Private Equity Value Creation with Clarion's Jon Haas

0:09Welcome to the Karma School of Business, a podcast about the private equity industry, business best practices, and real-time trends. I'm Sean Mooney, Blue Ways founder and CEO. In this episode, we have an awesome conversation with Jon Haas, Managing Director of Portfolio Transformation with Clarion Capital. Enjoy.

0:33I am super excited to be here with John Haas from Clarion Capital. John, thanks for joining us. John, great to be here. This is a good one. I'm really excited that John is joining us. I've wanted John to join us for a long time. I was trying to think before this, like how long have we known each other? I think it goes way back, certainly to the earlier days of when we were around, but I'm trying to think, did it even go further? Yeah, I think we first met actually right around the time that you were getting going with Blue Wave. You were probably questioning me. At that time, it was generally regarded to be the worst midlife crisis in East Coast private equity history, but we made it.

1:12So it's been a long time. So I'm looking forward to this conversation. I think it'll be a fun one and a really interesting and informative one. And so as we get into our conversation here, John, let's start back by even going further back. So can you tell our listeners and share a little bit more about yourselves, where you grew up, college, some of these early formative experiences? Sure. Happy to. Not sure how interesting it is, but I grew up in Armark, New York, about 40 minutes north of the city. At the time, I didn't realize what most of my friends' parents did for a living. But looking back, many were in commercial real estate law or worked on Wall Street.

1:55There was also a group of dads who used to joke who worked in the construction industry. No one really knew what they did and no one asked. I'd say one of the most important turning points in my life actually happened in middle school. I was running with the wrong crowd, so my parents encouraged me to transfer to private school. I went to Rye Country Day. And looking back, I'd say that decision ended up having an enormous impact on my career. One of my closest friends' father was a partner at War Over Pincus, and through that friendship, my dad actually got to know him as well. My father had been a senior executive at Time Warner, but after Jerry Levin, who completed the infamous AOL acquisition, took over as CEO, he brought in a new CFO, and my dad took an early retirement.

2:46But through that relationship, I mentioned with my friend. He was connected with Warwick Pincus. He joined a couple of boards of their portfolio companies. And watching my dad work with those companies gave me my first exposure to private equity. He saw firsthand the impact investors could have, not just financially, but operationally. And he encouraged me to consider the industry someday.

3:15it's an amazing background for people who get the opportunity to grow up in the new york city kind of metro area so i grew up in austin texas so like we had none of that but we had different things so i grew up in a family business working on the back of manufacturing plants but then when i went to college all my roommates were kind of like these new york city metro areas and their dads all grew up in this area and so like their family business in many ways was kind of this growing up in the investment world. And they were kind of almost like, whether they knew it or not, they were trained to think like investors since being a kid, because that was the world that they lived in.

3:49And so, you know, as I think about this, through the lens of your childhood, you didn't know it, but you had this great opportunity to osmotically kind of breathe in your future job. Absolutely. But I would say my path was anything but direct. So I went to college up in New Hampshire at Dartmouth. When I graduated, I followed my heart and moved to Washington, D.C. to be near my college girlfriend. About a month later, she broke up with me. It wasn't exactly the career plan I had envisioned. I actually started at a small consulting firm, but it quickly became clear that it wasn't the right fit.

4:27The firm claimed they were doing benchmarking. To me, it felt more like corporate espionage.

4:36Fortunately, though, through an introduction from a family friend, I joined AT Carney. That turned out to be a great experience. I worked across industries ranging from media and financial services and packaging and paper and helping companies think through strategy and operations. And I really enjoyed the work. But after a couple of years, I looked at the senior partners who spend most of their lives on airplanes and realized that wasn't how I wanted to spend my career. And I decided to go back to business school, build my finance skills, and thought really, you know, the combination of consulting and investment banking would maybe position me in the future for something in private equity.

5:15So off I went to business school, graduating Kellogg in 1998, just before the internet boom occurred. And I joined Credit Suisse First Boston and landed in the East Coast Group, which covered what were considered the less glamorous industries like steel and packaging and transportation. Shortly after I joined the firm, they recruited Frank Watrone, who was the tech banker of the era. To me, it felt like all the excitement was happening somewhere else at the firm. He was printing IPOs and doing all these high-profile M &A trades.

