Ever wonder how authentic connections and Midwest values could transform mergers and acquisitions? Dive into a compelling blend of business acumen and heartfelt legacy preservation with our latest episode.
In this episode, Jonathan Babcock, Senior Associate at Compass Group Equity Partners, joins Patrick Stroth to uncover the intricate world of lower middle market investments and the human-centric approach that defines their success.
You’ll discover…
- The unconventional inspiration behind the name “Compass Group” and what it symbolizes.
- How networking in unpredictable ways opened doors for a young Jonathan.
- The secret formula behind Compass Group’s success in the lower middle market.
- Real-life stories of legacy family businesses transformed by strategic partnerships.
- Why operational excellence and people-centric values are critical in today’s competitive market.
Mentioned in this episode:
Transcript
Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and national practice leader for mergers and acquisitions for Liberty Company Insurance Brokers. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions, and we’re all about one thing here. That’s a clean exit for owners, founders, and their investors.
Today, I’m joined by Jonathan Babcock, Senior Associate of Compass Group Equity Partners. Based in St Louis., Compass Group is made up of experienced investors with business acumen, financial prudence, and Midwest values to reach to the next level of success for their partners, be it their buyers, sellers, or investors. Jonathan, it’s great to have you here today. Thanks for joining me.
Jonathan Babcock: Yeah, I appreciate it. You know, been a student of the podcast for many years now. It’s funny, going back to undergrad, listening to all these different M&A podcasts and getting the opportunity to come on and really, you know, share some of the insights I’ve picked up over the years is phenomenal. And so I’m excited to be on today.
Patrick: Well, it’s great. It really is a thrill to have you here. Particularly with, you know, being out in the Midwest and being so active with what you’re doing. But before we get into Compass Group Equity Partners, let’s start with you. Why don’t you tell us, what brought you to this point in your career, other than being inspired by podcasts?
Jonathan: Yeah, for sure. Before coming on with Compass, spent time in various roles within the lower middle market space. But you know, the common chord between all those was really business development and building relationships. Two things that I really enjoy doing. And, you know, on average, since I’ve been on with Compass, you know, connected with about 1000 people, having 1000 meetings and conversations a year, which fuels me and gets me, you know, really excited.
But you know that really all started with, you know, a large testament to my dad. He’s got a small business on the Illinois side where I grew up, and I remember being in high school, and I’ve got two brothers, and he’d bring us into the office and tell us, you know, I’ll give you 20 bucks for every lead you bring in. And, you know, had us making cold calls to businesses, yeah, yeah. And I remember him saying, you know, what’s the worst they can do?
All they can do is say no. You know, don’t be afraid of getting a no. And, you know, just focus on building relationships, which, for a high schooler, you know, I was more focused on the $20 that I was trying to make to, you know, buy Little Caesar’s hot and ready pizza or whatever it was. But I think that broke down barriers for me.
And then moving on to college, I would get the Forbes magazines, and I remember reading this article that talked about how to network as a young person, where you don’t really have as much to offer. Truthfully, I was, I think, 19 or 20 at the time, but read this article that said the best way to network like that is really start a business journal, website geared towards giving advice to, you know, younger professionals coming right out of college.
And you know, executives want to share that advice. They want to give back. And so I remember after a few of those articles that I put together, ended up networking and meeting the former CEO of Tractor and Supply. And I remember it was my, I think 21st birthday at the time, and took time to write down notes and met with him, and, you know, just got a whole wealth of information, and he was really charged with growing the company at the time, expanding the footprint. You talk about Midwest values.
Everybody here in the Midwest knows Tractor and Supply is not just for agriculture and tractors. It’s, you know, more of a shopping venue at that. But yeah, I remember the key takeaway from him was, you know, put your values in people, and you know the business will grow.
And you know that definitely stands true. And so you know, before getting to come on with Compass and being fortunate, knew several team members here from had this theme of grabbing our coffee a day, just getting out, meeting people in St Louis.
