Some private equity groups buy assets just to pull them apart and sell them for the pieces. However, that is the exception rather than the norm. In fact, private equity has done a lot to build businesses and make them better, especially in the small and medium-sized business segment.

In this episode of The Corner Series, McGuireWoods’ partner, Geoff Cockrell speaks with Edward Crawford, the Co-founder and Co-CEO of Coltala, a Dallas-Fort Worth-based venture capital and private equity firm that employs a “mission” investment style. Geoff and Edward discuss Coltala’s unique investment style, the ethos that drives the firm’s investment strategy, and the misconception about private equity. 

Tune in to learn more about Coltala’s partnership culture, the mission and margin investment strategy that serves as a filter to screen out certain companies, the test used to evaluate potential deals, and hear why Edward has walked away from opportunities that otherwise looked great financially.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner, Geoff Cockrell, as he and specialists share real world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series, where we bring together thought leaders and deal makers in healthcare private equity investing. Here at The Corner Series, we have a few different corners. We have a capital corner, which is private equity folks, usually a banker's corner for investment bankers, a professor's corner for technical elements. Today, I'm thrilled to be joined by Edward Crawford, the co-founder and co-CEO of Coltala, which does some unique investment strategy and style that can be a ton of fun to talk about. But Edward, maybe give a introduction of yourself and Coltala, and we can kind of jump into the discussion.

Sure, sure. So my name's Edward Crawford, originally from Louisiana. Moved to Dallas from Miami Beach actually years ago, and helped co-found Coltala. A little bit about our firm. We are a Dallas-Fort Worth based firm with offices in Dallas and Fort Worth, and we really focus on a mission and margin type of ethos or purpose to try to grow businesses, but also create jobs in our great country. The Coltala purpose is to back exceptional leaders to build businesses that comprise the backbone of America, and that's really what we're all about and our team is united around that.

Edward, you describe on your webpage forward-facing that you employ a missional investment style. Can you give a little color as to what that means? I've encountered folks that do impact investing, which is investing in particular companies that do certain impact activities. Mission type investing can mean different things. How would you describe your philosophy?

Sure, sure. Our philosophy is we were blessed to live in an incredible country. Ralph and I have both served in various ways, whether it's in the nonprofit realm or overseas in the military or Peace Corps, and we're faith-based guys as well. So part of what we do is we love what we do. We love finding great servant leaders, and we feel that the businesses that treat people the best and deliver the best product oftentimes deliver the best financial returns. And so our mission and margin ethos is, if there's a true mission in the business, I'll give an example. Our home health business, which seeks to give the best level of care to patients in home health and therapy, but also in a business called hospice where people are on their last leg of life. And so that hospice nurse is providing care for a loved one, a father, a son, a husband, and that care is so important as they pass from this life into the next.

And we want to be in that business to deliver great care. So we look at when we could provide a mission and wrap the company around a mission they all believe in, we think that the margin comes along with it. And then we also think if you don't have margin, you don't have a very sustainable way to help people through your product or service.

Do you think there's a trade-off in that style of investing? I think your answer will be no, but if you're limiting your pool of companies by an additional criteria other than margin, do you feel that there's a trade-off on returns?

We don't feel like there's a trade-off on return. We actually think it boosts returns. And one example I would get is we've employed in some of our businesses something called a profit share, by which you allow everyone in the business to have a certain piece of the business through a profit share in taking home cash times their straight-time wages. And so we look at things like that and getting everybody involved in the growth of the business instead of just the top couple people in the business. And we just think that that has implications for not only long-term sustainability of the business and lower turnover, but we think people work harder. And one thing I learned in the military is that some of the best ideas come from the people on the ground. And you get a lot more ideas from the people on the ground in the trenches in the business when you engage them in that regard, and compensate them for the business doing well, not just their individual performance.

How would you contrast your style of investing to what I'll call a regular private equity fund, and is it a straight dichotomy or more of a sliding scale?

Yeah, I would say it's more of a sliding scale. I think we're similar to some other private equity groups in many ways. I think the misperception is that private equity isn't there to build the business and make it better. I think most of my colleagues in the business that I know well want to grow the business and build the team. They want the team to learn and grow. And so there's really a lot of positive growth throughout the business. There are groups that will buy assets and pull them apart and sell them for the pieces, but I think that's much more the exception than the norm. I believe that private equity does a lot of amazing things in our country to grow, especially in our segment, the small and medium-sized business segment, the lower middle market does a lot to help people achieve smaller, medium-sized businesses to achieve really good goals.