5:54in the year 2000 many of my classmates were leaving banking and consulting to join startups in silicon valley like pets.com and cupid.com which by the way didn't end so well and watching all that unfold made me realize that if there was ever a time to take more career risk this was it and so that's uh when a really interesting opportunity came my way and sort of an unexpected way as well. My brother-in-law worked at Wasserstein Perella and he knew Mark Ute, Clarion's founder, was leaving to start a new private equity firm after he had led two very successful investments in Wasserstein's fund, IMAX, the large screen theater company, and Allclad, the high-end cookware company.

6:40And so my brother-in-law went into Mark's office one day and asked if he was hiring, and Mark explained to him that he was going to be staying on as a senior advisor at Wasserstein. And as a result, he agreed with Bruce not to hire anyone of the firm's employees. In a moment of brilliance, my brother-in-law responded, well, if you can't hire me, you should hire my brother-in-law. So Mark and I met. We immediately connected over sports and business and investing. He offered me an opportunity and I took the leap. And so when I first joined Clarion, we didn't even have a fund. We had two initial investments and a plan, and the strategy was actually to sell IMAX.

7:22And the two co-CEOs, who were former Drexel Burnham partners and Mark, were going to join us, and then we were going to raise our first institutional fund. But then reality intervened. So five of the six largest movie theater chains who are IMAX's biggest customers all filed for bankruptcy right after the process was launched to sell IMAX. So the sale process stopped, the co-CEOs had to basically go back and run IMAX, and our fundraising plans had to be completely rethought. But instead of giving up, we found an alternative path. We secured backing from a hedge fund that specialized in seeding emerging managers.

8:02And we continued investing, built the team, and eventually raised our first institutional fund several years later. since then I'd say we've been fortunate to build one successful fund after another grow the firm into what it is today and we've had some pretty impressive results along the way looking back every stage of this journey from changing schools to a breakup to missing the internet boom to almost not getting our firm off the ground felt like a setback in the moment but each one ended up opening a door that otherwise wouldn't have existed So today we're investing out of our fourth fund, and I like to joke we're a 25-year overnight success.

8:45That's usually how success works. And I think a lot of people kind of miss that. It's the hard work, it's the tenacity, the grit that matters. Life is never up and to the right. It's a sine curve at an angle at best. I love so much of your background because I think so many people think that you have to be on this linear logical path to get into PE. And very often what it is, it's kind of a serendipitous journey that gets there. And what I really like about your background as well is you started off with consulting, then you found your way into investment banking, and then you went into private equity.

9:25And what seems maybe like a direct path, but I'm sure there's a lot of moments of opportunity and grabbing them when they came. When I started, some similar and different things. I was in Houlihan Loki's restructuring group in the 90s. A lot of people forget that the 90s were tumultuous. The experience they were giving me as a 22-year-old kid was almost grossly negligent. But I think the statute of limitations have passed then. It was just kind of an amazing time. We were competitors with Wasserstein Perella. Those were kind of two of the groups. and then Blackstone were all kind of the founders of the restructuring industry.

10:11You had this kind of moment where they grabbed you, but I kind of went from investment banking to a PE firm where one of the managing directors that I worked with grabbed me and took me out to Greenwich, Connecticut. But what I didn't have, which I then subsequently appreciated, the next firm I worked with was they hired a lot of consultants. And I was really good at modeling and writing things in Microsoft Word. And they were really good at understanding the levers of value in PowerPoint. And if I were to play it all over again, I was like, oh man, I think that consulting skillset was more valuable than me knowing how to make a model in 30 seconds.

10:51And not that that wasn't valuable too, but I was always just kind of, maybe it's grass is greener. I was always kind of jealous of the kids who did kind of what you did because they had that kind of framework to think through, like, is this a good business? The skills I got, I think, were very valuable in their own right, but I was always kind of grass is always greener on that side. Well, it's interesting because AI may make both of those career paths less important to become a private equity investor, too. Yeah. It all comes down to judgment now. It's all about judgment. Critical thinking. Hey, as a quick interlude, this is Sean here.

11:26I wanted to address one quick question that we regularly get. We often get people who show up at our website, call our account executives and say, hey, I'm not private equity. Can I still use Blue Wave to get connected with resources? And the short answer is yes. Even though we're mostly and largely used by hundreds of private equity firms, thousands of their portfolio company leaders, every day we get calls from everyday top proactive business leaders at public companies, independent companies, family companies. So absolutely, you can use this as well. If you want to use the exact same resources that are trusted and being deployed and perfectly calibrated for your business needs, give us a call.