It’s a big, small city, I would say, where few connections on from knowing just about anybody. And so it’s really cool to connect, you know, both of those things and have the opportunity just to develop relationships on a daily basis. But then you’re also, I think another exciting thing was, you know, always been fascinated with the entrepreneurial journey and the opportunity to talk to founders on a day-in, day-out basis.
My mom’s side of the family, they actually have a small business that’s been around since 1908. Her grandfather came over from Italy and stopped in Ellis Island. Lived in New York for six years, and then somehow ended up in a little town in Iowa, where they actually bought a chocolate recipe for a quarter. The story has it. And, you know, started the business in 1908 and the rest was history.
And now it’s on to the fourth generation, which, you know, for a lot of these businesses, that’s an incredible feat to, you know, transfer over four generations and continue to go on. They actually won the James Beard Award for all the foodies out there. And so it’s a pretty prominent. I recommend anybody look them up.
Lagomarcino’s is the name. But not every business has the fortune to transfer over to the fourth generation or even the second. I think, looked up some data before coming on here, and the family business org, I think, says about a third of businesses make it to the second generation.
So Compass is a key role in what we do is partnered with family/founder-led businesses that you know don’t have that transition in place, and finding owners that are excited about that second opportunity for growth. And so, you know, it’s been a tremendous opportunity since I’ve been on for coming up on three years now and seeing the team double and, you know, get out raise more funds, but really still sticking to our knitting in the lower middle market.
Patrick: Well, a couple of things. It’s great to have you here, because what I see just foundationally is going across your entire experience from just getting into now with Compass, is this love of being out with people. And that’s one thing about mergers and acquisitions I’ve observed over the years, is that, you know, a lot of people think of mergers and acquisitions is Company A buys Company B.
So, you know, Amazon buys Whole Foods. And those are the types of things they think about when really it is one group of people agreeing to partner with another group of people. And you have to have that, you know, human connection in there to get that forward. And you know, there are firms out there that don’t subscribe to that.
They’re looking for opportunities, but there are other firms like yours, like Compass Group, that go ahead and that’s entwined within them. Because as people, as part of the Midwestern culture that we’ll talk about in a little bit with that. But get us to Compass Group. And how do they come up with the name Compass Equity? We’ll start there, and then let’s talk about Compass Group itself.
Jonathan: Yeah. I mean, really, it was John Huhn. He’s our Founder and Managing Partner, and then Chris Gibson, our other Managing Partner came on shortly after founding Compass in 2014 but you know, would love to tell you we were named after a beautiful mountain range here in St Louis, Missouri, but we don’t have too many of those.
We do have a rather exciting ski resort, Hidden Valley that not too many people know about. But really it came about, he, John, he’s a sailor. He grew up sailing, which, those that aren’t familiar with the Midwest, there’s actually a lot of beautiful lakes to get out and sail on, and so he’s been doing that ever since he was younger.
And I think the the theme there was, you know, sailing, or even, you know, sports, all this, like we talked about, everything comes back to people, right? And so you’ve got a team. No one person is greater than the ship moving in the same direction.
Everybody has a certain role. And so I think, you know, culture was a big part of that. And then you know, also compass, you know, the guiding factor with a lot of these businesses that are going through a once-in-a-lifetime transition, right?
It’s emotional a lot of times, you know, those people within the business who are like family to those owners, and really preserving the legacy is a key part of that. And so we always call it, you know, our true north, right as we partner with these businesses, ensuring that we’re aligned on values, we’re taking care of people, we’re ensuring they’ve had opportunities for growth.
And you know, you do those things, and the results, you know, inevitably come. But you know, then also, I think with that true north comes what we call our compass playbook. Think of something similar to the EOS operating system if you’re familiar. But a repeatable, predictable, scalable playbook that every business is different, but you know over the course of time, you built your repetitions and understand what key things need to go in place to professionalize these businesses.
Because at the end of the day, you know, when we’re connecting with an owner or a founder, you know, they’re looking for a partner for a certain reason, right? They want to ensure that people are taken care of and that people have the opportunity to continue to grow in their careers. And you know, at the end of the day, every last dollar before we connect and partner of their money is you know, going back into the business, right?
