It can be a challenge trying to distinguish oneself in the crowded middle market. I. Joseph Massoud, co-founder of
Massoud began his career at McKinsey & Co. after completing his undergraduate education at Claremont McKenna College in his native Southern California. He served as a management consultant in McKinsey’s Los Angeles and Mexico City offices until departing to Harvard Business School for his MBA. In 1993 he joined Los Angeles-based
In 1997, after a stint as VP of finance and corporate development for Petroleum Heat and Power (Nasdaq: HEAT), Massoud was recruited by the principals of the Kattegat Trust to head up the investment activities of the TK Foundation, a philanthropic organization launched by Teekay Shipping founder J. Torben Karlshoej. A year later, Massoud founded The Compass Group, which invests on behalf of the Kattegat Trust and affiliated groups.
The Compass Group story doesn’t differ that much from many of its mid-market peers. The firm invests in various industries and favors deals with transaction values of between $25 million and $150 million. This past May, though, the group did what others in the industry can only hope for when it launched a publicly traded holding company on the Nasdaq. The public company, called Compass Diversified Trust, is listed under ticker symbol “CODI” and Massoud sits as its CEO. Kattegat Trust owns 38% of Compass Diversified Trust.
The idea to launch a public vehicle evolved through discussions and efforts to figure out a sensible fundraising strategy. After countless lunches and beers with his colleagues, the Compass Group’s initiative grew into its public market effort. “It wasn’t an ‘a-ha’ moment,” says Massoud. “It was more of an evolution.”
The Compass Diversified Trust, unlike most other private equity sponsored public vehicles in the past, was not designed for investors to buy shares in a blind pool of capital. The idea, similar to Ripplewood’s float of RHJ Holdings on Brussels’ Euronext Exchange, was to buy stakes in a portfolio that Compass was already managing: a collection of companies that includes employment agency CBS Personnel Holdings, electronic components company Advanced Circuits, air gun manufacturer Crosman, and Silvue Technologies, a maker of abrasion-resistant coating systems. Earlier this month, Compass added another company to the portfolio, when it bought Los Angeles-based Anodyne Medical Device Inc., which makes patient supporting and positioning devices.
Through the float, the Compass vehicle raised funds for investment in specific assets. It will make quarterly distributions to shareholders, similar to business development corporations (BDCs), but it is not under a timed mandate for investing its cash, unlike special purpose acquisition companies (SPACs).
Oftentimes it’s the investment bankers that try to sell GPs on new products. Not so with Compass’s public trust. “Half the investment bankers we talked to looked at us and said it was interesting but that they couldn’t do that,” says Massoud. “When they said we were ahead of our time, maybe they thought we were nuts.”
Generating enthusiasm around a public vehicle may be easy when the name Apollo Management or Kohlberg Kravis Roberts & Co. is stamped on the prospectus. Compass, however, was not graced with that kind of brand recognition. However, even as skepticism abounded at first, time on the road showed Massoud that there was a market for the Compass model.
“As we developed it, people became more and more interested,” he says. “Once we got on the road, we had a very good response on both the institutional and retail side. It took until day four or five of the road show until we realized it was going to get done.”
Massoud says that Compass’s ability to launch the public vehicle was helped along by the fact that placement agents had responded positively to the prospect of their ability to raise traditional private equity capital. “We thought that if the market didn’t take it, we would be able to raise a straight private equity fund. We had a lot of fall backs.”
The May 11 IPO of Compass Diversified Trust could probably be described as underwhelming. Its stock price closed at just over the offering price of $15 a share, hitting below the mid-point of its estimated $14 to $17 per-share range. As of press time, its stock was trading at $14.53 a share.
Compass netted $269.9 million through the IPO and the company is already receiving analyst coverage, receiving “buy” ratings from both BB&T Capital Markets and Ferris, Baker, Watts.
One of the benefits of the public vehicle is that it allows Compass to emulate Berkshire Holdings and hold on to growing companies beyond the traditional private equity investment windows. “In your fifth or sixth year of ownership of a business, if it’s growing… you shouldn’t sell that business,” says Massoud.
Whether or not the Compass model is emulated by other private equity firms remains to be seen. What made the model easier in Compass’s case, was that the firm only had one dominant limited partner, The Kattegat Trust, and a relatively small portfolio of investments. A more traditional buyout firm would need to get all of its LPs to agree on one valuation for the entire portfolio. The larger the investor base and more sprawling the portfolio, the more difficult a public trust such as Compass’s becomes.
Massoud believes it was worth the effort, though. “We’ve created a permanent capital vehicle [and] that is a pretty good widget.” His prediction for 2025 is that the firm will “still be doing transactions [through] Compass Diversified Trust.”