12:03Visit our website at bluewave.net. Thanks. Back to the episode.

12:11We'll delve more into some of these topics in a second here. But the one thing I like to do before we get into too much serious stuff is tell me a little bit about yourself something that we know you better if we knew this about you so what might one of those things be so look if you could have seen me when i had hair i had a helmet of curly hair which i would say served me well in my college rugby days but i haven't missed it so much since i like that and i empathize with that but you wear now also the the look well whereas uh at one point i gave myself in college right before i knew i was gonna have to interview for jobs it's like this is the only time i'm able to give myself like a to the skin like buzz cut and it would be very bad for me but i am i would say follically challenged for sure I had the added benefit of going gray at age 30.

13:10And so I think that was like a gift that the private equity industry gave to me. Yeah, it ages you fast, but I think it's a dignified look now. You got Dwayne Rock Johnson out there making bald men look good. It's a good look. It's a strong look. So you kind of hinted on this. There's a couple things that I consistently see through the privilege of these conversations and people who are successful like you in private equity, which is almost like a Hunger Games of a career because you have to go through all these phase gates where it just continues to have people either take the off-ramp or showing the off-ramp out of the industry because it's really hard.

13:55The table stakes is you have to be smart enough. The world's full of smart enough. But I think the differentiator in this industry particularly, and maybe more so than most, is this sense of tenacity and grit and constantly overcoming challenges. And you're constantly throwing curveballs in PE, particularly across a portfolio. And so I'm curious, what are maybe some of the things that you've encountered in business, particularly through a host of deals over time, that you had to overcome? Do you have a story of that where you had to say, to be clear and candid, every one of my deals was up and to the right and there were never any problems.

14:35Actually, none of them turned out the way the deck said. But I'd be curious, do you have one of those? Yeah, absolutely. So one of the toughest experience I've had over the past five years was an investment that at one point seemed like almost everything that could go wrong did. So at Clarion, we often look for businesses with fixable flaws or companies operating out of favor industries where operational improvements, including digital transformation, can create significant value. One investment I led was in the accounts receivable management industry, which most people simply call collections.

15:12It's not the most glamorous industry. I think it's actually the second oldest industry in the world. I'll let you guess what the oldest one is. but we believed it was actually on the verge of a major transformation. So at the time we were looking at the business, the Consumer Finance Protection Bureau, the CFPB, was developing something called Regulation F, which for the first time would allow collection agencies to communicate with consumers through email and text instead of relying almost exclusively on letters and phone calls. And that represented a dramatic cost reduction because a text or an email cost two or three cents versus a letter with postage was probably 75, 80 cents.

16:00And most importantly, it was an opportunity to fundamentally change how the business operated. So the company that we were going to invest in had very limited data analytics. And so our thesis was that by investing in analytics, we could determine the next best action to contact each of our customers' debtors and prioritize those with the highest propensity to pay and transform the business from an analog operation into a digital one. Then, as all good plans go awry, or everyone has a plan until you get punched in the face, as Mike Tyson said, COVID hit and almost overnight we had to furlough about a third of our workforce and transition hundreds of employees from call centers to working remotely.

16:45Elective surgeries stopped, which was reducing our healthcare division collections. Government clients flowed dramatically during the lockdown. So that was another big part of our business. We lost a couple of important customers. And then the founder, who was also the CEO, told me that about a year, year and a half into the deal, that he wanted to retire. It was basically a perfect storm. we recruited a first-time ceo who embraced the transformation strategy but despite making meaningful progress the financial results deteriorated before they improved at the same time a couple years into his stint he had a significant family tragedy and ultimately decided to step away from the business and thought he would be better served going back into the corporate world, which would be a little bit less pressure for him.

17:42So at that point, it would have been easy to conclude the original investment thesis was wrong. Instead, we sort of asked ourselves a different question, which was, has this investment thesis changed or have the circumstance changed? We still believe the long-term opportunity was intact. The fundamentals of digital communication and analytics hadn't changed. We simply had to navigate through a pretty extraordinary series of events. So we promoted the company's number two executive to CEO, and he proved to be an exceptional leader. We continued to invest in analytics rather than pulling back. We completed a couple of strategic acquisitions and we stayed focused on executing the original vision.

