March 11, 2025 • 21 mins
In this episode of How I Invest, I interview Robert Cherun, an expert in search funds and small-cap investing. Robert shares his journey from launching his own search fund to building and exiting a highly successful business. We dive into the fundamentals of search funds, the economics of acquiring and scaling small businesses, and the key traits that make a successful searcher.
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Episode Transcript
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(00:00):
Ended up finding a security business called, atthe time, UCIT Online Security in Toronto.
And six months later, we bought it from theentrepreneur.
And how did that play out?
Amazing.
It kind of exceeded my expectations.
So we bought this 5,000,000 revenue, 2,000,000EBITDA strip mall security business, and the
(00:21):
entrepreneur Sydney agreed to stick around andand kind of help us run Toronto sales while we
focus on strategy and growing the business.
And we grew organically 30% a year for thetwelve years I was CEO.
We just sold to a strategic as a hundred50,000,000 ARR business with 2,000 employees,
40 plus offices, five countries.
It was an amazing platform for us to kind ofcompletely change the profile of the business
(00:45):
and make it the largest independent remotevideo monitoring company in North America.
What is a search fund?
So it's a model for acquiring a smallestablished business, where a group of
investors would provide, funding to anentrepreneur or we like to call them a searcher
to go out and find a business to acquire,manage, and grow.
So they would spend up to kind of twenty fourmonths to find that business, and then they
(01:09):
would take over that business and run it day today.
So they would be the actual CEO and orpresident of the business.
Allows the searcher to take over leadership andcreate value through operational improvements,
market expansion, and strategy changes.
What are the historical returns for searchfunds?
There's been over 681 search funds formed inThe US and Canada since 1984 when the concept
kinda started out of Harvard and Stanford.
(01:30):
And and based on a 2024 search fund study byStanford, we're still tracking to 35% net IRRs
and a four and a half times ROI.
To play devil's advocate, assuming these kindof returns, why hasn't the space gotten bigger?
Why haven't institutional investors piled intoit?
And unpack that for me.
The most obvious answer is you're dealing witha micro caps, small cap space where you can't
(01:54):
put real dollars to work.
You're buying 5 to $30,000,000 businesses with,call it, million dollar checks, and and
institutional investors just can't put enoughmoney to work.
And so it's typically been, an asset class forhigh net worth individuals.
That's why it hasn't scaled to kind of theinstitutional platforms.
Unpack an individual search fund or search fundopportunity and tell me how it's capitalized
(02:15):
through its life cycle.
Typically, the searcher would raise, you know,call it 500,000 to a million to find the
business.
And that would essentially be funded by 10 orso entre investors that they've reached out to,
and so each investor would have 10% of theircap table.
Then those investors get pro rata rights whenthe searcher finds the business.
So let's say I find, you know, the best HVACcompany known to on Earth and I write a 50 page
(02:37):
SIM.
I then present it to my investors and say, Iwanna buy this business.
It's doing 10,000,000 of revenue, 2,000,000 ofEBITDA.
I wanna apply it for five times EBITDA.
I'm gonna put 50% leverage on it, so I need a$5,000,000 equity check.
So each of those investors would have their prorata rights for 500,000 in that example, and
they would then kinda buy that business onbehalf of the searcher.
You run a fund that invests into search fundopportunities.
How do you go about constructing the portfolio?
(02:58):
Talk to me a little bit about your strategy.
I'm investing in the entrepreneur to then lookfor the business, and then I'm investing in the
businesses that the entrepreneur buys.
My construct is having at least 10 to 20searches a year in my portfolio running and
looking for businesses.
I then choose which businesses I want to investin as my fund.
And then my portfolio construct would typicallybe about 70 percent through those acquisitions,
(03:21):
about 15% in follow on capital, and about 50%in in management fees.
How do you look at the TAM of search fundopportunities?
And walk me through from a top down level.
The space has grown significantly over the lastfifteen years.
To give you context, when I did it in 02/2010,there was no traditional search fund out of
HBS.
There was no traditional search fund out ofWharton, and there was one other group out of
(03:43):
Stanford.
And that was one of the first ever Canadiansearch fund stories.
Now there's dozens coming from each of thoseschools doing search.
And and the reason being is I think the the thereturns speak for themselves, but it's become
more institutionalized.
There's larger investors.
There's more of a playbook, call it more of atraditional path now because of the
opportunities in the microcap space.
And how does that play into what kind ofsearcher is attracted to this model?
(04:06):
Has that changed the dynamics in terms of who'sapproaching the space?
Great question.
You know, I I'd say, in my case, we're drivingaround all across The US and Canada, pitching
people, sleeping on friends' couches.
We're we're we're getting pro bono work fromaccountants and lawyers trying to craft
together this concept of a search fund inCanada.
And and now it's it's a little bit more, youknow, this is the PPM templates that typically
(04:29):
people use.
Here's the five law firms that people use.
So so with that, it it produces a wider rangeof searcher.
