Michael Bennett is a searcher.
It’s a term some may associate with a brand of existentialism – or with a John Ford western from the 1950s – but for Bennett it’s all about business.
“My background is investing out of our family office in Kelowna,” said Bennett, managing partner of McIntosh Partners LP.
This eventually led him to assisting on a deal in Toronto that gave him his first taste of a search fund, a type of hands-on private equity that helps entrepreneurs – known as searchers – find companies to acquire, operate and expand before exiting after a few years.
Searchers typically look for companies that aren’t for sale, are facing problems with succession and are in industries with high potential for growth.
Revenue is usually between $5 million and $30 million, below what the typical private equity buyer is interested in.
“It’s the hands-on management approach that’s unique in this situation,” said Bennett, who has been conducting his own search while also funding other searchers through McIntosh Partners for more than a year.
A 2016 report from the Stanford University graduate school of business estimated that searchers stick around to run a company for an average of six years before selling it off.
The model has been around in the U.S. since the 1980s but search funds are still nascent in Canada, with the country seeing its first exit in 2014.
Last year Vancouver-based Vonzeo Capital launched what it says is Canada’s first institution investing in these funds.
“There are individuals investing in this space, but they’re investing as individuals with their own money,” said Vonzeo co-founder and managing partner Jan Simon. “The whole institutional world at this stage is still pretty small. There are probably 10 institutions worldwide.”
Vonzeo is also taking a more hands-on approach to its investments, providing searchers with an advisory board featuring former searchers and CEOs to help guide the new entrepreneurs. Simon said there are only two other institutional investors he knows of that are providing the same support to these entrepreneurs.
“It really is a route into entrepreneurship,” said Bennett, who started his own search after completing his master’s degree in business administration.
The Stanford report noted that although the search fund model is growing in popularity, “relatively few recent business school graduates raise search funds each year as compared to those who pursue more traditional career paths.
“The narrow appeal may be explained in part by the non-traditional financial outlook for search fund principals.”
That is to say, new grads shouldn’t expect to get those same big signing bonuses some of their brethren may get on Bay Street.
Bennett said the typical search fund model requires $300,000 to $600,000 in overhead for two years to cover the cost of one to two searchers as they look for a business to acquire.
This initial investment gives the funds the right to put up acquisition capital but the funds are not under any obligation to follow through with the searchers’ recommendations.
“The uncertain nature of the location and the industry of the ultimate acquisition are other factors that likely play into an individual’s decision to pursue the search fund model,” the Stanford study said.
The study also found that since the model launched in 1983, 258 search funds have formed across the globe. As of December 2015, 47 had ended without an acquisition.
But for those successful acquisitions, the aggregate pre-tax internal rate of return – a measure of investment performance – was 36.7%.
“The returns have been high, persistently high,” said Simon, a former Goldman Sachs Group Inc. banker who has since moved into academia and serves as a senior lecturer at Simon Fraser University’s Beedie School of Business. “But it’s also a labour of love. If you want to write big tickets, this is not your space. You want to be in private equity.
“It’s a great space but it’s a space where everybody has to work and roll up their sleeves.”
