John Stobo, General Partner at ABS Capital, speaks with GrowthCap about ABS’ 25 years as a leading growth equity investor and the evolution of the industry as an asset class.
RJ: Hi John thanks for joining us. Maybe we can just kick off with an overview on ABS Capital and its history?
John: Absolutely. ABS Capital is a growth equity firm, and we’ve been in business since 1990 — so this is our 25th year anniversary. Over that time we’ve invested in over 115 growth companies, and I’ll tell you exactly how we define growth in a bit, but we focus on growth companies in three industries: 1) health care, which is where I spend all my time here at ABS Capital, 2) business and education services, and 3) information and communications technology. We have two offices with one in Baltimore and one in San Francisco.
RJ: And can you share with us a little bit about your background and experience, both leading up to and with ABS Capital?
John: I came out of Cornell’s MBA program in 1991 and joined Alex Brown & Sons in Baltimore. You’re probably familiar with that from your Robertson Stephens days. Alex Brown was entirely focused on growth companies whether it was taking those companies public or looking for the appropriate acquirers. We got to see very interesting companies—like Microsoft and Starbucks in their early days.
Through those experiences, we built a lot of knowledge about what successful growth companies look like and built a network of executives that had been in and around growth companies. We were started because we saw an opportunity at the time to work with companies that were well past the start up stage, but were not the types of companies that buyout firms were paying attention to because they were smaller and more technology-oriented. I started in the health care group doing M&A work for them and then joined ABS Capital in 1993. I was in Baltimore then, but moved to San Francisco in 1998 to establish the office here. I’ve been doing this for 22 years now, and I’ve been involved in well over 20 companies with a primary focus on health care, which for us is a focus on health care services and health care information technology.
RJ: Excellent. Have you shifted in terms of your investment thesis or have you been fairly consistent? I imagine that you see new kinds of emerging business models or new technologies. How have you seen things evolve and what are you particularly interested in at the moment?
John: That’s one of the big reasons we’ve focused on the three industries I mentioned. They’re very large industries that are undergoing constant change which provides the opportunity for smaller, entrepreneurial-oriented companies to disrupt or displace the more established companies. There is a lot of opportunity for them to grow, be professionalized and then either go public or be acquired—whether that is by a strategic buyer or more recently, a larger financial buyer. So while we focus on those sectors, our core competency is knowing growth. As I alluded to earlier, we define growth as companies typically doing $20 to $60 million dollars of revenue when we get in and having the capacity to grow the top line north of 25%. They don’t need to be profitable, but they should be around break-even. We focus on driving the growth and realize that they’re investing in infrastructure, people and sales forces that will be necessary to take the company to a hundred million dollars or more in revenue. We are very comfortable with this stage in a company’s life and we believe it is one of the most significant ones in terms of value creation.
Another point I would make is that we’ve been consistently investing in growth deals over a long period of time, and the thing we’ve seen change is that certainly there’s a lot more capital flowing from limited partners into the sector. Investors now treat growth equity as its own allocation. It used to be just venture and buyout and we spent a lot of time describing that we were positioned in between. It was harder for people to figure out which bucket to put it in, but now I think there’s clearly the venture bucket, the growth equity bucket and larger buyout. However, I still believe people are navigating the exact definitions and parameters for growth equity—there are still a lot of flavors.
RJ: How does ABS approach an investment opportunity?
It’s all about finding a great growth company and backing the right CEO who we believe wants our type of help. We sit on the board of all of our investments and work with the management to go from where we invest to that next level. We’ve done that 115 times, so we are confident we know well the opportunities and the pitfalls of this stage and can be effective in helping the management teams navigate through it all. We’ll take minority or majority positions, whereas some other firms will not be as flexible.
For us, it is all about finding the great growth company—that trumps all. From a structure point of view, we are investing in preferred stock, are on the board and are very active at the board level—though we believe management should be involved in the day-to-day operations—not us. We use our network to build the board with independent members in addition to ourselves, work with management to help build out the team, focus the strategy and overall set them up for success.
RJ: Are there any particular investments that you’ve made in the past which you think that exemplify the ABS value proposition?
John: Sure. One investment we made last July was into a company called Bravo Wellness, based in Cleveland. They provide health outcomes-based wellness programs to self-insured employers to help them measure the wellness of their employee base and, through biometric screenings and biometric performance, help them provide rewards or other incentives for employees to improve on those core biometric readings. The company was 100% owned by the founder, and he had grown it to over $20 million dollars of revenues. It was cash flow positive, but as he looked at taking the business to the next level, he wanted to find the right partner who would be additive, but would respect the culture he had built and the success he has had to date.
There’s certainly enough capital out there and he probably could have raised it from a lot of people, but we demonstrated that we had the experience to work with him to add to his team, implement metrics, the processes and the systems to sustain and support continued rapid growth—all in a way that is comfortable for a CEO that has not had an outside investor before. So we made a minority investment and we’re on the board. We’ve been busy building the board and helping to round out the management team there. I think when we find a compelling business capitalizing on an important growth trend and can team with a founder to professionalize and focus the business; we can achieve a lot together.
Another example is a company called Connect Your Care. It was a buyout of a business unit from Express Scripts, so here we own the majority of the company. It was also doing about $20 million in revenues when we invested. They provide technology to employers that help employees manage their defined contribution plans such as health savings accounts (HSAs) and health reimbursement accounts (HRAs). Employees are becoming much more accountable for how they spend those dollars and how they get reimbursed so companies need technology to help them manage this process.
Bravo Wellness and CYC have very different ownership and transaction structures – one is very much the traditional minority growth model, and the other control. What is very similar between the two are their big market opportunities, and that they are well-positioned with a defined product and service so that it’s all about execution risk and navigating through rapid growth—something we know well.
RJ: Those are great examples. Is there any additional information you’d like to share about ABS’ differentiation within the growth equity category or other helpful color?
John: There are a lot of growth firms that are very successful, but we have a very different model. Some in Silicon Valley are doing what I think of as later stage venture, which is a focus on very high-growth rates, but perhaps not as much of a focus on valuations or profitability. Others have large calling efforts or in-house consultants that they rely on for deal sourcing and value creation. By contrast, we continue to focus on companies where we can work closely with the management team to take it from $20 to $60 million dollars to $100 to $300 million dollars of revenue, and do that quite profitably in the industries where we’ve spent our careers. All of our sourcing and work with our companies is done at our partner level so we have a very partner-heavy model. All of the partners participate directly in very detailed, strategic discussions between ourselves and a company’s management team. We think that our CEOs appreciate the experience and attention from a senior partner who has worked with growth companies over multiple decades and market cycles.
RJ: I really appreciate the time John. This has been very informative and I’m sure the family offices and limited partners in our network will appreciate learning more about ABS Capital.