I will say there's still a lot of mypersonality, in in search, but there's also a
lot more call it, you know, sales CEOs ortechnology CEOs or strategic type personalities
that would have been probably less interestedin the asset class due to the risks fifteen
(04:51):
years ago.
Three joined has been invested in search andsearch acquired companies from 1986 to 2023.
From the Stanford study, 700,000,000, 20 5percent of that was the last two years.
So the asset class is blossoming, and and therisk profiles are definitely changing quickly.
A lot of these searchers are from elitebusiness programs like Harvard, Stanford.
How do they even come about deciding to be asearcher?
(05:13):
Maybe I'll give you my example, and then we cankind of triangulate.
So so here I am.
Right?
I'm I'm 27.
I go to the GSB.
I spent my summer at a hedge fund.
I had worked at McKinsey and Morgan Stanleybefore.
But everyone I look up to is a business owner,entrepreneur.
So so what do I do?
Do I go work somewhere institutional to thenget the corner office then wonder what am I
doing in my forties when I have dependents?
And that's where I step back and said, youknow, this is a really interesting asset class.
(05:37):
The risk is not taking the risk.
I had offers from those three previousemployers with, call it, bonuses to help pay my
tuition.
One had prepaid my tuition, and I ended uphaving to pay the tuition back.
And so when I look at, like, my profile at 23when I was working at McKinsey, when I look at
the salary, who I was living, my roommatesituation, my net worth, and then I look at 29
(05:59):
after the GSB.
So I have after paying back my tuition, I hadthe same bank account.
I had the same salary as McKinsey analyst, andand I actually ended up living with the same
roommate in Toronto.
And so it felt a bit bizarro world six yearslater, but the profile is someone who's not
doing it for the monetary reasons.
They're doing it for, call it, the career pathand the experience.
It's a fascinating concept to search on becauseyou find investors that will fund you for two
(06:22):
years to go find what you wanna do.
It's almost like they're funding a secondbusiness school for you.
Do you think that model could work in startups?
Say, a Stanford or Harvard MBA wants to gostart a startup but doesn't know what he or she
wants to do and needs a salary for two years?
Could a model like that work in startups?
Yeah.
It feels riskier.
Right?
So on the entrepreneur in residence concept ofstartups, you're you're you're essentially
(06:43):
funding someone to come up with an interestingidea that you'd then want to invest, and you're
caught buying a call option on a person.
That you'd almost wanna receive the deal,right, unless that person had deep, deep domain
expertise.
Here, it's a bit different.
You're investing in someone to buy atraditional business that cash flows, that's
been around for thirty years, that hasrecurring revenue.
(07:03):
And so the bet is that this person is gonnachange the business and make it better.
But but even if they didn't, you still have agood business.
In that example, the risk profile is verydifferent on betting on the person because
they're looking for a seasoned already provenentity as opposed to a start up where you're
you're betting twice.
(07:24):
Your business is default default alive versusdefault dead like a start
up.
Exactly.
So start up example, you're betting twice.
On the on the search example, you're reallybetting once.
You're betting on the person, but then whenthey actually find the business, the business
will speak for itself.
In 02/2009, when we first met, you went and youdecided to go down the search fund path and you
went to find a company.
Tell me about your process and tell me aboutthe deal that you did.
(07:46):
So in 02/2010, I wrote an independent whitepaper for one of my professors named Joel
Peterson on the microcap opportunity in Canada.
And it was clear that that space had hadopportunity, and so he's like, I'd be your
first investor of
It's a good sign.
So I was like, okay.
Maybe this concept makes yeah.
It's a good sign.
So then I, decided the risk would be higher ifI didn't have a business partner.
(08:07):
So I found a business partner named Eric who,lived in LA at the time, had been done banking
New York and PEV equity in LA, but also wasCanadian.
And we moved back to Toronto.
And we started our search in September oftwenty ten.
The concept was unknown, so we labeledourselves more as a private investment fund
than a search fund just because we didn't wannaspook people.
And and then, the LOI you know, the deals juststarted coming through.
And we ended up finding a security businesscalled, at the time, UCIT online security in
(08:32):
Toronto.
And six months later, we bought it from theentrepreneur.
And how did that play out?
Amazing.
It kind of exceeded my expectations.
So we bought this 5,000,000 revenue, 2,000,000EBITDA strip mall security business, and the
entrepreneur Sydney agreed to stick around andand kinda help us run Toronto sales while we
focus on strategy and growing the business.
And we grew organically 30% a year for thetwelve years I was CEO.
(08:55):
We just sold to a strategic as a hundred50,000,000 ARR business with 2,000 employees,
40 plus offices, five countries.
It was an amazing platform for us to kind ofcompletely change the profile of the business
and make it the largest independent remotevideo monitoring company in North America.
So walk me through the economics on the UCITdeal for you and your cofounder.
Sure.
In that example, we bought the business withinvestor capital.
(09:18):
And for that, we had a 30%, call it, upsidescenario where 10% of it would vest upon buying
the business, 10% would vest over a four tofive year vesting period, and 10% was based on
20 to 35% net IRRs on the return.
So we actually in this example, each had 15% ofthe upside of the business.