You mentioned your investment in home health and hospice, and I've done a bunch of deals in both of those sectors with private equity funds that wouldn't exactly describe themselves the way you've described yourself. When you look at that particular investment, was it the nature of the business and what the business does that makes it fit within your mission and margin model? Or was it the nature of the people that are in management of that business, or some combination?

Right. So in this case, it was discernibly a combination. So we liked the mission of the business for sure, but in this business we have a leader named David Jackson who is actually a physical therapist by trade. And the COO of the business was actually an LVN, Katrina Lanier. And so we had, what we call in our industry, clinician-led business. And we have seen when somebody has committed to a profession and taking care of somebody as a nurse or taking care of somebody as a physical therapist, that clinical component in understanding that person, David Jackson used to take care of Ms. Smith and help her get better through physical therapy. So his experience in taking care of people, we think helps him and Trina become much better operators, because they understand the clinical piece.

We also have seen culturally that a lot of people, nurses, LVNs, therapists, et cetera, really like to work with a clinician-led business. And so although we liked the mission just generally of home health and hospice, we really liked that this was a clinician led team that truly had a mission and cared about the people, and that demonstrated that through their professions prior to starting this business.

I can see the mission element of the business for home health and hospice. Does it translate some of those ideas into other businesses that may not have the same sort of natural missional element? Meaning would a widget maker be a candidate for you even if the business doesn't have a missional element, but the team and their philosophy and approach to how they treat customers, how they treat employees, can it still fit within your model even if the core business doesn't have quite the same mission elements?

Great question. Yeah. The answer is yes. We have a business right now called Pond, Robinson. That business does things like inspect the Sears Tower, for very large investment banks and asset managers. So when assets trade large buildings or when people are building large buildings, they do the inspection, they'll do the ongoing monitoring as well. It's a combination of architects and engineers. And so we think that business helps make sure that buildings don't fall down, and that's an important part of our economy. We've seen horror stories in Miami and other places when buildings weren't expected, but in this business there was a cultural element that we really attached to. The average tenure of a person at Pond, Robinson is 13 years, and they have a culture of taking care of one another, working hard together and growing the business.

But it was very much, I actually look at it as a partnership culture similar to what Goldman Sachs was before the IPO and just people really taking care of one another, committed to the business, wanting to do right by the business. And we've seen through the two leaders of that business, that that culture has really carried through in the operations of the business. And so in that business, yes, we think what they do for a living is a great thing and a benefit to society writ large, but we were really attracted to a collegial culture where we can do things like a profit share and work with them in that regard.

I would think that your kind of intake as you're looking at investment opportunities has an additional filter that's going to screen out probably a number of companies that, if someone didn't have your exact investment philosophy, wouldn't necessarily screen out. How big of a filter is that? Do you have to look at a lot more companies? Do people self-select into your orbit, or how does your missional posture impact deal sourcing?

Yes. So I would say we actually end up walking away from a lot of opportunities that others might go into. When we really care deeply about the character, the people, we have a test that we call the "would you leave your kids with the management team?" test. Some people call it the beer test or the Thanksgiving test. You get along well, and we take it a step further. And we also have a saying that yellow lights, got this from Ken Hirsch at NGP, but that yellow lights don't turn green. And so when someone says, "Let's build this business, put lipstick on a pig and then sell it," we walk. When we see somebody who's talking negatively about their colleagues on the management team, for example, like talking bad about their COO, talking about their CFO and not being what we think in the highest character, we really look at the management team heavily.

And so we actually do psychometric testing through Culture Index. And then given my background, I was a former Intel officer, we do some pretty deep background checks as well before we get deep into a business under LOI. And so that is something that has had us walk away from opportunities that looked great financially, but we just didn't trust the people on the team had the same values we were looking for in a team.

That front end process sounds rather intimidating. Does that necessitate you looking more at businesses that are not in a full out kind of auction type process? Or does your system work in those contexts as well?

That's a good question. So our businesses that we've acquired have been not in processes. They've been off market. We have looked at a couple businesses in processes as well. And I would say our system works in both regards. The way we evaluate teams is in a very collaborative way, and so we actually open ourselves up as a Coltala team and we share our backgrounds and our psychometric exams, and that's what we do first. We say, "Hey, this is kind of how I'm wired. This is how Ralph is wired, Melanie, this is how John and Blaine are wired, or Russell Hartsfield."