It’s a big financial commitment. You’re putting food on the table for, you know, 100-plus families. You’re helping send, you know, employees’ kids to college, and so it’s a big responsibility. And so I heard from a few owners, and one in particular, I remember, you know, after he partnered with us, he got to say, you know, I get to do the fun stuff again.
It feels like I’m an entrepreneur, and that’s exciting, right? And those are the stories we look for in every partnership. And so, really, but yeah, large testament was, was John coming up with the name and talked to him before the podcast, and heard this story a million times, but it’s pretty cool to see it get to where it’s at today from even when he started it back in 2014.
Patrick: So Jonathan, talk about Compass Group Equity Partners’, funds right now. A new fund coming in, closing an old one?
Jonathan: Yeah. So, I mean, really, we got started again back in 2014. It’s pretty awesome to see how far we’ve come. You know, we started as an independent sponsor. Through that, put about 200 million to work across 10 platform opportunities, which, for those of you that have been an independent sponsor, it’s not easy. That was before my time.
The blood, sweat, and tears were done by John and the rest of the team that was around then. But when I first came on, we just raised our first institutional fund at 255 that was back in May ’22. And since then, we made seven platform investments out of that fund. Raised a new fund earlier this year, back in April, at 408, and have already made three platform investments out of that fund.
And so it’s pretty incredible to see the growth of coming up on three years now, and the team’s doubled in size and continuing to move at a fast pace. But methodical and process driven where, you know, we’re not partnering with all these groups. We’re focusing on, you know, growth, and continue to grow them. But, you know, continuing to build out the team.
Patrick: Jonathan, Compass Group Equity Partners has been around for about 10 years. You’ve been very active, and with all the success you’ve managed to keep down in the lower middle market, you have not moved upmarket. Talk about that commitment to being in the lower middle market.
Jonathan: Yeah, the team’s done a good job, as we continue to obviously partner with more and more businesses over the years. Just mentioned, continue to, you know, raise new funds, but it’s been a methodical approach to continue to stick to our knitting, that thesis-driven approach. It works within the lower middle market, and that’s why you know that people-centric approach, as well, works within the lower middle market, and that’s where we’re going to continue to stay.
You build relationships, you know, over time. And those take time to materialize. But having that coordinating with, you know, sticking with family and founder-led businesses, you know, first institutional capital, and really allows us to tell that story and continue to build that playbook dedicated to, you know, the lower middle market. And so it’s exciting to see it move so quickly, going from fund two to fund three at 408, here pretty quickly.
But again, when we raised that fund, we always kept in mind that we’re sticking with our true knitting of family and founder-led businesses. And so as groups, I think, like you mentioned, raise new funds, ultimately, they move upmarket and continue to move upmarket. And so the groups that really stay and do it well in the lower middle market becomes far and fewer between. And so it’s definitely been a competitive advantage for us.
Patrick: And from what you say there, I always ask my guests, you know, what are you bringing to the table? Because this is a big market. It’s actually growing every year. Compass has been around since 2015. You’ve been very, very active with adding platforms. You’ve got quite a few of them. You have not gone up market.
You’ve stayed pretty much in the lower middle market, which is great. That’s a signal to your commitment. I like that you’re putting together a playbook. What that says to people is, there’s a repeatable, reliable formula. And this isn’t just guessing. This can be as simple and straightforward and predictable to a pathway to success that you’re bringing to the table.
I think that’s fantastic. Let’s talk about, you know, some of the other things that Compass Group is bringing and working. We don’t want to pay lip service to this is a tangible thing where you got the Midwest values. Okay, yeah. And so, you know, let’s go ahead and just if you’re in the lower middle market, what is Compass Group bringing to the table?
Jonathan: I love that question, because, you know, we get that asked that every single day. And you know, at deer point, there’s a lot of groups out there. I think PitchBook says there are about 1000 committed funds, PE firms, on the buyout side, similar to us, within the U.S., and so, not including all the independent sponsors, this new wave of eta, and then strategics even that we compete with on a daily basis.