So you and your cofounder both had 15% in thedeal.
(09:39):
How did your investors do?
Three years in, we had, I'll call it a boardmisaligned perspective on EBITDA versus unit
economics.
And so at that point, we offered our investorstwo point five nine 2.55 net return, about a
35% net IRR.
And at that point, about a third bought, athird sold, and a third held.
From there, five years into the search, so afew years later, we did an acquisition where it
(10:02):
was around a four and a half times net returnto investors called, 32% IRR.
And then in 2019, we sold two thirds to aprivate equity fund at an eight and a half
times net 30% IRR.
Then we transacted five years later to Garda inOctober 2024, which the purchase price was
confidential.
But you can infer multiples of that.
(10:22):
There's a famous search deal, Asurion.
Tell me about Asurion.
Yeah.
Asurion was one of the legends of search fundlore.
It was founded in 1994 by, two Stanfordgraduates, Kevin Tweel and Jim Ellis, who
acquired a Houston based road rescue roadsideassistance carrier.
So you probably remember back in the day, we'dall pay $5 a month on our mobile phone and
(10:44):
never use roadside assistance.
Well, Asurion was one of the examples of whobenefited from that.
And so those entrepreneurs said, what else canwe sell into the mobile platform?
And they expanded by purchasing a business inspecialty insurance for cell phones and thereby
entering the mobile phone insurance sector.
Fast forward twenty years, thirty years,they're now the largest mobile insurance
provider in the world.
They're They're one of the largest extendedwarranty providers in the world, employing
(11:07):
20,000 plus employees.
And the returns to the original search fundersinvestors was over a hundred x, and some of
them who stuck around would be over a thousandx.
Tell me about your fund, Legate Partners.
Yeah.
So we we invest in search fund entrepreneursand the companies they build.
It's a way for me to pay it forward in thecommunity by investing in intellectual
horsepower and search fund entrepreneurs andthen supporting them in governance, sport, and
(11:31):
operational support.
And what industries are you going after in thefund?
Traditional.
Right?
I'm not we're not trying to get complicated.
When I when I read a sim and it gets tooblurry, you know, commodity trading, I I start
to say this is not for me.
So so, typically, business services, software,health care, and and basic manufacturing
industrial.
(11:52):
What do you look for when it comes to findingsearch fund entrepreneurs?
There's a half dozen or so criteria.
Right?
So so one is educational and professionalbackground.
Have they excelled at everything they've done?
Have they been top decile in everything they'vedone?
You're typically looking for business acumen orfinance related fields.
Second is is the skill set.
Right?
So you need them to be very analytical.
Right?
We need them to be numbers forward.
(12:13):
We need them to be extremely likable from anegotiation standpoint.
Personal qualities, resilience, we all know howhard this is.
Ethics and integrity are are critical.
Strategic vision is gonna be important.
Right?
They're gonna be buying a very small business,and how do they transform and change that
business into a medium sized business?
And and that takes a specific skill set.
And then, I guess, the final two areoperational expertise, right, familiarity with
(12:36):
the industry practices that they're buying intoand the change management that would be
required, and then finally commitment.
Right?
The last thing I need is someone to to quit twoyears into running their business.
I need dedication, action orientation, and anda personal investment into the business.
You have a bias towards likable CEOs, which Ihave a bias against, not because I don't like
likable CEOs.
Just my my experience has shown me that theytend to underperform unlikable CEOs.
(13:00):
Why do you have a bias towards likable CEOs?
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I do like likable CEOs, but probably more fairCEOs than likable.
And what I mean by that is I want someone whopeople gravitate towards.
Right?
They're they're buying a recurring revenuebusiness.
(13:21):
That that typically means you need to corralpeople around you.
You need to recruit new talent.
You need to set the culture, and then you needto expand.
And so we're looking for, in some cases, abuilder profile versus a visionary profile.
What do you mean by a builder profile versus avisionary profile?
What I mean by that is they already have theconcept.
Right?
And so even if they just rinse and repeat theconcept, they will have a successful outcome.
(13:43):
And so if if you bought, vacuum truck businessand you're cleaning up storm debris and dealing
with property maintenance companies, no need tochange the vacuum truck.
Just expand it.
Right?
Come up with new offerings, come up with newcustomer off.
And and that takes a skill set of buildingrelationships, building customers, hiring good
people, and and and versus saying I need tocome up with a whole new concept, a whole new
(14:05):
industry like a lot of the startupentrepreneurs you speak to.
And a lot of these search fund deals have coCEOs.
What are the best practices for making surethat co CEOs work well, and how do you manage
that process?
Yes.
It's very popular.
Returns are stated to be better with co CEOsthan than single entrepreneurs.
I think it brings a different skill set.
Right?
Like, I look at my business partner, Eric, andI.
We were very different.
(14:26):
I was focused internally as the CEO, and he waschief revenue officer and president focused on
biz dev m and a and sales.
And so that bifurcation responsibility reallyallowed us to focus and hold each other
accountable.
And what about decision making, tie breakingscenarios?
