Drew Caylor, managing director, and the rest of the team at private equity firm WILsquare Capital have a passion for helping lower middle market companies grow bigger and better.
He says it’s all about the leaders at these companies and their commitment to making a difference to their people and the communities they’re in.
At WILsquare, they help create value through hands-on work with carefully selected businesses. It’s a level of service you won’t get at “brand-name” PE firms.
We take a deep dive into that topic, the post-pandemic M&A scene, and…
- The first place they look for future investment in a business
- 3+ questions they ask about every company they work with
- Why they view Representations and Warranty insurance as imperative
- Their management philosophy and how it differs from other PE firms
- And more
Mentioned in this episode:
Patrick Stroth: Hello there. I’m Patrick Stroth. 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 Drew Caylor, managing director of the private equity firm WILsquare Capital. Based in St. Louis, WILsquare was established by private equity and operational executives dedicated to provide financial capital and operating experience to lower middle market companies in the Midwest and South. Drew, thanks for joining me. Welcome to the show.
Drew Caylor: Yeah, thanks a lot, Patrick. Appreciate you having me too.
Patrick: Before we get into WILsquare, let’s start with you. Just give our audience a little bit of a context. How did you get to this point in your career at Wilsquare?
How Drew Ended Up With WILsquare Capital
Drew: Great question. So my path to a career in private equity is not one that I think many in the industry would consider typical. You know, I think a lot of people begin their careers and fields like ibanking or public accounting and make their way to private equity. Instead, I started my career in football. My first job out of college was playing for the Pittsburgh Steelers.
And after a short stint in the NFL, I ended up moving to St. Louis and working for a wealthy family that was making direct investments in lower middle market companies. Along the way, was asked to be president of one of their portfolio companies. And at the age of 28, I suddenly had 65 employees and had no idea what to do. At that point in my life, I was really better prepared to read defensive friends that I was to manage people.
But after six years of operating the company, we lucky enough to sell the business to a strategic acquire and all things had a happy ending. So, you know, that experience of operating that business has provided a really nice foundation for me when I think about my career in mergers and acquisitions. Following the sale of that business, I resumed my career making direct investments in lower middle market companies. And in 2019, I was lucky enough to join the talented team at Wilsquare.
Patrick: Well, let’s go on to WILsquare. By the way, as we record this, we just completed the draft for the NFL and I can’t let this go without asking you. So you were drafted by the Steelers. Where were you drafted?
Drew: So I was drafted in the sixth round. And I always like to tell people that I was selected a few picks before Tom Brady. He was drafted in a different year, but I was drafted slightly higher in the NFL Draft. So that’s something I suppose,
Patrick: Well, there, that’s something a lot more of us cannot say, so good for you. Tell me about a WILsquare Capital. Before we get into that, I always like to learn a little bit about a firm by how it’s named. Because if you’re in the legal community or insurance, you’re boring. You just name your firm after yourself or the names of the founders. Tell me about WILsquare and, you know, its focus and so forth.
How WILsquare Stands Apart From Other Private Equity Firms
Drew: Yeah, so, you know, WILsquare’s name isn’t that innovative, but it’s really the first syllable in the two founders’ last names, Wilhite and Wilson, hence the name WILsquare. But, you know, more important than the shared syllables of the name is really, I think the values and the commitment to the lower middle market that I think everyone on our team shares. You know, we just really love this space and we do for a number of reasons.
You know, for me, I had the opportunity to operate a lower middle market business. And that gave me a profound appreciation for the challenges that leaders of businesses in this space face. It also taught me that, you know, value creation isn’t really achieved through simply buying low and selling high. It’s really more about rolling up your sleeves and doing the things that are necessary in order to build bigger and better businesses.
And so, you know, I really got to experience firsthand the responsibility that I think leaders of lower middle market companies have for their people and the importance that stewardship, when it comes to selecting the right partner for your business has. And so, you know, I just decided early in my career, this is where I wanted to spend my time. These are the businesses where I think there’s talented people and all kinds of opportunity. And I think everyone at our firm has a story like mine for why they fell in love with the lower middle market and the people in this industry.