And so the need, I think, more now than ever, to stand out and do things in a differentiated way. The Bain mid-year report. Not sure if you ever read through that, but they do a nice report. They do a good job, putting it together, but mid-year, they said there was about 1.1 trillion in dry powder, just within North America alone, between PE firms. And so you think of competition. It’s everywhere, right?
And so like to think of it similar to a funnel at the top. You’ve got 1000s of groups and, you know, slowly trying to differentiate in different ways to hopefully, you know, boil that down to where we’re just competing with a few groups. But I think John has really done a good job between his background. Prior to founding Compass, he spent time in corporate strategy and development, and when he founded Compass back in 2014 he really set out to do things from a different perspective.
You know, within corporate development at a strategic firm, you’ve got a reason to get into that business, a reason to get in that industry, and it’s more of a long-term view on the market. Which everything we do is a top-down, thesis-driven approach. Where we’re spending time in, I call it overarching niche manufacturing, value-added distribution, businesses, and consumer services, not necessarily anything new there, but within those try and find segments that are, you know, good regulatory drivers, good industry tailwinds from a macro perspective.
And you know, that really leads us to, really every deal that we’ve done historically started with a thesis. And he always says, persistence and curiosity is what it takes to get a thesis done. It’s not, you know, just get a SIM in and review it and move it at the first thing you see. You have to get out, walk trade floors, make it to industry conferences, know the Mount Rushmore of the industry, from an executive perspective, and get out, talk to people really understand the nuances in the business.
And so that’s one leg of the stool. For an example, recently, we closed down a business in our restoration services space. Our Managing Director, Bobby Brian, led up that thesis and that started two years ago. He went to a bunch of different trade shows, and industry conferences, talked to industry executives, ultimately found an operating partner to work with that spent 25 years in the industry, and we always say, you know, we do the thesis work to get smarter in an industry, but we’re still coming humbly to the table.
We’re not going to say we know as much as that owner has probably ever forgotten, right about the space. And so that’s why the collaborative partnership works. But I always think back to the book Jim McKelvey wrote called The Innovation Stack. And he’s a local St. Louisan. Born and raised here, co-founder of Square. But the book talks about you do many things in a differentiated way, and that becomes your mode.
And so the thesis-driven approach is really where it starts, and then, you know, also within that, doing direct outreach. And so there’s a lot of groups out there that would say, you know, maybe sit back and wait for opportunities to come in. And you know, we’re taking a little bit more proactive approach where, you know, we’ll still compete in processes every now and then where we can win on something other than just enterprise value or top value.
Try and win on culture and appeal to the group and really selling the story, but direct outreach. You know, we’re talking to hundreds of business owners each year, and long-term relationships, right? Those relationships take time. We’re never pushing or forcing anybody into a partnership. It’s a mutually beneficial opportunity. But you build those relationships in the industry to really take a proactive approach and not just wait for things to come in the door.
And so that’s been a key component or another way we stand out. And then I think this trend, and we’ll talk about it later, within the industry, is operational excellence. Within that Bain report, as well, they talk about, I think the next 10 to 15 years is all about operational excellence. And you can’t just do, John Huhn actually as a great saying. He’s got a lot of good quotes. He always says, M&A is a tactic, not necessarily a strategy, right?
And you can be strategic with M&A, but, you know, so at the end of the day, you have to grow these underlying businesses and really add value. And it goes back to that competitive market that we’re in as well. But you know, early on, he built out what we call our Compass guides team.
And so we’ve got five individuals that work across the portfolio, but I think in a different way than some other groups have, you know, more general operating partners that have experience in a lot of different spaces, and more of you know, swiss army knife, versus how we’ve structured it, we’ve got somebody for technology strategy, human capital management, legal resources, marketing strategy, and we just brought on somebody for FPNA as well that has been ramping up really well.
And so, you know, another favorite book of mine from Malcolm Gladwell, Outliers, talks about, you know, those 10,000 hours, right? You spend 10,000 hours in your vertical expertise, and you know, you start to build that repeatable, predictable, scalable playbook within that space.