So we'll walk through our team and talk about how we're wired and how we work together as a team and why our unique wiring helps us to work together because we all cover down on each other's weaknesses. Ralph completes me where I'm weak at certain areas and vice versa, and same with our team. And so we really lead with that and then that helps a lot of management teams to open up and share that kind of testing. It's like six minutes, seven minutes on that test. They can share that with us and then we walk through and educate the team on their backgrounds and how we see it as well. So it's kind of a collaborative approach, and most if not all management teams we've talked to are pretty open to that approach because they get to learn about each other and themselves as a team.

Do most of the companies that you're talking to know what your general orientation on this topic is, or does it get introduced during the process?

No, I think they pretty much know. What's interesting is you can Google Coltala and the nice thing about Coltala, because we came up with the name, kind of made it up, Colt is a horse and then Ala actually means wing or wing like structure in Latin and in Spanish. And so Coltala is just a word that's not out there. So when people start to talk to us, they generally go on and do research on us a bit and understand that we've actually had, I would say, a lot of the people that we've ended up working with have come to us and they either heard about us or were connected and then did some research and said, "Hey, these guys seem a little different. I don't know a lot of private equity guys that were in the Peace Corps," for example.

Or that sort of thing. And have come to us saying, "Hey, we kind of like your ethos. We'd like to meet you in person and see if that's real or if it's just on your website." It has helped us, I think, attract people, and I think most of the people we speak to are aware of how we're wired through just a quick Google search.

You mentioned that your mission and margin investment strategy is a filter on companies that screens out a fair number of them. How often do you get the reverse of that, whereas you get a little further into the discussions with a potential target and you're discussing your investment ideas and how a company ought to be? How often do you find yourself getting screened from the other side?

Yeah, I think most of the people, and this might be just a self-selection, but I think most of the leaders that we speak to, they care about their teams. They built something incredible because their teams have followed them because they've earned a lot of trust and they're great leaders. And so we have not, I don't think, lost any that I know of, in either a process or otherwise, because of our ethos. If anything, I think it's just kind of refreshing for folks. We just try to be high integrity and trustworthy the best we can. We make mistakes, and we will make mistakes. We try to apologize for them and ask for forgiveness. But yeah, I don't think we've really lost anyone because of that.

Are you usually investing as kind of a first institutional capital in? I would think the answer to that is yes, but does your ethos and investment strategy also work in kind of financial owner to financial owner sales where you're working with the management team in particular as opposed to a selling founder? How does that play out?

We are almost always the first institutional capital into a business, and so that is really our bread and butter and where we do our best work. And a lot of times what works for us is there's people that haven't had institutional or private equity money in a company before. Sometimes there's a mistrust of private equity. And so our approach comes off a little bit different in a collaborative way. We can do one deal a year, we can do zero, and we can hold the business forever if we want, depending on the structure. And so I think that comes off well towards some of the private business owners. Ralph and I have also both started businesses, so many of the private business owners are also the founders, and so our approach helps with that.

You mentioned the profit sharing ideas is one of the elements that you might employ in connection with an investment with a company. Does your missional ethos for investing have other implications for deal structure or the use of debt? Does that connect to those ideas as well?

Great question. I would say we use lower leverage than a lot of our contemporaries, especially in this market where we are right now. But I would say our structure is not so different. What is nice is we can do different structures. We can have founders' role heavily into a transaction. We can do things like have a management team role into a large long-term incentive plan, funded in different ways. And then we can combine that with things like a profit share, which you can take 8%, 10%, 15% of after tax profits, put them into a pool and have everybody from a line worker or truck driver, forklift driver, realize, "Hey, the company did well this quarter, I'm going to get a check on my desk," type of thing. And so there are some structural differences. I would say a little bit lower leverage is probably one of them, but the rest can be fairly typical.

Where does your capital come from and is there a kind of corollary to this missional investment ethos on the fundraising and capital securing side?