Patrick: Well, I’m not a millennial, but there’s no doubt the belief of a lot of millennials is rather than just going out and finding a career and contributing, they want to make a difference. That’s a big focus for them. And when I think about that, if you really want to make a difference out there in American business, I think you’ll look to the lower middle market because there’s a vast number of these organizations out here. They are the biggest employers in terms of overall aggregate number of employees.
They are oftentimes the soul of a community that, where they serve. And it’s a shame because if you’re in the lower middle market, you’re not involved with mergers and acquisitions on a daily basis. You don’t have in house court dev facilities and resources. So when the off tuning comes or the idea comes to think about an acquisition, and everybody thinks about acquisitions either to be acquired or to acquire. They default to the brand names and the institutions out there.
They don’t know any better because they haven’t been around. And so unfortunately, when they turn to the larger institutions, what ends up happening is they’ll go to an institution who will overlook them. So they won’t be as responsive. The institution’s nothing wrong with them, but they don’t have the bandwidth to order, deliver a variety of different solutions that fit those little lower middle market companies.
And they may not be able to just roll up their sleeves and get in on a day to day basis and so forth. So they’re not going to be served there. But on the contrast side, also, the lower middle market company is going to end up either losing money or spending a lot more going to the institutions. And I think where they really get the true value is going to be with organizations like WILsquare, where you’re focused on that.
That is your passion and it’s where the best fit is. You have the resources available. The more the companies are aware of the great access to solutions that are provided by you that they didn’t even know existed, I think they’re better served. So any way that we can go ahead to promote and highlight organizations like WILsquare Capital that serve this community, I think is a win-win. So I really do appreciate that. Drew, tell us a couple of things on how WILsquare provides solutions on that lower middle market. What can a lower middle market company get from you that they couldn’t get elsewhere?
Drew: Great question, Patrick. You know, I think what they get from WILsquare is really a diverse set of perspectives. You know, our team is comprised of, you know, not only finance experts, but, you know, also people with operating backgrounds like myself. And I think there is a collective willingness to roll up our sleeves to actually add value to these businesses. We’re not financial engineers. Most importantly, I think cost is not our focus. You know, we look for opportunities to play offense and opportunities to invest in these businesses. We just think philosophically, a focus on costs is not an enduring strategy.
You can only cut so much cost. What is an enduring strategy is focusing on growth and that’s what we do. Sales and marketing is the first place we look for future investment in a business that we buy. We think about what new products, what new capabilities should this company have? How can it access new markets? And then, you know, we are lucky enough to have a pool of capital to put to work and so we also contemplate, you know, what acquisitions for a particular company could make sense?
And is there a value-creating combination that can be formed? And, you know, I think the other thing that’s important is a lot of operators of lower middle market businesses like to operate their business. And they don’t want to do it with someone looking over their shoulder. And I think that’s not what we’re about. I think we’re really about being a resource for these operators. And, quite frankly, we think if something makes sense to do in a business, we just ought to do it. There shouldn’t be a lot of bureaucracy. If it’s for the benefit of the business, we just ought to do it.
So when you think about private equity firms, I think there’s really a spectrum of firm involvement. There are some that are heavily involved in the operations of a company. There are some that are not involved at all. You only hear from them, you know, once a year. And then there are those who are somewhere in between. You know, I think we’re probably in that middle portion. We’re somewhere in between, who we think it’s important to invest in the management teams and ultimately let them run the business that they are the experts in. Truly, we simply aspire to be a resource for these management teams going forward,
Patrick: So you’re not fund it and forget it and you’re not micromanaging. So two extremes. You’re in the middle. And I’m sure it just varies from company to company, right?
Drew: Yeah, I think that’s right. I mean, I think we would never buy a business without having some sense for what we can bring to the table. So I think our swim lanes are generally well defined going in and we try and communicate that well with the management teams that we seek to partner with.
Patrick: Tell us what’s your ideal profile for a target company?
WILsquare’s Target Company Profile
Drew: Sure. So as a firm, we focus on businesses generating between three and 10 million of EBITDA. And we like businesses that are situated in markets that are less cyclical and in industries that are growing, I would say we’re simply not a turnaround shop. You know, we’re not out there looking for bargains. We’re truly looking for healthy businesses that are growing and businesses that we can help continue to grow.