And so that definitely helps us stand out and a lot of cool stories we can dive into later about, you know, the successes Jason on the technology side, going back to building up people in these businesses, because at the end of the day, you know, we want to help employees grow and scale their career within the businesses we partner with.
And you know, those Compass guides do that. They find champions within the organization to, you know, implement the ERP system helped them elevate CRM system as well. Went through a pretty robust update on one of the companies that Jason worked on. Brad on our marketing side, he’s worked on with one of our home services businesses, Fewa, with their marketing manager. Building him up to do the quarterly and recurring reporting.
And so it’s exciting, you know, those people are getting opportunities that maybe they didn’t have before, and getting to elevate their career. And so that’s another leg of the stool. And then, really, as we talked about in the I think the common theme here is cultural values, right? We’ve got, you know, a few different core pillars within that that’s everybody matters, do what’s right, customer focused, be better, and results matter.
And, you know, I think we call it Midwest values, but, you know, not just Midwest values, but values that reign through and are kind of our true north on every business that we partner with. And so it’s been fun, but I think that all those things, like I said, you know, this past year, we’ve closed four platforms. The year before, closed a substantial amount of new opportunities.
And so we’re, we’re definitely moving, but you know, those are the kind of the core pillars that I think enable us to do that. And the team does a good job, right? Since everything starts with the thesis-driven work, it’s not easy, right? You’re working on portfolio companies, getting ready for board packages, all these things while driving theses forward, and so it takes time.
And I think you know John Huhn, another good quote from him is, so what? He always says that you know, you’ve got a problem that comes in at a portfolio company or within a thesis, so what? What are you going to do next? And that’s something I always revert back to and enjoy that quote.
Patrick: Now is it safe to say that the vast majority of the owners and founders that you’re partnering with, they are looking to move up, you know, remain with the organization, move and bring their venture up to the next level, or are they seeking an immediate exit?
Jonathan: Yeah, that’s an ideal situation. Is we’re looking for family, founder-led businesses that the owner wants to stay on. They’re excited about, you know, growing to the next level of growth. They’ve taken it, you know, as far as they feel they can take it. And, you know, risk appetite, like I talked about earlier, comes into play.
You know, before we’re partnering with these businesses, you know, I’ve heard a few owners say every last dollar that goes back into the business is essentially coming out of their pocket, right whether that’s new equipment, hiring new sales managers, and at some point the risk-reward starts to get a little more nerve-wracking, and finding a partner that is committed to growth is exciting for them. And so that’s definitely the ideal partnership. Usually, you know, those owners are rolling over equity.
They’re excited about the path forward, and that’s why they’re choosing us, and it’s exciting to see. I think, quoted again, another owner that you know, said it’s awesome to feel like an entrepreneur again. I keep referring back to that. But you know, the risk appetite is back, and they’re willing to go after a more hungry growth path, and it’s exciting to see, you know, that play out time and time again.
Patrick: Yeah, for my conversations, I you know there, there are probably a lot more buckets that we can categorize we can put these owners and founders in. But there are those who are looking for an exit. They put their time in, and they may need a way to exit where their people are taken care of and, you know, move on with the next chapter of their life.
A lot of other owners and founders, you know, they’re looking for that, you know, that surge of energy again. They, you know, have gotten immersed in the bureaucracy of their business, and the skill set that got them to wherever they are right now can’t get them to the next level. And so they look out for help that way.
And that’s what I want to you know, the purpose of, you know, speaking with you and Compass Group Equity Partners, is that you know, you don’t have to default to a huge brand private equity firms out there, and you don’t have to also capitulate to a strategic competitor out there, because you got nowhere to turn.
There are organizations, you know, in the middle of the country where there’s a lot of innovation. You don’t have to be in California or New York for a you know, great innovation. There’s innovation there, and it’s in an area where you can get them to that next level because you’re bringing in resources to bear. Like you mentioned earlier, you have a playbook.
