FIVE QUESTIONS WITH… SCOTT MARDEN, Managing Partner, Compass Partners

1. Compass Partners is in the market with a maiden fund targeting $350 million. Tell us what compelled you and your colleagues to spin out of DLJ Merchant Banking and start a new firm?

This team had been working together for four years at DLJ when we decided to launch Compass. When we spun out of DLJ, we thought for a long time about the direction we wanted to move in. Our passion has always centered on growing companies in the middle market, where there was better deal flow. Our premise has been putting money to work in places where we can make a real difference. In this environment, however, you have to bring more than just money to the table. Our secret sauce is a marriage of deep operating experience and world-class transactional experience.

Our firm concentrates on four areas: business information services, where we focus on the B-to-B marketplace; marketing services, where we target smaller companies that help larger companies acquire customers; the training and assessment market; and outsourced services. Digital publishing is very interesting for us; it’s where you can harness the move from print to digital content. Many businesses have strong legacy brands embedded in print. We take that strong content, and then slice and dice it and redistribute it in many different ways.  

2. You mention content but not ‘media.’ Is media a dirty word in private equity?

The word ‘media’ connects to entertainment, which we don’t do. And we don’t do television, film, theatrical entertainment or casinos. We’re also not interested in traditional publishing businesses that are heavily tied to advertising. When advertising is up, these businesses do incredibly well, but when ads fall off, they get crushed.

With illiquid alternatives, given the longer hold periods, the opportunity to buy low and sell high is riskier. So for us, the attractive parts of media are on the content side, particularly in business information and education. Because of that, we’ve steered away from being identified as a media fund, even though some investments we make will have a media aspect to them. Besides, there are already a lot of media funds out there.

3. Besides money, what are sellers most looking for?

Our most recent investment is the leading company in online driver education, called I Drive Safely. That’s a company we bought from its two founding partners, who launched it 16 years ago and never took a dime of outside capital. They were visionary entrepreneurs who saw a real opportunity to take your typical paper and classroom-led driver’s education course and create an online alternative. We are now control investors, but the founders own a substantial stake. We are very committed to finding management teams we like and believe in. In that way, we’re different from other firms that buy a company with an eye to changing management.

4. Lately, we’ve seen a lot of sponsors selling companies to other sponsors. Why is that?

In private equity, time works against you, not necessarily in terms of cash-on-cash returns, which is what should really count, but in terms of the other metric everybody unfortunately uses, IRR, which is very time sensitive. You may have a terrific business that you bought at the wrong point in the cycle, and that means you hold it for a longer period of time. But hold periods work against you when it comes to returns. So, more often than not, exits are based on the sponsor’s length of ownership.

5. You’ve worked at both private firms and public companies. Which do you prefer working in?

Much of what we do in private equity is the same as what I did as an operating executive at large public companies like McGraw-Hill, Philips and Marvel. You look to hire the best people. You look to empower people. You look to drive new products into new markets.

The major difference is the source of capital. With public shareholders, the disclosure burden is huge, and you’re also living quarter to quarter. At a private company, however, we’re able to drive rapid change, build a 180-day operating plan, reengineer management teams, restructure a balance sheet and introduce new products. In a private company, we get a lot more done in a much shorter period of time, so it’s tremendous fun.

Edited for clarity by Gregory Roth