18:25And then another unexpected catalyst arrived, artificial intelligence. I won't pretend that we predicted the AI revolution when we made this investment. We didn't. But because we already digitized the business and had built a strong analytics platform, we were in a great position to capitalize on it far more quickly than many competitors. So today, roughly 90 % of our customer interactions occur through digital channels. So email, text, ringless voicemail, which compares to virtually none when we acquired the business. We're now using conversational AI to improve customer engagement while we're growing revenue without adding significant headcount.

19:07So I'd say the biggest lesson for me on this deal wasn't about collections or even technology. It was about conviction. As investors, you constantly have to distinguish between a thesis that's broken and a business that's simply going through an exceptionally difficult period. If you can't tell the difference, you'll often abandon your best investments at precisely the wrong time. the story as you're telling it i could feel my heart rate picking up because i'm getting triggered for the similar experience i think every private equity investor who listens to this is probably like nodding as they're listening because like everyone's had that happen at least multiple times in the differences in how you react there's a metaphor that i always latched on to when i was in PE, in PE, you have to be a buffalo.

20:00And for people who know nature, buffaloes are very unique in that when a storm comes, most animals will seek shelter and furl down. And what buffaloes do is they start running towards the storm and just go straight through it. It's some genetic imprinting knowing that you get out of the storm faster.

20:25First, you just go through shock. But then what I heard was like, no, we're not going to just sit here and wait for time to pass and heal the wounds. You just started taking action and charging through it versus waiting for the storm to go by. I love that. And here I was always thinking it would be a goldfish, right? So you have no memory. but I like the Buffalo analogy. I'm going to use that one. It's such a good one. And then by taking action, inevitably, like during that time, so many people just kind of like circle the wagons. And then you just said, like, load it up and you ran towards digital transformation.

21:01And then another opportunity comes. It's amazing how you find opportunities when you're in motion. You have eyes forward versus kind of like eyes down and waiting it out. Hey, Karma School listeners, this is Sean with a quick aside. Virtually every day I'm having conversations with private equity firm professionals and business operators, and we're talking about the same exact thing. Where and how do we actually start with AI? The answer is you start with people who have already done it successfully for others. This is exactly what Blue Wave does. We have built a one-of-one invitation-only network of trusted AI enablement providers that top private equity firms are using right now to create real value.

21:45Private equity, great quality, pre-vetted by Blue Wave, ready to go at a moment's notice. And they're not just for PE. Whether you're a PE professional or an operating company CEO, go to bluewave.net. That's B-L-U-W-A-V-E. will get you to the right resources so you can start on your AI journey right now.

22:12John, you've got an interesting vantage, I think, almost solely or very uniquely in private equity in that the first chapter of your career was on the deal side. And then similar as you think about things change, situations change. You made a decision because of the evolution of the industry to kind of grab the helm and say that you're going to then provide firm leadership on value creation. Can you tell us about that journey and then tie in what's your vision for and what are you doing within the value creation elements of your firm now? Sure, happy to. So I think the biggest change in private equity over the course of my career is that value creation has gone from being a differentiator to being the business itself.

23:03When I entered the industry over 25 years ago, there was far more room to create returns through financial engineering. Valuation multiples were lower, leverage was more readily available, and simply buying well could generate outstanding outcomes. I'd say today it's a very different environment. High-quality businesses regularly trade at double-digit EBITDA multiples. Equity checks are significantly larger, and every sponsor has access to sophisticated financing and advisors. Those advantages have largely been competed away. We often joke at Clarion that lenders have taken the L out of LBO. operational improvement is one of the very few sustainable sources of alpha that remain and recognizing that shift at the end of last year my partner and clarion's private equity president david reagan's asked me to lead our portfolio transformation and value creation efforts rather than trying to build a large consulting organization inside the firm we started by asking a simple question.

24:13Where can we consistently help our companies become more valuable? So we identified eight areas where we think we can make the biggest difference. Those include commercial excellence, digital transformation and AI, technology implementation, operational excellence, organizational alignment and culture, human capital, finance and KPI development, M &A and corporate development. And our goal isn't to tell management teams how to run their businesses. It's to provide them with resources, expertise, and proven playbooks that help them accelerate initiatives that they already know are important. I'd say one thing we've learned is that we don't have to build every capability ourselves.