How do you manage having co CEOs in in thatcase?
There's two components there.
I think there's there's a level of respect andkind of radical transparency as to how you
(14:47):
feel.
And I think with Eric and I having beenbusiness partners for fourteen years, there was
many times we disagreed, but I think that wasthe healthy part of it.
Right?
How do we get to an agreement that then is bestfor the business?
You also have a board.
Right?
So investors do, in the end, own the business,and they have the governance, and they can help
tie break certain strategic decisions or keyhires.
Wanna unpack that?
So you and Eric have a key strategic decision.
(15:08):
It's not, you know, whether to hire this adminversus that admin.
It's whether to go into new markets, whether toinvest a substantial amount of capital.
What happens when you don't agree, and whathave you learned through those experiences?
Eric's very aggressive.
He's like, we should be open at 10 offices ayear, Robin.
I'm like, hey, Eric.
Let's just, you know, do four offices.
So how do you kinda get to that resolution?
I mean, in our case, we would typically kind oftalk with the pros and cons.
(15:30):
We'd kinda come up with rational, heroic trees.
We would talk about the pros and the the therisks inherent in that decision.
And in most cases, we would get to anagreement.
Or in some cases, we'd agree on certainmilestones that would then reset the triggers
of making a new agreement on that.
There were times where we might disagree, andthat's where we bring in our management team.
We bring in our board members.
(15:50):
And so there's lots of ways to kind of tiebreakas long as there's a lot of respect between the
two entrepreneurs.
Do you believe in
this concept of disagree and commit?
Meaning, you make an agreement, and then youmight not agree with it, but you have to commit
to whatever agreement you make.
I do.
Absolutely.
The inaction, in some cases, worse than actaction.
Right?
And so, yeah, I I as an entrepreneur, there'smany times, I think, where our management
(16:11):
disagreed.
But when we made a decision, everyone had torow in the right direction whether they agreed
with it or not because we needed to then getalignment.
We had a concept one team, one dream, and wehad to kinda move forward.
And we could always hold ourselves accountablesix months later and say, did this work or not,
and what's the postmortem here?
But to have an unaligned management team orboard or partnership would be catastrophic to
(16:32):
the business in poison.
Let's say that you knew that a decision was,quote, unquote, correct, but Eric was really
pushing for something.
Do you always fight for that decision?
Do you sometimes let your partner have it eventhough it might hurt the business in the short
term?
And walk me through managing both thepartnership dynamic while also managing the the
growth of the business.
It's business first.
Right?
So our responsibility is to dissent, and andEric and I had pretty rough skin.
(16:54):
There was many a time, I think, employeesfreaked out because because Eric and I would be
screaming at each other in a meeting.
We we actually really felt in that radicalresponsibility of of not taking it personally
and kinda standing up for what's best for thebusiness.
And so there's no question, that we should haveever backed down or or ever felt like we were
doing something for the partnership.
It had to feel like the right thing.
And if that made a decision take a week longer,so be it.
(17:16):
But it also meant that we had to be dedicatedto coming up with making that decision and not
just punting.
Sometimes you just needed more information.
It wasn't a matter of who's gonna win thisbattle.
It's you know, what are the nuances of thedecision, extra information, extra inputs from
other parties?
Exactly.
Though we might disagree on pricing plan.
Well, then let's just have a third partypricing consultant for the next two weeks.
Let's bring in our CFO.
(17:37):
Let's bring in our head of marketing, and wecan have a real conversation here and get to
somewhere as opposed to two people in a roombattling it out for no good reason.
There's this odd governance in search fundswhere you have the investors or LPs own a
majority of the company, but the CEOs actuallyhave control.
How does that play out?
In the end, it plays out in a few differentways.
One is board composition.
Right?
So the the investors control the board and thentherefore control a lot of the big productive
(18:02):
positions such as CapEx, spending, additionalfundraising, change in strategic direction.
The second is, performance based incentives.
Right?
So setting the compensation of the CEOs, makingsure that burnouts and and bonuses are based on
achieving specific targets.
Those are some of the ways to kind of aligninterests.
What would you like our listeners to know aboutyou, about Legate, about anything else you'd
like to share?
I'd like to let people know that that, youknow, in the end, I've learned a lot over the
(18:25):
last fifteen years, and I really loved thesmall cap space.
Right?
You can really make a difference.
You roll up your sleeves.
Everyone's doing as opposed to thinking.
And and it's that operator focus, isn't privateequity.
It typically is much kinder.
The SearchPoint community, is is focused on theculture and the people of the business and and
making sure that the first time CEO getssupport.
But what's probably been the most, aspiring forme is betting on intellectual horsepower over
(18:48):
experience.
And that has been amazing to see a 30 year oldtake a business and transform it when no one
would have probably given them a chanceotherwise.
And so this alternative route toentrepreneurship that may have not happened.
If you have a former Google CS girl or guy thatwas at Stanford, they're probably gonna figure
out
how to do a start up
at some point, but the search fund might createthat incremental entrepreneur.
(19:09):
Exactly.