Yeah, so we actually have two people on our investment committee that are our board partners, Darrell Bevelhymer and Scott Luttrell. They're on our website. Both of them are strong men of faith but have also built billion dollar businesses. So they've been very successful, but I would argue that they've led missional lives as well. And so they've been able to have their cake and eat it too, if you will. And so they inform a lot of our decision-making. So those are two of our investors. And then I would say most of our, we have LPs that we work with on each deal. We do each deal a little bit differently, and so we have sometimes different LPs for each deal, but we have a core group. And I would say a lot of the values I've spoken to before that are shared with the Scott and Darrell, for example, are shared along with our investor base.

What is your typical investment size or company size that you're investing in, and does your mission style investing play better at certain scales of targets, or would that work all the way up the scale?

We usually look four, five to 15 of EBITDA. We can go as high as 20 in the businesses. We think that our playbook can work in many different businesses. In fact, a lot of the Danaher Playbook we utilize is used in very large companies, but we think it works better with the five to 15 of EBITDA just because there's a lot of change and growth there, where systematic approach is important. And part of our CES for Coltala enterprise system is putting in the structures that don't exist in maybe a founder-led business and building it to the next level. And so that's really done, we think, best once there's critical mass in a strong team, but it's not 50 million of EBITDA, for example.

You mentioned KKR, and they famously, about a year ago implemented a structure, and I'll probably jumble this a little bit, where they ended up sharing a material amount of the sale proceeds with line level employees, which was super interesting to see. And do you think that your style of investing and this whole idea of expanding who your constituencies are that you're thinking about as you make decisions, do you think that that is a movement on the rise and it's becoming more prevalent in even just straight mainstream private equity, or is it still a little niche?

I think it is a movement on the rise and becoming prevalent in mainstream private equity. I mean, the fact that you mentioned that Stavros and KKR, this is the book, Barbarians At The Gate was written about KKR, and now they're sharing profit across the whole business. So I think that almost answers the question right there, and I think it's great for companies. I also think with the internet and the ability to scroll Instagram and watch Netflix while you're working, there is a greater percentage of people, employees, who are quitting in place and just not productive. They don't like their job, but they're not leaving and they do enough to get by. And I think it's difficult to cross across our country. And so the idea that you're involved in the winnings of the business, not just the top two or three people or the private equity firm, really changes that mentality and say, "Hey, I'm not going to sit at my computer today and just do my job and then go home at five. I'm going to take that extra step, or I have some ideas that can make this company better."

And so the bottom up approach of that I think is really helpful to companies in becoming more mainstream. I learned this in the military when a general sent us a bunch of motorcycles to give to the Afghans, and we realized that the motorcycles were preassembled. We then had to assemble all the motorcycles even though it wasn't our idea, and give them to the Afghan population, which ended up many of them falling into the hands of the Taliban. That was an example of a decision that was made from the top down without really asking us on the ground. And so in business, it's the same thing. When you can get the ideas from the people in the factories, the people selling the product or the service, the nurse that's in the home, you get better ideas and better engagement. And so I think this is very much going to be become mainstream, and I'm really excited about it, and I thank Peter Stavros and others for really pushing hard to make people more aware that this is not only good for people, but it's a profitable way to do business as well.

Edward, I think we'll call it a wrap there. Your investment thesis is super interesting, and it's fun to watch your success in that. And I do agree that taking into account more constituencies is more prevalent and that there is a perception of PE that those folks are the barbarians at the gate. That's really not been my experience. Maybe one last question before we end.

For sure.

If this is a sliding scale and private equity investors can be at different spots, do you have any advice you'd give to a private equity investor that would like to incrementally move further down that scale?

For sure, for sure. No, I think one of the first things you can do is the profit share concept, and that's an easy way to get everybody in the business involved. And you can take after-tax profits, a certain percentage of those, and then multiply it times the straight-time wages of different folks. So you can have somebody making $40,000 and somebody making $200,000, and they're both going to get a piece of that profit share. And you can track it monthly and then announce it quarterly is a good way to do that. And actually, it kind of gets everybody on the same page and feeling like they're playing on the same team, even whether you're in the plant or the home office or you're in your car on the sales team or a weekend warrior, it kind of aligns everybody around a common goal, kind of one team, one fight. And so I think that's probably the best step in that direction and can help a lot of people, but also help align workers and increase employee engagement, which is a great thing to do.

And with that, I think we will call it a wrap. Edward, thanks a ton. This was a great to hear about your missional investment style, and good luck as you pursue that.

Awesome. Thank you so much.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved, and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.