You’ve done this many times before, and I think, you know, for owners and founders out there, just the way they can go and get to that next level and just get revitalized, it is almost like, as we’re coming, we’ll be going through winter, we get into spring, and it’s just everything’s new and fresh.
Jonathan: Breath of fresh air. Yeah, exactly. And you know, I think that’s where the cultural appeal comes in, right? You know, working with people that align on those values and align, but like you said, you know, it is an infusion of energy. It’s awesome to talk to some of these owners and see them get reinvigorated and excited about the business, and at the end of the day, it’s a collaborative partnership, right? It’s not we’ve got the playbook as a resource. But, you know, we’re working alongside these companies.
You know, all the deal team members that work with these companies on a, you know, daily basis. You know, they build long-term relationships with these owners that even past exit, they’re staying in touch. And it’s not, here’s the playbook. All right, we’ll touch base next quarter at the board meeting and see how things are going. It’s, hey, let’s work together. How can we get there? Which is awesome.
Patrick: I think you’re definitely a hands-on, not absentee source of capital is dropping, you know, writing a couple checks, and then just keep doing what you’re doing. And we’re going to be passive. At the same time, you’re not going to be grinding down, imposing your will on them. Say, this is how we do it, you know, on the west or east coast. This is the way we do it and this is how it’s done.
Jonathan: Exactly. Yeah, it’s not passing off trying to take a Fortune 500 playbook and, you know, implement it at these small businesses. It’s aligning on strategy and taking a collaborative approach.
Patrick: Any regional, yeah, I’m sorry to interrupt. Any regional limitations for you? Do you like the whole country? Are you preferably staying in the middle of the country?
Jonathan: Yeah, we say we hunt between the mountain ranges, which I think if you look at the portfolio rings true. There are always a few outliers, given that thesis-driven approach, oftentimes, you know, takes you sometimes outside those boundaries. We partnered with the business up in Rhode Island, MPC, on the advanced material side.
But if you look at historical companies we’ve partnered with and current I’d say it aligns really well. And I think it goes back to that Midwest values, Midwest culture. You know, I always say it’s not a sentiment maybe carried by everybody at the firm.
But you know, you haven’t fully experienced the Midwest unless you’ve stopped at a Casey’s gas station and had their pizza. For those of you that are in the Midwest, you know Casey’s as a pizza place, or pizza place that happens to sell gas and, you know, I think it’s something that, you know, it’s flyover country for a reason.
Not everybody stops in but the Midwest has a lot to offer. And, you know, growing up here, love the Midwest. I think it’s funny. You know, we drove up to Chicago for a Christmas concert two weeks ago, and for those of you that you know, familiar with Illinois, you think Chicago is all there is. But you drive from St Louis all the way up to Chicago.
It’s, you know nothing, but you know, farmland really the way up. And so it’s fun, and it’s fun, you know, you connect with businesses and owners that align with those values, and a lot of good things happen.
Patrick: I think there are going to be a lot of opportunities there. There are a lot of companies there, and there’s going to be a lot more companies, as, you know, we’ll get into what we see for the future. But there’s just going to be a lot more opportunities for businesses to expand in the Midwest, just with light manufacturing and other things. Just to think of a couple of ideas on that.
But you know, with the activity that Compass Group Equity Partners has undergone with, you know, so many acquisitions, I wanted to check with you because, you know, there are mergers and acquisitions transactions, there is financial risk. Not everything works out, you know, as designed. And there has been a lot of concern about the financial risk involved, and that’s put tension into transactions.
What the insurance industry did about 10 years ago was they came up with this product called reps and warranties insurance, which took away a lot of that financial risk from the buyer, so the buyer isn’t stuck holding a lemon. And the seller’s not kept on the hook to the buyer.
Definitely post-closing it removed a lot of tension, and it’s really accelerated the pace at transactions have been happening. But, you know, don’t take my word for it. Jonathan, good, bad, or indifferent, what’s Compass Group’s experience been with rep and warranty insurance?