One of the variables we think is truly important is human capital. You know, it’s just a key variable in unlocking the value in any company. And so chemistry really matters to us. We found really great companies that are run by people where there just wasn’t a chemical fit and we opted to move on. But we just think it’s important that we all be able to row the boat in the same direction with the management team. And so we call ourselves a firm with Midwestern values because that’s the truth.
We don’t view ourselves as very fancy people. We really probably rather eat in a sports bar than a steak house. And I think we really feel a shared responsibility for others and humility to know what we don’t know. And to us, that’s just a simple way of characterizing people in the Midwest. And so that’s how we market ourselves. That’s how we think about ourselves. Are folks that care about others and have a humble sense about them along the way.
Patrick: That personifies the view I’ve always had had when I first came into M&A on my front was that it’s not Company A buying Company B, it is a group of people over here choosing to work and combine forces with a group of people over here. And to the degree that they can successfully integrate, get along, get their culture moving and handle those human skills, they’re going to successfully move forward. And the ideal is one plus one equals three. The whole is greater than the sum of its parts.
So it always comes down to people. And I think that anybody that overlooks that aspect and just focuses on either the financial or the technology is really missing something. Drew, tell us what experience have you had one of the tools that we use out here for mergers and acquisitions from the insurance world is a product called rep and warranty insurance. That has gained quite a bit of traction in the last couple of years, driven largely by private equity. And so I’m curious as your thoughts, good, bad or indifferent. Your thoughts on rep and warranty for deals.
Drew’s Take on Rep and Warranty
Drew: You know, it really only takes one experience to make you a believer in rep and warranty insurance. And I was lucky enough or perhaps unlucky enough to have that experience quite early in my career. There was a breach wrapped in a small deal I was involved in where it led to a costly legal battle that distracted the management team and cost the business all kinds of opportunities.
Yeah, I think it’s pretty easy for a lot of people to view rep and warranty insurance as expensive. It is relative to very small deal sizes. But even if you aren’t a believer in the value that these policies can bring, more and more I think providers are being pretty innovative and generating products and policies that are a lot more affordable and tailored to the lower middle market. So, as a firm we view rep and warranty insurance as imperative.
Patrick: Now as we record this, we’re hopefully on the tail end of the Coronavirus pandemic sell in place process. We’re now beginning to start seeing states not only begin to open but having long-range plans for so. Hopefully, this will be over. But in light of how this is literally touched all the lives of people across the country here, give us your perspective on either for you or WILsquare Capital on deals you’re looking at or where you see the M&A environment going forward. Choose short-term long-term. Give us your thoughts.
Post-Pandemic M&A Scene
Drew: Yeah, sure thing. First, I have to acknowledge I don’t have a crystal ball, so I’m not sure I have a ton of insight into what the world will look like. But I can tell you the way that we’re thinking about it is we think that the health of an industry is critical to look at. And we’re focused not only on how long will it take these industries to recover. I think we’re focused on a more important question, which is, how will these industries change?
What will be different? And that is where I think there is a ton of opportunity. It’s not about, you know, how long will it take people to get on planes again? It’s what will they be doing instead? Every industry has a has a different answer to that question. But that’s the question we’re focused on as we review new opportunities.
Patrick: I agree that it’s just going to be different. I think the other thing that people are really accepting is that things can change from week to week and you got to be okay with that. And if you’re okay with that, then you’re less encumbered in looking at opportunities out there. And I sincerely believe there are going to be quite a few of them. There is going to be a much more buyer-friendly market going forward.
And private equity firms have the dry powder. It never went away, to my knowledge. And there are firms like yours that have been most likely taking very, very good care of their portfolio companies and handling their concerns through this process. And the next step is going to be, you know, have an abundance mentality and look for opportunities out there. I think that there’s just quite a bit and just like you said, it won’t be the same, but it won’t be bad.
So hopefully, all of us optimists will be proven right. Of course, I also projected a month ago that Disneyland would be open the first week of May, so I might have been, yeah, I might have been a little optimistic there. But, you know, we’ll see about some other times though. Drew, how can our audience reach you?
Patrick: Drew, it’s been fantastic. Thanks again. It was just a lot of fun talking to you and I really deeply encourage folks to look for WILsquare Capital. They are a firm out there in the Midwest, but they’re not stuck there. They’re looking at a lot of stuff and couldn’t be happier to have you with us today.
Drew: Thanks a lot, Patrick. Appreciate it.