Like, if if you you
know, coming out at 29 and having worked at ahedge fund, you know, in in New York, that's
$10,000,000,000 plus AUM.
To say, hey, Rob, you're gonna be running ahundred million revenues video surveillance
business with hard hats and steel toed bootsten years later, I would have said you were
crazy.
But in the end, it was the most meaningful partof my career path so far.
What do you wish you knew before starting thiswhole search fund process over fifteen years
(19:33):
ago?
I always glorify the CEO role until I realizeall it is is dealing with problems and
negativity all day.
So you have to be a bit of an eternal optimist.
You know,
I I'd say the the the resilience that you'regonna need in this role is insurmountable, but
the meaning that you'll get is way greater thanthan most other career paths.
(19:53):
The other thing I would say is underestimating,the talent that you're buying into the business
and making sure that they're all feeling likethey're part of the story, because you're
you're brand new and typically new to theexperience and new to the industry, and that
can be quite overwhelming for people that havebeen around for a very long time in the
original business.
Allowing and getting getting buy in fromeverybody.
(20:14):
Yeah.
A lot of them have seen, you know, MichaelDouglas and Wall Street, and that's their
experience with buyers.
And so you have to very quickly let them knowyou're not that guy, or gal, and that you're
you're in it for the right reasons and and andlooking for growth as opposed to restructuring.
What is the biggest misconception about searchfunds?
One of the biggest misconceptions of searchfunds is that people think that the young
(20:34):
entrepreneur has no right to running a businessand that you need to have a lot more gray hair
and experience.
What I've learned is there's a lot you canlearn on the job, and you put a hardworking,
really smart person in a role, they can dowonders a year or two in.
Well, Rob, we've been friends since 02/2009, '2thousand '10.
I don't have the exact date, but it it's beengreat friendship,
and I appreciate you jumping
(20:54):
on podcast.
Thanks, David.
Looking forward to many more years.
Thanks,
Rob.
Thanks for listening to my conversation withRob.
If you enjoyed this episode, please share witha friend.
This helps us grow and also provides the bestfeedback when we review the episode's
analytics.
Thank you for your support.
Ended up finding a security business called, atthe time, UCIT Online Security in Toronto.
And six months later, we bought it from theentrepreneur.
And how did that play out?
Amazing.
It kind of exceeded my expectations.
So we bought this 5,000,000 revenue, 2,000,000EBITDA strip mall security business, and the
(00:21):
entrepreneur Sydney agreed to stick around andand kind of help us run Toronto sales while we
focus on strategy and growing the business.
And we grew organically 30% a year for thetwelve years I was CEO.
We just sold to a strategic as a hundred50,000,000 ARR business with 2,000 employees,
40 plus offices, five countries.
It was an amazing platform for us to kind ofcompletely change the profile of the business
(00:45):
and make it the largest independent remotevideo monitoring company in North America.
What is a search fund?
So it's a model for acquiring a smallestablished business, where a group of
investors would provide, funding to anentrepreneur or we like to call them a searcher
to go out and find a business to acquire,manage, and grow.
So they would spend up to kind of twenty fourmonths to find that business, and then they
(01:09):
would take over that business and run it day today.
So they would be the actual CEO and orpresident of the business.
Allows the searcher to take over leadership andcreate value through operational improvements,
market expansion, and strategy changes.
What are the historical returns for searchfunds?
There's been over 681 search funds formed inThe US and Canada since 1984 when the concept
kinda started out of Harvard and Stanford.
(01:30):
And and based on a 2024 search fund study byStanford, we're still tracking to 35% net IRRs
and a four and a half times ROI.
To play devil's advocate, assuming these kindof returns, why hasn't the space gotten bigger?
Why haven't institutional investors piled intoit?
And unpack that for me.
The most obvious answer is you're dealing witha micro caps, small cap space where you can't
(01:54):
put real dollars to work.
You're buying 5 to $30,000,000 businesses with,call it, million dollar checks, and and
institutional investors just can't put enoughmoney to work.
And so it's typically been, an asset class forhigh net worth individuals.
That's why it hasn't scaled to kind of theinstitutional platforms.
Unpack an individual search fund or search fundopportunity and tell me how it's capitalized
(02:15):
through its life cycle.
Typically, the searcher would raise, you know,call it 500,000 to a million to find the
business.
And that would essentially be funded by 10 orso entre investors that they've reached out to,
and so each investor would have 10% of theircap table.
Then those investors get pro rata rights whenthe searcher finds the business.
So let's say I find, you know, the best HVACcompany known to on Earth and I write a 50 page
(02:37):
SIM.
I then present it to my investors and say, Iwanna buy this business.
It's doing 10,000,000 of revenue, 2,000,000 ofEBITDA.
I wanna apply it for five times EBITDA.
I'm gonna put 50% leverage on it, so I need a$5,000,000 equity check.
So each of those investors would have their prorata rights for 500,000 in that example, and
they would then kinda buy that business onbehalf of the searcher.
You run a fund that invests into search fundopportunities.
How do you go about constructing the portfolio?
(02:58):
Talk to me a little bit about your strategy.