Jonathan: I think, you know like you alluded to, it’s definitely a product that’s moved down market pretty substantial. I think a lot of people have historically thought of it for, you know, larger transactions, and given we play in the pretty true lower middle market space, right? Two to 15 of EBITDA, I think over the last even five years, you’ve seen more and more opportunities to utilize it. And just thinking back through some of our most recent platforms, I think on about 50% of partnerships we’ve utilized it.
And so it’s definitely a great resource. And you know, depending on, again, going back to that collaborative approach. If there’s an owner that, you know wants to utilize reps and warranties, get more cash at close, have some certainty within that, and, you know, not tie up, you know, money in an escrow. I think it’s definitely something we look to utilize when warranted.
Patrick: That’s a great dynamic to bring up is that, you know, during the due diligence process and then the negotiations on the reps and the indemnification process, there is a point where the two sides are almost competing with each other, and you know, they have different objectives in there, and there could be, you know, some conflict, or at least some resistance in there.
When the indemnity risk is taken away because it’s an insurance policy, all of a sudden the two sides become, instead of confrontational, they’re collaborative. And you just mentioned that as well, and we see that in these things, where it just lowers the temperature of the room and it works out.
The one thing I did want to point out is that reps and warranties traditionally have been a product for transactions that are in the, you know, 25 to 30 million to billion dollar EV range, okay. If you’re looking at smaller transactions under, particularly under 20 million, rep and warranty becomes a little bit of a cost issue, because it’s just not priced, you know, favorably on smaller deals.
The nice thing is that the industry has come up with a sell-side rep and warranty policy. It’s called TLPE, transactional liability private enterprise. That policy is designed to fit in these deals that are priced between 1 million and 30 million in enterprise value and at an average cost of $15,000 per million in limits, there is no underwriting fee. It is a great way to take the benefits of that traditional buy-side rep and warranty product and bring it into the lower yet even micro market.
And that’s where we see a lot of these, you know, sub $20 million EV deals in the Midwest. And it’s a way to bring benefits down to the owners and founders there and the deal parties. So Jonathan, what do you see going forward in 2025 either be with Compass Group Equity Partners specifically or just M&A in general?
Jonathan: Yeah, I think there’s a lot of interesting trends. I follow a lot of articles again, listen to a lot of podcasts, but just living and breathing it real time. I think a lot of the trends go back to that competitive environment that’s kind of taken place over the last call it 12 months. I think talking to a lot of groups, you’ll hear larger funds coming down market less activity in that 20 plus of EBITDA range, even from an investment banking or M&A advisor standpoint.
Hearing groups pitch up against larger investment banks that they haven’t seen in maybe 15, 20 years, which maybe tells you the slowdown of, you know, again, that 20 plus of EBITDA opportunities. And then I think PitchBook quoted some data here recently that, you know, average hold within a portfolio company is up to closer to 7.1 years.
And so I think next year you’ll start to see that creep a little bit where people think need to start thinking about exits on that side, which hopefully frees up more opportunities within the lower middle market. But just looking back over the last 12 months, I think we’ve seen a lot of those larger PE firms come down market, compete on seven, eight of EBITDA, which is generally our sweet spot, and it’s gotten more competitive.
Fact set data also was looking at some of the reports here recently, and deal volume was, I think, slightly down over the last 12 months. I think 14% or 13.8% to be exact, is what they said. And similar trends within lower EV businesses, multiples creeping up a little bit. But again, the need for having a way to stand out with all that competition coming down market is a key trend.
And, you know, PEI put out operational excellence report, and reverting back to our Compass guides team and how we like to stand out on that front, I think they talk about, you know, the next 10 years of PE really being all about operational excellence. Again, reverting back to the need to really be adding value in different ways, not just M&A as a sole method of growing these businesses organically.
You have to grow them. And you know that goes back to Bain as well. I think had an article a few years ago or even further back. And they called it, why zig when you can zag? And they talked about thematic investing and the need for PE firms to really stand out in that way. Again, we’ve been doing it since we were founded.
Big testament to John Huhn and being a forefront and having that insight to really the need of, you know, really understanding an industry, not just when an opportunity comes up, you’re learning about it for the first time. Spending enough time in that space to really be, you know, experts. But then again, always say that collaborative partnership approach those owners have always, you know, they’re going to know more than we’ll ever pick up.