25:02We've developed relationships with specialists who are world-class in areas like pricing optimization, AI implementation, and generative engine optimization. And I'd say Blue Wave, to make a little plug here, has been a terrific partner in helping us identify those resources quickly so our management teams can access the right expertise at the right time. So you and Rob Onslow and Jeremy Yonder and other members of the Blue Wave team have been great in helping us find the right resource for the right opportunity or challenge.

25:41And I appreciate the shout out there. To be fair, you know, as long as we've known each other, I've always appreciated how you and Clarion are so forward looking, right?

25:55You're not afraid to zig when others zag. it's this idea that the world is going to change but you're going to find the opportunity in it versus stew over the change and so that's something that we've consistently seen in you all is like identifying elements of value and then the levers that you can pull with them and i really also admire the approach that you've taken where you're saying like hey we're going to create this kind of symbiotic hole and you're going to get one of the deal partners to then take over the value creation side so it fits together really well. And you all have a lot of thoughtfulness in terms of how you're approaching it.

26:35As you're describing it to me, I was once again getting heart palpitations as the industry's matured because I always felt like I was getting econ 101, supply and demand, competitive intersection. And you can just let the surplus get skimmed or you can take some action. And what I've consistently heard from you is we're not going to just be victim to a trend, we're going to bend it to our will. And that's kind of what you're doing and what you're articulating here.

27:05So you're in the alpha game and I appreciate the position particularly that your firm and you take to go get it versus just saying, well, no, it's a competitive market. Because I hear that from a lot of particularly younger professionals in PE who are like, oh, it's so much harder. It's always been hard. So what matters is what you do about it. I don't mean to uncomfortably flatter you, but I've always appreciated that approach that you and your firm take in that regard. I appreciate that. We're actively debating now, and I think other private equity firms maybe too, how much value creation should be standardized versus how much should be customized.

27:46About 80 % of our investments are founder or family-led businesses, and in most cases, we're the first institutional investor they've ever worked with. We're very proud that we've been recognized multiple times by Inc. Magazine as a founder-friendly investor because we believe founders build successful businesses for a reason, and our job isn't to replace their vision, it's to help them realize it. But that also means striking a balance between introducing best practices and preserving what makes the business successful in the first place. And so for us, value creation isn't about imposing a one-size-fits-all operating manual.

28:25It's about partnering with management to institutionalize the business, build capabilities that endure long after we're gone, and position the business to be attractive to the broadest possible universe of buyers. The fact that roughly two-thirds of our exits have been to strategic acquirers tells us that the approach has worked pretty well. And I think ultimately, the firms that will outperform over the next decade won't necessarily be the ones that find the best deals. They'll be the ones that become the best partners to management teams after the deal closes. And I appreciate that perspective.

29:03and we started p kind of in the same time or era if you will in the early days it was here we're going to invest in based on what the company is right and then we're going to maybe you know do a kitchen or a bathroom and then today it's about what the company can or will or should be So it's a transformation game. And that has profound implications on the types of companies you invest in, how you invest, how you price and manage risk and opportunity.

29:39Given your perspectives that we've already talked about, one thing I'd love to pick your brain on here, John, is how did limited partners today, what is their lens through the type of risks, the type of returns, the variability, the consistency, the amplitude, what is their kind of lens on PE today? And then how does that maybe impact how PE at large is kind of reacting to the missives that they're sharing?

30:12I think one of the most interesting questions in private equity today is whether our incentives are unintentionally pushing us towards average outcomes. Ask any LP what they want, and the answer is straightforward, top decile returns. But if you ask what characteristics they reward during manager selection and re-ups, the answer is often very different. Exceptional winners are appreciated, but losses tend to receive far more scrutiny. In other words, we celebrate upside less than we penalize downside. And that creates an interesting tension. At Clarion, we've historically looked for investments with asymmetric risk reward profiles, not because we enjoy taking risk, but because we believe that's where outsized returns come from.

31:00The reality is that approach doesn't produce a portfolio where every investment is a success. And we've certainly had investments that didn't work, but we've also had a handful of businesses that have generated an extraordinary share of our overall return. And those runners are what create alpha. I sometimes wonder whether our industry has become uncomfortable with that reality. Private equity isn't baseball where batting averages tells the story. It's more similar, I think, in some respects to venture capital, or at least in one respect, which is a relatively small number of investments often drive a disproportionate share of return.