I'm investing in the entrepreneur to then lookfor the business, and then I'm investing in the
businesses that the entrepreneur buys.
My construct is having at least 10 to 20searches a year in my portfolio running and
looking for businesses.
I then choose which businesses I want to investin as my fund.
And then my portfolio construct would typicallybe about 70 percent through those acquisitions,
(03:21):
about 15% in follow on capital, and about 50%in in management fees.
How do you look at the TAM of search fundopportunities?
And walk me through from a top down level.
The space has grown significantly over the lastfifteen years.
To give you context, when I did it in 02/2010,there was no traditional search fund out of
HBS.
There was no traditional search fund out ofWharton, and there was one other group out of
(03:43):
Stanford.
And that was one of the first ever Canadiansearch fund stories.
Now there's dozens coming from each of thoseschools doing search.
And and the reason being is I think the the thereturns speak for themselves, but it's become
more institutionalized.
There's larger investors.
There's more of a playbook, call it more of atraditional path now because of the
opportunities in the microcap space.
And how does that play into what kind ofsearcher is attracted to this model?
(04:06):
Has that changed the dynamics in terms of who'sapproaching the space?
Great question.
You know, I I'd say, in my case, we're drivingaround all across The US and Canada, pitching
people, sleeping on friends' couches.
We're we're we're getting pro bono work fromaccountants and lawyers trying to craft
together this concept of a search fund inCanada.
And and now it's it's a little bit more, youknow, this is the PPM templates that typically
(04:29):
people use.
Here's the five law firms that people use.
So so with that, it it produces a wider rangeof searcher.
I will say there's still a lot of mypersonality, in in search, but there's also a
lot more call it, you know, sales CEOs ortechnology CEOs or strategic type personalities
that would have been probably less interestedin the asset class due to the risks fifteen
(04:51):
years ago.
Three joined has been invested in search andsearch acquired companies from 1986 to 2023.
From the Stanford study, 700,000,000, 20 5percent of that was the last two years.
So the asset class is blossoming, and and therisk profiles are definitely changing quickly.
A lot of these searchers are from elitebusiness programs like Harvard, Stanford.
How do they even come about deciding to be asearcher?
(05:13):
Maybe I'll give you my example, and then we cankind of triangulate.
So so here I am.
Right?
I'm I'm 27.
I go to the GSB.
I spent my summer at a hedge fund.
I had worked at McKinsey and Morgan Stanleybefore.
But everyone I look up to is a business owner,entrepreneur.
So so what do I do?
Do I go work somewhere institutional to thenget the corner office then wonder what am I
doing in my forties when I have dependents?
And that's where I step back and said, youknow, this is a really interesting asset class.
(05:37):
The risk is not taking the risk.
I had offers from those three previousemployers with, call it, bonuses to help pay my
tuition.
One had prepaid my tuition, and I ended uphaving to pay the tuition back.
And so when I look at, like, my profile at 23when I was working at McKinsey, when I look at
the salary, who I was living, my roommatesituation, my net worth, and then I look at 29
(05:59):
after the GSB.
So I have after paying back my tuition, I hadthe same bank account.
I had the same salary as McKinsey analyst, andand I actually ended up living with the same
roommate in Toronto.
And so it felt a bit bizarro world six yearslater, but the profile is someone who's not
doing it for the monetary reasons.
They're doing it for, call it, the career pathand the experience.
It's a fascinating concept to search on becauseyou find investors that will fund you for two
(06:22):
years to go find what you wanna do.
It's almost like they're funding a secondbusiness school for you.
Do you think that model could work in startups?
Say, a Stanford or Harvard MBA wants to gostart a startup but doesn't know what he or she
wants to do and needs a salary for two years?
Could a model like that work in startups?
Yeah.
It feels riskier.
Right?
So on the entrepreneur in residence concept ofstartups, you're you're you're essentially
(06:43):
funding someone to come up with an interestingidea that you'd then want to invest, and you're
caught buying a call option on a person.
That you'd almost wanna receive the deal,right, unless that person had deep, deep domain
expertise.
Here, it's a bit different.
You're investing in someone to buy atraditional business that cash flows, that's
been around for thirty years, that hasrecurring revenue.
(07:03):
And so the bet is that this person is gonnachange the business and make it better.
But but even if they didn't, you still have agood business.
In that example, the risk profile is verydifferent on betting on the person because
they're looking for a seasoned already provenentity as opposed to a start up where you're
you're betting twice.
(07:24):
Your business is default default alive versusdefault dead like a start
up.
Exactly.
So start up example, you're betting twice.
On the on the search example, you're reallybetting once.
You're betting on the person, but then whenthey actually find the business, the business
will speak for itself.
In 02/2009, when we first met, you went and youdecided to go down the search fund path and you
went to find a company.
Tell me about your process and tell me aboutthe deal that you did.
(07:46):
So in 02/2010, I wrote an independent whitepaper for one of my professors named Joel
Peterson on the microcap opportunity in Canada.
And it was clear that that space had hadopportunity, and so he's like, I'd be your
first investor of
It's a good sign.