And so finding good business owners to partner with is really the key and that. And then a broader theme, I think, which is an interesting one, AI. I think that’s a moving trend. Dan Cremons, know really well. He’s a thought leader in kind of the M&A lower middle market, PE space. He’s got a lot of good books, but he’s coming out with a book called Intelligent Equity, I think, in q1 2025, that talks about and breaks down the value creation that PE firms can drive through AI.
And, you know, I think this stage is, how can you adopt, or how can you start learning or dipping a toe in the water? Jason from our, you know, our technology Compass guide, he’s working with portfolio companies, whether it’s getting more efficient on RFPs and really utilizing it to create, you know, tech-enabled opportunities.
I think, again, reverting back to the Bain report, one article they had here recently was, 47% of worker tasks can be accelerated, right? And so how do you take some of that mundane work off people’s plates to elevate them and utilize it in a way, not to replace jobs, but really accelerate and allow people to be more strategic thinking, and so that’s an exciting trend.
I think that’s going on as well. And then people, lower middle market, can’t emphasize this enough, but it’s all about people. At the end of the day, I think we’re a growth-minded firm, right? We’re partnering with businesses in the lower middle market two to 15 of EBITDA. It’s not about cost, right? That’s for some of the larger groups to worry about that focus on carve-outs and other opportunities.
But for us, it’s truly about growth, and growth comes from having the right people at the table, and Jane Anne another one of our compass guides, she spent time at Panera, leading up their human capital strategy, and has spent 20 years in the industry all about people, and she does a good job of interviewing our owners as they come on, and understanding different dynamics as we look to build out the team.
Because again, at the end of the day, we’re not looking to cut costs or be focused on costs. You gotta be mindful, I think, but you have to build these teams and add people to the companies that will, you know, help accelerate things, and then again, build people up within those organizations and allow them opportunities for growth. And that’s the exciting thing.
You know, I heard one owner say that an employee came up to them and talked about, you know, from being able to elevate and have more career upward mobility, they were able to send, you know, three of their kids through college, buy the truck they never thought they’d buy, the house they never thought they could.
And those are the stories I think we live for, and we get excited about, you know, because, again, I can’t say it enough, but lower middle market, it’s all about people and and I think that’s a key trend where HBR said here recently in an article that talked about the most successful PE firms will be focused on people in the coming age.
The battle for talent right is, I think, now more than ever, you’re seeing and again, talk to owners all day long, where it’s, it’s not, can we get the work? It’s, can we find the right people? Attract, retain, and get them excited about being here. And so that’s always at the forefront of everything we do.
Patrick: What’s under all of what you just said, and then the value proposition that Compass Group brings, really is that one statement that Mergers and Acquisitions is a tactic, not a strategy. And so the job isn’t done when you make an acquisition. That’s only the work just begins in going forward.
I think that’s really, really encouraging, particularly for owners of founders that want to get to that next level and the members of their teams who also want to be, you know, you want to be on a winning team and be part of that. I mean, you’re giving that platform so that’s fantastic. Well, Jonathan Babcock from Compass Group Equity Partners, how can our audience members find you?
Jonathan: Yeah, you shoot me a note on LinkedIn. You can find me, Jonathan Babcock, and on our website, cgep.com. Give us a follow on LinkedIn. The marketing team, Kate and Brad do a great job of coming up with creative content all along with the journey. And yeah, don’t be afraid to reach out.
Patrick: Johnathan, it has been a real pleasure. Thanks so much. And let’s keep talking because you guys have a great story out there.
Jonathan: Thanks again, Patrick. Can’t thank you enough for having me on. And have really enjoyed the time I could talk about this, you know, all day long. And I think we’ve got an easy story to tell, so it’s a blast. And again, thank you for having me on.
Patrick: Nobody tells your story better than you, so it’s a real pleasure. Thank you, Jonathan.
Jonathan: Thanks, Patrick.
