Digest

This episode of the Carmas School Business podcast features an interview with John Stewart, founder and managing partner of Middle Ground Capital, a private equity firm known for its innovative approach. John shares his unique background, starting his career on the production line at Toyota, and how his experience in manufacturing shaped his vision for private equity. He emphasizes the importance of lean manufacturing principles, even in service and technology-based businesses, and how Middle Ground Capital applies these principles to its own operations. John discusses the challenges of entrepreneurship, including the personal sacrifices involved, and the importance of perseverance in the face of adversity. He also shares his firm's approach to value creation, which focuses on industrial B2B companies, particularly distribution companies, where they can leverage their expertise in manufacturing and operations to drive value beyond traditional financial levers. John highlights the importance of actual cash flow and EBITDA over pro forma adjusted numbers, emphasizing the need for a deep understanding of a company's true financial performance. He also recommends Tiago Forte's book "Building a Second Brain" for managing information and improving efficiency. The episode concludes with John's advice for navigating the current economic climate, emphasizing the importance of cash flow and focusing on the fundamentals of business.

Outlines

00:00:00

Introduction

This Chapter introduces the Carmas School Business podcast and its host, Sean Mooney, who welcomes John Stewart, founder and managing partner of Middle Ground Capital, to the show. The episode focuses on John's unique background, his firm's innovative approach to private equity, and the challenges and rewards of entrepreneurship.

00:00:28

John Stewart's Background and Journey

This Chapter delves into John Stewart's unique background, starting his career on the production line at Toyota. He discusses his experience in manufacturing, his transition to private equity, and how his background shaped his vision for the industry. John emphasizes the importance of lean manufacturing principles and how they apply to various businesses, including private equity.

00:01:34

Middle Ground Capital's Approach to Value Creation

This Chapter explores Middle Ground Capital's approach to value creation, focusing on industrial B2B companies, particularly distribution companies. John explains how his firm leverages its expertise in manufacturing and operations to drive value beyond traditional financial levers. He highlights the importance of actual cash flow and EBITDA over pro forma adjusted numbers, emphasizing the need for a deep understanding of a company's true financial performance.

00:37:36

Advice for Portfolio Companies in a Challenging Market

This Chapter provides advice for portfolio companies navigating the current economic climate. John emphasizes the importance of cash flow and focusing on the fundamentals of business. He also discusses the need for a deep understanding of a company's true financial performance, beyond pro forma adjusted numbers.

00:42:24

John Stewart's Insights and Recommendations

This Chapter explores John Stewart's insights and recommendations for entrepreneurs and business leaders. He discusses the importance of continuous learning and shares his experience with Tiago Forte's book "Building a Second Brain" for managing information and improving efficiency. John also emphasizes the importance of embracing technology and utilizing tools to enhance productivity.

Keywords

Q&A

• What is John Stewart's unique background and how did it shape his vision for private equity?

  John Stewart started his career on the production line at Toyota, gaining valuable experience in manufacturing and operations. This experience shaped his vision for private equity, emphasizing the importance of lean manufacturing principles and operational expertise in driving value creation.

• How does Middle Ground Capital approach value creation in its portfolio companies?

  Middle Ground Capital focuses on industrial B2B companies, particularly distribution companies, where they can leverage their expertise in manufacturing and operations to drive value beyond traditional financial levers. They underwrite a value creation plan into their models, ensuring that the plan generates a significant portion of the return.

• What advice does John Stewart offer for portfolio companies navigating the current economic climate?

  John emphasizes the importance of cash flow and focusing on the fundamentals of business. He advises companies to prioritize actual EBITDA and cash flow over pro forma adjusted numbers, ensuring a deep understanding of their true financial performance.

• What are some of the challenges of entrepreneurship that John Stewart has faced?

  John discusses the personal sacrifices involved in entrepreneurship, including the potential impact on personal relationships. He also highlights the importance of perseverance in the face of adversity, emphasizing that success often comes after numerous setbacks and failures.

• What book does John Stewart recommend for managing information and improving efficiency?

  John recommends Tiago Forte's book "Building a Second Brain", which provides a methodology for organizing and accessing information effectively. He shares his own experience using this methodology and the tools he employs to manage his information.

• What is Middle Ground Capital's approach to risk management?

  Middle Ground Capital's approach to value creation, which focuses on leveraging operational expertise, provides downside risk protection. They are less reliant on debt and have a higher equity stake in their deals, reducing their exposure to financial risk.

• How does Middle Ground Capital's team composition contribute to its success?

  Middle Ground Capital's team includes a significant number of professionals with experience in manufacturing and operations, alongside traditional private equity deal team roles. This unique composition allows them to not only underwrite deals but also execute the value creation plan effectively.

• What is the importance of actual cash flow and EBITDA over pro forma adjusted numbers?

  John Stewart emphasizes that actual cash flow and EBITDA are crucial for understanding a company's true financial performance. Pro forma adjusted numbers can be misleading and should not be relied upon for making investment decisions or managing a business.

• What are some of the key takeaways from John Stewart's interview?

  John Stewart's interview provides valuable insights into the private equity industry, the importance of operational expertise in value creation, the challenges and rewards of entrepreneurship, and the importance of continuous learning and embracing technology.

• What is the Business Builders Network and how can it benefit businesses?

  The Business Builders Network is a platform that connects businesses with top-tier professional service providers, independent consultants, and interim executives. The network provides access to expertise and resources that can help businesses achieve their goals and drive success.

Show Notes