So I was like, okay.
Maybe this concept makes yeah.
It's a good sign.
So then I, decided the risk would be higher ifI didn't have a business partner.
(08:07):
So I found a business partner named Eric who,lived in LA at the time, had been done banking
New York and PEV equity in LA, but also wasCanadian.
And we moved back to Toronto.
And we started our search in September oftwenty ten.
The concept was unknown, so we labeledourselves more as a private investment fund
than a search fund just because we didn't wannaspook people.
And and then, the LOI you know, the deals juststarted coming through.
And we ended up finding a security businesscalled, at the time, UCIT online security in
(08:32):
Toronto.
And six months later, we bought it from theentrepreneur.
And how did that play out?
Amazing.
It kind of exceeded my expectations.
So we bought this 5,000,000 revenue, 2,000,000EBITDA strip mall security business, and the
entrepreneur Sydney agreed to stick around andand kinda help us run Toronto sales while we
focus on strategy and growing the business.
And we grew organically 30% a year for thetwelve years I was CEO.
(08:55):
We just sold to a strategic as a hundred50,000,000 ARR business with 2,000 employees,
40 plus offices, five countries.
It was an amazing platform for us to kind ofcompletely change the profile of the business
and make it the largest independent remotevideo monitoring company in North America.
So walk me through the economics on the UCITdeal for you and your cofounder.
Sure.
In that example, we bought the business withinvestor capital.
(09:18):
And for that, we had a 30%, call it, upsidescenario where 10% of it would vest upon buying
the business, 10% would vest over a four tofive year vesting period, and 10% was based on
20 to 35% net IRRs on the return.
So we actually in this example, each had 15% ofthe upside of the business.
So you and your cofounder both had 15% in thedeal.
(09:39):
How did your investors do?
Three years in, we had, I'll call it a boardmisaligned perspective on EBITDA versus unit
economics.
And so at that point, we offered our investorstwo point five nine 2.55 net return, about a
35% net IRR.
And at that point, about a third bought, athird sold, and a third held.
From there, five years into the search, so afew years later, we did an acquisition where it
(10:02):
was around a four and a half times net returnto investors called, 32% IRR.
And then in 2019, we sold two thirds to aprivate equity fund at an eight and a half
times net 30% IRR.
Then we transacted five years later to Garda inOctober 2024, which the purchase price was
confidential.
But you can infer multiples of that.
(10:22):
There's a famous search deal, Asurion.
Tell me about Asurion.
Yeah.
Asurion was one of the legends of search fundlore.
It was founded in 1994 by, two Stanfordgraduates, Kevin Tweel and Jim Ellis, who
acquired a Houston based road rescue roadsideassistance carrier.
So you probably remember back in the day, we'dall pay $5 a month on our mobile phone and
(10:44):
never use roadside assistance.
Well, Asurion was one of the examples of whobenefited from that.
And so those entrepreneurs said, what else canwe sell into the mobile platform?
And they expanded by purchasing a business inspecialty insurance for cell phones and thereby
entering the mobile phone insurance sector.
Fast forward twenty years, thirty years,they're now the largest mobile insurance
provider in the world.
They're They're one of the largest extendedwarranty providers in the world, employing
(11:07):
20,000 plus employees.
And the returns to the original search fundersinvestors was over a hundred x, and some of
them who stuck around would be over a thousandx.
Tell me about your fund, Legate Partners.
Yeah.
So we we invest in search fund entrepreneursand the companies they build.
It's a way for me to pay it forward in thecommunity by investing in intellectual
horsepower and search fund entrepreneurs andthen supporting them in governance, sport, and
(11:31):
operational support.
And what industries are you going after in thefund?
Traditional.
Right?
I'm not we're not trying to get complicated.
When I when I read a sim and it gets tooblurry, you know, commodity trading, I I start
to say this is not for me.
So so, typically, business services, software,health care, and and basic manufacturing
industrial.
(11:52):
What do you look for when it comes to findingsearch fund entrepreneurs?
There's a half dozen or so criteria.
Right?
So so one is educational and professionalbackground.
Have they excelled at everything they've done?
Have they been top decile in everything they'vedone?
You're typically looking for business acumen orfinance related fields.
Second is is the skill set.
Right?
So you need them to be very analytical.
Right?
We need them to be numbers forward.
(12:13):
We need them to be extremely likable from anegotiation standpoint.
Personal qualities, resilience, we all know howhard this is.
Ethics and integrity are are critical.
Strategic vision is gonna be important.
Right?
They're gonna be buying a very small business,and how do they transform and change that
business into a medium sized business?
And and that takes a specific skill set.
And then, I guess, the final two areoperational expertise, right, familiarity with
(12:36):
the industry practices that they're buying intoand the change management that would be
required, and then finally commitment.
Right?
The last thing I need is someone to to quit twoyears into running their business.
I need dedication, action orientation, and anda personal investment into the business.
You have a bias towards likable CEOs, which Ihave a bias against, not because I don't like
likable CEOs.
