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

Sean Mooney:
Welcome to the Karma School of Business Podcast. In this episode, we have a very insightful conversation with a true innovator in private equity, John Huhn, managing partner with Compass Group Equity Partners in St. Louis. This episode is brought to you today by BluWave. I'm Sean Mooney, BluWave's founder and CEO. BluWave is the go-to expert of those with expertise. BluWave connects proactive business builders, including more than 500 of the world's leading private equity firms to the very best service providers for their critical variable on point and on-time business needs. I'm very pleased to be here with John Huhn. John, thanks so much for joining us today.

John Huhn:
Thanks, Sean. Thanks for having me on.

Sean Mooney:
Absolutely. I think one of the things we always like to start off with is hearing a bit of the story of you and how you found your way into the private equity industry. And I think you have a really interesting story that led up to your path to private equity. So I'd love it if you could just tell us a little bit how did you end up in PE and what were the steps that led up to it?

John Huhn:
Yeah, well I'm glad you think it's interesting. Some people think that I'm an odd duck and I might agree with that a little bit because I went to school and got an engineering degree and quickly decided I didn't want to be an engineer. But I sometimes have to remind the young associates here that they didn't have spreadsheets when I was in school. 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, so I'm always looking for the next project or 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 as a result of that activity. And as a result, 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, spent a little time with a family office launching a program here in St. Louis, which then 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, did that for a period of time. And then we raised our first formal commingled fund starting a couple 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 interest 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.

Sean Mooney:
That's great. I think that that journey makes a ton of sense if you think of private equity and the leaders and professionals in the industry, really good at solving problems, really good at identifying opportunities, building and growing companies in many ways kind of doing acquisitions, but also making these companies bigger and better. And in the meantime, finding ways to be a constructor of things. And so your background as an engineer and then going into consulting and then into corporate development, that's already kind of like this deconstructed private equity role that you then led to starting your own firm, which is I think an amazing path and intuitively makes a lot of sense.

John Huhn:
I'm glad you think that way. Sometimes the LPs wonder how is that going to apply? But yeah, it's been good for us. And in fact, during our fundraising process, we've had a few LPs say, "Well, what happens if one of these businesses struggle and you need to put a placement executive in there?" I can say, I've been on the other side of the table and I can jump in and do that until we of course can call BluWave and get an interim executive in there or something like that.

Sean Mooney:
Absolutely. I think that that's a great background and I'd love to hear, and I think that's more and more the common and the norm in private equity is the business of private equity becomes more and more business-like 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?

John Huhn:
Well, I think I shared a little bit about the background that I've had in the entrepreneurial world, but what really drove me into private equity was that I had more failures than successes in the entrepreneurial environment. I probably started 17 different businesses, I'd say less than half of them were successful, 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 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.

Sean Mooney:
I love that story and that perspective. And in some ways the opposite of what I did. I started off and I built my career in this kind of linear path that brought me to private equity and then did the unthinkable and became an entrepreneur in my 40s. And it was terrifying. When I started in the 40s, it was a heart attack a day. I never really built something from the ground up, but I think I've learned more in these 6, 6.5 years 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.

John Huhn:
Absolutely, Sean. And it's interesting, I think some of the guys here might think I'm pushing them out of the firm from time to time because if they talk to me about trying to decide if they want to spend a career in private equity or they want to be an operating executive in a business, I will tell them they'll learn so much more in a business leading it or participating in management day to day than they ever will sitting on the outside trying to work with management in private equity. And so it's a great experience. I often encourage the younger folks to do it, but if you can afford it and have the stomach for it, you did it a little later in life, it's an awesome experience.

Sean Mooney:
There's nothing like a midlife crisis to encourage you to do the unfathomable.

John Huhn:
I guess you could have done also, you could have bought a sports car or something else, but a business lasts longer.

Sean Mooney:
Absolutely. This has been a more fun and rewarding experience than buying a depreciating sports car.

John Huhn:
You bet.

Sean Mooney:
That's great. So you've had these, 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 is importantly, could it be a really good company?

John Huhn:
Everything we do here at Compass Group is what we call thesis oriented. So we're a thematic researcher, so 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 there's that age old question, do you want an A management team and 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 raises all boats, 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 and a 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 than 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 a relatively hands-on partner. 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.