31:42And so if every investment in a fund is a modest success, there's a reasonable chance the overall fund will also be modest. And I think this has implications beyond LPs. It also affects investment committees. The danger I'd say there isn't disagreement. It's optimizing for decisions that carry the least career risk. So consensus can become more valuable than conviction. And sophisticated financial models can often overshadow first principle questions like, is this the right CEO? or does this business have a competitive advantage that others are underestimating? It's often easier to approve the 20th roll-up in a well-established industry than back a company with an unconventional business model or one that has customer concentration or a thesis that doesn't fit neatly in a spreadsheet.

32:37Yet those are often the investments with the potential to generate truly differentiated returns. And the challenge is becoming even greater because AI is accelerating the pace of change. It's increasingly difficult to predict what an industry or a competitive advantage will look like five years from now, let alone 10 years from now and the next owner's planning to exit. And I think that uncertainty doesn't mean we should become more conservative. it means we need to become better at distinguishing between intelligent risk and unnecessary risk. So to me, this is where value creation becomes the differentiator.

33:17The firms that outperform won't simply identify promising businesses. They'll build organizations that can adapt faster, adopt new technology sooner, create value through execution rather than relying on financial engineering alone. And ultimately, I think the industry's biggest challenge isn't finding higher return opportunities. It's making sure our incentives don't discourage us from pursuing them. I love that perspective. It goes back to not being afraid to zig when others say zag. In an industry where most people are kind of doing follow the leader because of exactly that, it would drive me insane when i was in your shoes because it's like we would spend and i would spend so much of my time focusing on the losers and frankly like not giving nearly enough love to the winners we would always debate it's like hey we're spending 80 of our time trying to get back to an arbitrary zero like money back it's like what is the point why don't we just clip this thing and the ultimate answer was always like don't hate the player hate the game like the lps will kill us but the intellectually honest answer that we should have said is like let's clip this thing and let's focus on quadrupling the winners and not like having to sell our best investment because we're fundraising too early on and it would just drive me nuts and so you know what you're saying there i think is once again so true and ultimately it's like if the industry at large is going to be successful.

34:50It's like that intellectual courage to say, we're going to have to change as we do.

34:59There was a Mikey Life cereal commercial. It's like from the 80s.

35:06Mom brought back a new cereal and the three brothers don't want to try it. And they're like, well, we're not going to try it.

35:14We're going to have a younger brother, Mikey, try it first. And Mikey tries it. Mikey likes it. And they're like, he likes it. and then they all eat it and then like life cereal became the most popular cereal in childhood almost in some ways there's parables for the p industry is like i always said to others like we're not fast followers but we're fast followers of fast followers and i think is what you're articulating is like in what you're doing at clarion is like the p industry probably needs to be moving not even have to be early adopters but probably more fast followers versus fast followers of fast followers and have the courage to zig in an industry that typically follows zag and i think you're doing a great job of articulating how you all are doing that and you're probably my sense is going to extraordinarily benefit it by doing so

36:01so one of the things that i think that we all love here is talking about other people's lessons learn right in some ways that's the purpose of this podcast is like let's teach people about ways to do business better let's let's humanize people in this industry who are really good in trying to do good things to create better businesses but i think a lot of people who are successful learn a lot through reading the wisdom of others and one of the favorite questions I get to ask on this is, are there any books that you've read or have an impact on you that others you think should know about as well?

36:43Yeah, I love that question. So one of my favorite business books is Red Notice by Bill Browder. It's one of those rare books that's part investing story, part geopolitical thriller, and part lesson in courage. So Browder was one of the earliest Western investors in post-Soviet Russia. He built a firm called Hermitage Capital into the largest foreign investment firm in the country by buying deeply undervalued business that everyone else was afraid to own. So when Russia was privatizing industries in the 1990s following Glasnost, he was buying shares from workers who were given ownership in old line industrial businesses that they thought were worthless.

37:29And he wasn't simply chasing cheap assets. He was looking for situations where the market had dramatically overestimated the risk or underestimated the opportunity. And of course, the story takes an extraordinary turn. So after exposing corruption inside Russia, and this is a true story, Browder was expelled from the country. His companies were and his lawyer, whose name was Sergei Madzhenitsky, uncovered a massive tax fraud perpetrated by Russian officials. So his lawyer was imprisoned, denied medical care, ultimately died in custody after exposing the corruption. And Browder then reinvented himself from investor to human rights activist, and he advocated for the Mednetsky Act, which has become the model for sanctions legislation in multiple countries.

