Business Breakdowns
· Matt Reustle
[00:00:00] S0: I still have one of those old plastic credit cards, a Capital One that sits in my wallet and has to come out every now and then. It drives me nuts. The rest of my cards, which I prefer to use, are those premium metal cards. They happen to be CompoSecure cards. It is this interesting niche business. The reason I wanted to have you on was because it came on my radar after Dave Cote was involved in the business sometime in 2024, sometime last year. And that added a unique dynamic. You have some experience with this business well before that. Maybe we could just start with Cote and what he represents to the story and how it's changed, and we'll get into the backstory to the business after that. But I do think it's important to bring him into the conversation quite early.
· Parsa Kiai
[00:00:00] S1: He's probably the main figure in the story right now. You're right, it was August 2024 that he came in. It was a watershed moment for the company. He became the controlling shareholder by buying out the private equity sponsors and the co-founder, a lady named Michele Herslow. And for many of your listeners, Dave Cote needs no introduction. He, along with another industrial CEO who's been talked about on your podcast a lot, Brad Jacobs, are probably the two best-known industrial CEO entrepreneurs that we have in our market right now. And their track records are both incredible. Dave Cote was the star CEO of Honeywell for many years and then became the chairman of Vertiv and has led the growth in that company. He's written two books on the operating system. It was the Honeywell Operating System at first. It is a focus on operational excellence. It is a focus on capital allocation, and a large part of that is exceptionally astute M&A, which comes from deal origination, integration, and paying the right price for the right business. His involvement is critical, and we honestly look at our investment in the company in kind of two parts. There's CompoSecure 1.0, which was before Mr. Cote's involvement when it was a broken IPO with a hidden gem of a business that was trading at a fraction of its core value. And then CompoSecure 2.0, which is a more respected business with attractive near-term tailwinds and a much longer-term potential under the CompoSecure Operating System.
· Matt Reustle
[00:00:00] S0: Let's get back in time to some of that Compo 1.0 era. It's not quite the 100-plus-year-old business like we just covered with Amphenol. It has a little bit of a shorter history, though it's still decades old. Bring us back in time in terms of the origin story and how they got to this position in the marketplace where they are so prominent.
· Parsa Kiai
[00:00:00] S1: Very fascinating story. Does not have the length of history of some other companies, but it was a family-started business, and there was a gentleman named John Herslow and his daughter Michele Herslow. They worked for their family's plastic business that the grandparents had started in the '50s. And through that business, they eventually founded CompoSecure in 2000. By happenstance, they worked with American Express in 2003 in introducing the first-ever metal credit card. And up until then, credit cards were always plastic, and they worked with American Express to make the first metal credit card. And I think there's a rich history of innovation and growth that we'll get through, and it's important that American Express today, 22 years later, is still a key partner and customer. And I think it just shows you a lot about the innovation and organic growth that the company has throughout the years. They pioneered a lot of what we see in a physical premium credit card today. After working with Amex, they helped Chase launch their first metal card, which was the predecessor to the Chase Sapphire card. It was called Chase Palladium in 2009, and again, Chase today, many, many years later, is still a premier customer. And you've seen that relationship has grown. Throughout the years, so much of the innovation that we see in a card today was helped and pioneered by them. They were the first ones to put an EMV chip in a credit card. And your listeners will know, those who listened to the Visa and Mastercard podcast will know EMV is Europay, Mastercard, and Visa, which is the security protocol for payment cards that puts a microprocessor embedded into a chip so that it works with an EMV-enabled payment terminal to authenticate transactions with much higher security. So they were the first ones to do that. They were also the first ones to put large-scale NFC, or near-field communications, integrated dual interface mailer cards. This is a protocol in a card that allows for radio frequency identification between the payment card and the terminal. So a lot of this innovation was done by them, and even up until now, including biometric security dynamics, CVV codes, and a lot of other things. Rich history. And then along the way, a private equity company called LLR invested in the company. They paid $100 million for a 60% stake in the business.
· Parsa Kiai
And one key aspect was they brought on board a senior payments executive named Jon Wilk. Jon Wilk has a deep history in the business at Bank of America first and then at Chase. Jon was in the room when they were making that first Chase Sapphire card, and he had the vision and the experience being on the issuer side, saying, "What does an issuer need? What do our premium clients want? Our cardholders?" And Jon has been instrumental in growing the business, strengthening and growing the American Express and Chase relationships, and expanding to all these new customers like Capital One and the Delta co-branded card, Amazon co-branded cards. And now with all these neobanks and fintechs, that business was growing. When COVID comes around, everything payments-related went crazy. I believe they were trying to shop the company in 2020. I think that sale didn't materialize. The company came public via a SPAC. They merged with a special purpose acquisition company called Roman DBDR, and it debuted in the market in 2021 at a $1 billion enterprise value. SPACs didn't have a great reputation at the time. We hit a little bit of a bear market, and it provided an opportunity for our involvement in Compo 1.0. But it's a really rich history of innovation and growth for an interesting niche little company.
· Matt Reustle
[00:00:00] S0: It's easy for me to look at the metal card and think about the vanity play of the noise it makes when it drops on the table. But there is obviously a lot of actual innovation going into the chip and what would attract them to the banks on the other side of this. I want to get into that SPAC era now because they had this premium metal card business, but I know they introduced another growth engine. Very much a sign of the times and we'll see where it goes. But can you talk a little bit about, beyond just being baby thrown out with the bathwater in terms of SPAC up and SPAC down, what was fueling some of the excitement over Compo? That was another piece of the business that we can introduce now.