Sean Mooney:
I think that sums up kind of a lifetime of business wisdom very quickly. And as you said, the market always wins. And so if you have a good enough market, the rest comes down to the people you have, how team oriented they're, how are strategic, how thoughtful. And I think particularly as we think about our listeners who are growing and picking and choosing where they want to build their careers, look for a good market and look for good people. And if you're a business owner, do the same, business builder, find places. And at the end of the day, life becomes a lot easier.

John Huhn:
No doubt, no doubt. I mean, we've all been in those businesses that are struggling and sometimes you can fix them, but sometimes you just can't go against the grain. And if you've got too much headwinds, it's no fun, 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'm a tax and spend Republican. 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.

Sean Mooney:
Absolutely. So John, as you've built this firm and you're building it, how does Compass itself really think about value creation and what resources do you bring to your portfolio companies that help them building a company that's safer, stronger, and bigger and better?

John Huhn:
Yeah. Well, maybe the segue, I'll tell you just a minute about what our strategy is as a firm and we're looking for businesses that fit a couple different criteria. One is we're Midwestern based, so we like businesses that are in the middle of the US, mid America as we call it. Number two, we're thematic as I mentioned, we want to find businesses in areas that we understand and like. Then number three, we're looking for businesses that fit in a certain size or scope of what we do. And 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'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 swam 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 plan 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, "Okay, 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 and make some changes. We have what we call 100 day plan, which is exactly what it sounds like. What are we going to do in this business in the first 100 days? And if we can get involved in those first 100 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 pretty easy. We just say we buy businesses that are single digit EBITDA at single digit multiples, probably growing them to double digit EBITDA and double digit multiples. And the math works out pretty well. But one of the groups that we have 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 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 creation, 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, we 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 off the boxes and move along. The truth is all businesses are volatile and lots of ups and downs.

Sean Mooney:
I really like your comprehensive and thoughtful approach, not only to opportunity identification, but also then resulting value creation and transformation. And I think that shows one of the reasons why Compass Group was named one of BluWave's top private equity innovators out of all the firms there. And we take that very seriously. I think that was a great reflection of why we put you on that really, really short list of people who we think are doing the business of private equity really well.

John Huhn:
Well, thank you. And we appreciate the recognition. It's not something that we started out of the gate. Like every business, 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.

Sean Mooney:
That's phenomenal. So as we turn the page here, John, this is obviously a unique period in economic history. We haven't had kind of an economic downturn since 2008 or 2009, whether you want to call this a recession, I'm just calling it a washing machine economy where we're just agitating back and forth, but not making any direction. And whether you're growing 0.5% or declining 0.5% as economy does a really different matter. And so one of the things that I've loved about private equity is the PE 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?

John Huhn:
When I think about our portfolio, the first thing you have to remember is we're in the lower middle market. So these are small businesses, 25, 50, 100 million in revenue, and they are rarely exclusively driven by the economy. And what I mean by that is, I said earlier that of course we want to pick businesses that have tailwinds and are moving in the right direction, but as you said, if the economy is shrinking by 0.5%, that just means you have to work 0.5% harder to get to your goals and your plans. 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 white water, right? You call it a washing machine. I guess the same analogy, a white water has rough spots and smooth spots, and when you get into rough spots, you got to figure out how to get yourself over to the smooth spot or be prepared for the next rapid.

In the past, I got involved in a few businesses where the owner had a strategy, five years later, the strategy's not working and they can't figure it out. And as I mentioned, I did consulting and strategy and I'd say, well, when's the last time you reevaluated 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 reevaluated how to succeed in the current market. And so 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 turbulent water.

Sean Mooney:
I think those perspectives are spot on in this whole notion that you're talking about. It's like the world changes and you have to change with, and it's not all going to be smooth sailing. And one of the things that we do here with each of our team members is we give them this book that called, Who Moved My Cheese. It's a great little parable. It's of maybe a 40 page book. And tells the story of these mice and a maze, and they're used to going to this one spot where the cheese always is, and then suddenly someone moves it and the more intrepid ones just immediately go with it. And they continue to 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 is part of it and realize 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, just go find that opportunity, work a little harder, and go to the places where maybe the white water isn't as rough, and then guess what? This too shall pass.

John Huhn:
Absolutely. It's interesting, some of the team around here would be tired of me saying it, but oftentimes someone will come and tell me the problems or struggles or business, and I stare at them for a second, and now they can answer what I'm going to say next, which is, so what? So what are you going to do about it? 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 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, so what? So what are you going to do to figure that out, make it up and make things happen?