38:26It's also alleged that Browder's still high on Putin's list of people he would like to eliminate. It's an incredible story, but the investing lesson there stayed with me, which is the best investments aren't necessarily the one with the fewest risk. They're often the ones where everyone sees the same risks, but only a few investors correctly understand which risks actually matter. And that lesson actually influenced me in one of my favorite investments. So about 10 years ago, I led investment at Clarion in a software localization company that was based in Brno in the Czech Republic. And on paper, there were plenty of reasons to walk away.

39:09The business had meaningful customer concentration. It was headquartered halfway around the world in a city most people couldn't find on a map. And many people believed that machine translation would eventually eliminate the need for human translators. So almost every advisor we spoke with focused on those risks. But our diligence uncovered something different, which was Microsoft had recently selected the companies to support its cloud and enterprise division. Growth from other customers like Apple, Google, Facebook, and Amazon was accelerating, and the company's role was evolving beyond translation into a broader set of managed technology services.

39:51And so we concluded that the market was focused on risks that were visible while overlooking opportunities that weren't yet reflected in the financials. And so three years later, after we bought the business, EBITDA tripled. We ultimately were able to sell the business to a company called RWS, which is publicly traded in the UK and made eight times our money. Clarence received the Buyout Insiders International Deal of the Year award in March of 2018 for the Moravia transaction. And so looking back, we were also a little fortunate with our timing. Shortly after our exit, the industry faced some pretty meaningful challenges, first from COVID, and then more recently from the rapid advancement of AI.

40:42high. That's another lesson I think Red Notice reinforced in me, which is great investing isn't about finding businesses with no uncertainty. It's about developing a point of view that's different from the markets and being right often enough that the winners more than compensate for the inevitable mistakes. Well, I'm going to one-click that book, first of all. Probably both of us being around during that kind of era where it was changing. It was just the drama and the theater of that whole time in life will be fun. But I also love the consistency of our conversation here, John, where it's just this constant, like, don't be in the herd.

41:24The herd will keep you safe, but you're going to get average returns, you're going to get average outcomes, and it's the audacious ones who maybe take a step forward and go to the front that kind of benefit. Whether it's software in the Czech Republic or it's a debt collection firm, the easiest word in the english language is to say no it's like two letters right there's some i forget what the parable is like the word yes requires all these muscles in your mouth you know and so i think the the consistency that i've gotten from our conversation here is don't be afraid to go out you know look at things differently you know the herd is safe but not necessarily the best place to be when there's a storm run through it and that book not only personifies i think our conversation but also a lot of the way that you and your firm approach investing.

42:09And so I'm going to definitely take all of this conversation to bear. Also, I think everyday CEOs like myself get a lot of that. It's so easy to play it safe. In some ways, playing it safe is a lot more dangerous, particularly in times like now where it's moving fast. So I've learned all sorts of things today that I wish I knew before, John. And I appreciate you taking the time out of your busy schedule to share a lot of lessons that I'm going to take to heart here. It's been a lot of fun, Sean. Appreciate all your support over the years and looking forward to working together for many more.

42:57That's all we have for today. Special thanks to John for joining. If you'd like to learn more about John Haas and Clarion Capital, please see the episode notes for links. Please continue to look for the Karma School of Business podcast anywhere you find your favorite podcasts. We truly appreciate your support. If you like what you hear, please follow, five-star rate, review, and share. This is a free way to support the show, and it really helps us when you do this, so thank you in advance. In the meantime, if you want to be connected with the world's best in class, private equity-grade professional service providers, independent consultants, interim executives, AI advisors, AI tools that are deployed and trusted by the best business builders in the world, including many hundreds of the top PE firms and thousands of their portfolio companies, and you can do the same whether or not you're in the PE world, give us a call or visit our website at bluewave.net.

43:46That's B-L-U-W-A-V-E, and we'll support your success. Onward. The views and opinions expressed in this program are those of the individuals presenting and do not necessarily reflect the views or positions of any other persons or entities, including those referenced herein. No representations, warranties, financial, legal, tax, or other advice are made herein. Consult your advisors regarding any topics discussed during this episode.