that I mentioned, to help build and work with that management team. And then we set up this cadence of communication that I talked about as part of our playbook. Once that communication is in place, we have a rhythm of what are the right KPIS? What are the metrics we're looking at to assure we know when something goes off the rails, or if it goes off the rails? So that we don't have to do long and laborious report out sessions, you know, we, of course, stick with them on a on a monthly operating review and a quarterly board meeting.

But we really like to see ourselves as a partner with that management team. Not that they're coming to Compass Group and doing a necessary quarterly report where we pound our fist on the table and say, what are you going to solve that problem?

We work with them on an ongoing basis to steer the right resources to bring new partners to the table. And we have something called the handcuff, we like to make sure we ask and learn. What would it take? Or what could you do if we took the handcuffs off? And that handcuff might be capital, it might be resources, it might be people or connections.

And we do our best to take those handcuffs off and allow those to grow without, without those limitations.

But but, you know, at the same vein, you know, the the. The mentality in our firm was, you know, you make your bed, you gotta, you gotta sleep in it and and fix it. And so for those same five years, I, I, I think I had 8 a..m and 8 p..m. calls to China every day for for a long time. And we, you know, and we fixed it as a team.

And so I think that's that's a great way to think about it.

John I'd really, you know, love to get your thoughts on is? I think all of us, through all this, these journeys and these iterations and life lessons that we've gone through, have learned things that we wish we knew back then. And and I have pages of them as, Oh, if I could have spoken to my younger self, it would have been a different path. And in some ways, you know, I wouldn't be the same person I am today if I didn't go through that. But boy, what, I've loved to learn those lessons, at least in spots beforehand. If you could go back to your 22 year old self, meet yourself, then what would be one of the top piece of advice that you'd share with the younger John that you wish you knew that?

And I see it today, you know? Some of our team members will come in and they'll start their thesis research. And a quarter or two later, they'll say, I think I'm ready. I want to go buy a business. And and I think, you know, it takes a lot of time to become an expert in an industry.

And so you have to persist and keep working at it and peel the onion back, as they say, and get smarter. And then sometimes when things get rough, you just got to keep working at it. Had a friend tell me long ago. Just preserve the asset, right? you don't want to lose the asset. Where?

If you've invested $50 million and it goes down to 40, that's an unfortunate situation, but you don't want the 50 to go to zero. That's hard to recover from.

Persistence when times get tough, when you're frustrated, is one of the things that I think is most important. And then I mentioned at the beginning of the conversation, I'm a little bit add. But we look for individuals that are curious, right? That curiosity to always want to be better, to love what you do, to read, listen to podcasts, to do the things that make them smarter, and enrich their intellectual knowledge about a subject over time. If you're looking at it as a job and you have to come in and do some research about an industry that you're not so excited about, you're in the wrong spot.

You need to find a different industry or a different job. And so if people really become curious and become the subject matter expert in a niche, that's where I think they can really apply value, whether that be a consultant or an expert. Or that's where you can really bring value when you're looking at a private equity to invest in a business and grow it. So persistence and curiosity are two things that I try to bring, and certainly I encourage for the team members we bring on board.

Well, John, this has been really wonderful. Spending time with you. It's a privilege for us because we get to see how your team does it in real life. But really equipping us with a lot of the backstory and the whys has been quite revealing. In terms of the great team that you've built and why it's built that way. And no doubt will give value to anyone else who's thinking about, how do you build a great business over time? So thank you.

Thank you so much for sharing your insights and perspectives here.

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