Sean Mooney:
I love that. I'm going to borrow that. And when people realize that you're in control of your own destiny and you know the outcomes, you can either go with fate or bend fate to your will, and why not do the other one versus just be a passenger in life?

John Huhn:
You bet.

Sean Mooney:
I think that's phenomenal. John, as you think about the evolution of private equity, one of the things that's happening is it's a system of the private equity, the firms themselves are multifaceted. There's a symphony of motion between people that do different things in support of the objectives of building and growing value and building companies and providing all sorts of value, but not only for the economy, but also investors. And so with this symphony of motion that's occurring as private equity firms are innovating to make others successful, how does your firm manage the interplay between your different constituencies in your firm? So the deal teams, the PE operating executives, the Portco leadership teams?

John Huhn:
Yeah, so we're a little bit different than some firms. Of course, there's a lot of different models out there, but when we have a deal team that work on a business in the acquisition phase, it is the same team that works with that business on an ongoing basis. And we think that's important because just as we discussed, sometimes a deal team will lay out a very nice strategy and the thesis of why this is a nice investment and how we're going to provide value to it, and then they hand it over to an operating team who starts fresh and goes down a different path. 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.

We, of course stick with them on a monthly operating review in 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 do to solve that problem? Instead, we really 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 where we like to make sure we ask and learn 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 businesses to grow without those limitations.

Sean Mooney:
I think that's once again, a really spot on perspective. In terms of this interrelation, I really liked also kind of this accountability that you talk about. I can certainly think about in various iterations of my career when I was in private equity, making these models that looked really, really good on paper. And then I think at least in a couple situations, I definitely got a couple of our operating executives stuck in China for 12 to 18 months. So Matt, if you're listening, I'm sorry.

But at the same vein, the mentality at our firm was, you, make your bed, you got to sleep in it and fix it. And so for those same five years, I think I had 8:00 AM and 8:00 PM calls to China every day for a long time. And we fixed it as a team. And so I think that's a great way to think about it.

One of the things, John, I'd really love to get your thoughts on is I think all of us through all these journeys and these iterations and life lessons that we've gone through have learned things that we wish we knew back then. And I have pages of them as, oh, if I could have spoken to my younger self, it would've been a different path. And in some ways I wouldn't be the same person I am today if I didn't go through that. But boy would I love to learn those lessons, at least in spots beforehand.

So 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?

John Huhn:
Yeah, that's a great question. And you're very right. There's all sorts of things I wish I could have learned earlier in my career, and we'd need a lot more time if we were talking about all the mistakes I made. But we can keep it short with the things that I've actually learned. And one of them is just persistence, whether it be during my entrepreneurial days or working in corporate America, it takes time. And I see it today, 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 I think 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. A friend tell me long ago, "Just preserve the asset. 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." So that persistence, when times get tough, when you're frustrated is one of the things 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, 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 opportunity 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.

Sean Mooney:
I think those are two excellent life lessons that if you can just do those two things, if nothing else are going to make you a better person with a more enjoyable life. So I very much appreciate that guidance, and it's probably something I'll tell my kids tonight before they decide not to listen to me anymore.

John Huhn:
Do it while they're young, because when they grow up, they're done.

Sean Mooney:
Sadly yeah, they're tweens and teens, so they really don't listen to me, but it doesn't mean I stop trying because of persistence.

John Huhn:
You bet.

Sean Mooney:
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.

John Huhn:
Yeah. Well, thanks for having me on, Sean, and I really enjoyed the conversation and wish you all the best.

Sean Mooney:
Thanks so much, John.

John Huhn:
Take care.

Sean Mooney:
Special thanks to John for joining. If you'd like to learn more about Compass Group, please see the episode notes. That's all we have for today. For more information, go to bluwave.net/podcast. That's B-L-U-W-A-V-E. Please continue to look for us anywhere you find your podcasts, including Apple, Google, and Spotify. We truly appreciate your support. If you like what you hear, please subscribe, review and share. In the meantime, let us know if there's anything we can do to support your success onward.

Private equity insights for and with top business builders, including investors, operators, executives and industry thought leaders. The Karma School of Business Podcast goes behind the scenes of PE, talking about business best practices and real-time industry trends. You'll learn from leading professionals and visionary business executives who will help you take action and enhance your life, whether you’re at a PE firm, a portco or a private or public company.

BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.