Just my my experience has shown me that theytend to underperform unlikable CEOs.
(13:00):
Why do you have a bias towards likable CEOs?
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I do like likable CEOs, but probably more fairCEOs than likable.
And what I mean by that is I want someone whopeople gravitate towards.
Right?
They're they're buying a recurring revenuebusiness.
(13:21):
That that typically means you need to corralpeople around you.
You need to recruit new talent.
You need to set the culture, and then you needto expand.
And so we're looking for, in some cases, abuilder profile versus a visionary profile.
What do you mean by a builder profile versus avisionary profile?
What I mean by that is they already have theconcept.
Right?
And so even if they just rinse and repeat theconcept, they will have a successful outcome.
(13:43):
And so if if you bought, vacuum truck businessand you're cleaning up storm debris and dealing
with property maintenance companies, no need tochange the vacuum truck.
Just expand it.
Right?
Come up with new offerings, come up with newcustomer off.
And and that takes a skill set of buildingrelationships, building customers, hiring good
people, and and and versus saying I need tocome up with a whole new concept, a whole new
(14:05):
industry like a lot of the startupentrepreneurs you speak to.
And a lot of these search fund deals have coCEOs.
What are the best practices for making surethat co CEOs work well, and how do you manage
that process?
Yes.
It's very popular.
Returns are stated to be better with co CEOsthan than single entrepreneurs.
I think it brings a different skill set.
Right?
Like, I look at my business partner, Eric, andI.
We were very different.
(14:26):
I was focused internally as the CEO, and he waschief revenue officer and president focused on
biz dev m and a and sales.
And so that bifurcation responsibility reallyallowed us to focus and hold each other
accountable.
And what about decision making, tie breakingscenarios?
How do you manage having co CEOs in in thatcase?
There's two components there.
I think there's there's a level of respect andkind of radical transparency as to how you
(14:47):
feel.
And I think with Eric and I having beenbusiness partners for fourteen years, there was
many times we disagreed, but I think that wasthe healthy part of it.
Right?
How do we get to an agreement that then is bestfor the business?
You also have a board.
Right?
So investors do, in the end, own the business,and they have the governance, and they can help
tie break certain strategic decisions or keyhires.
Wanna unpack that?
So you and Eric have a key strategic decision.
(15:08):
It's not, you know, whether to hire this adminversus that admin.
It's whether to go into new markets, whether toinvest a substantial amount of capital.
What happens when you don't agree, and whathave you learned through those experiences?
Eric's very aggressive.
He's like, we should be open at 10 offices ayear, Robin.
I'm like, hey, Eric.
Let's just, you know, do four offices.
So how do you kinda get to that resolution?
I mean, in our case, we would typically kind oftalk with the pros and cons.
(15:30):
We'd kinda come up with rational, heroic trees.
We would talk about the pros and the the therisks inherent in that decision.
And in most cases, we would get to anagreement.
Or in some cases, we'd agree on certainmilestones that would then reset the triggers
of making a new agreement on that.
There were times where we might disagree, andthat's where we bring in our management team.
We bring in our board members.
(15:50):
And so there's lots of ways to kind of tiebreakas long as there's a lot of respect between the
two entrepreneurs.
Do you believe in
this concept of disagree and commit?
Meaning, you make an agreement, and then youmight not agree with it, but you have to commit
to whatever agreement you make.
I do.
Absolutely.
The inaction, in some cases, worse than actaction.
Right?
And so, yeah, I I as an entrepreneur, there'smany times, I think, where our management
(16:11):
disagreed.
But when we made a decision, everyone had torow in the right direction whether they agreed
with it or not because we needed to then getalignment.
We had a concept one team, one dream, and wehad to kinda move forward.
And we could always hold ourselves accountablesix months later and say, did this work or not,
and what's the postmortem here?
But to have an unaligned management team orboard or partnership would be catastrophic to
(16:32):
the business in poison.
Let's say that you knew that a decision was,quote, unquote, correct, but Eric was really
pushing for something.
Do you always fight for that decision?
Do you sometimes let your partner have it eventhough it might hurt the business in the short
term?
And walk me through managing both thepartnership dynamic while also managing the the
growth of the business.
It's business first.
Right?
So our responsibility is to dissent, and andEric and I had pretty rough skin.
(16:54):
There was many a time, I think, employeesfreaked out because because Eric and I would be
screaming at each other in a meeting.
We we actually really felt in that radicalresponsibility of of not taking it personally
and kinda standing up for what's best for thebusiness.
And so there's no question, that we should haveever backed down or or ever felt like we were
doing something for the partnership.
It had to feel like the right thing.
And if that made a decision take a week longer,so be it.
(17:16):
But it also meant that we had to be dedicatedto coming up with making that decision and not
just punting.
Sometimes you just needed more information.
It wasn't a matter of who's gonna win thisbattle.
It's you know, what are the nuances of thedecision, extra information, extra inputs from
other parties?
Exactly.
Though we might disagree on pricing plan.
Well, then let's just have a third partypricing consultant for the next two weeks.
Let's bring in our CFO.
(17:37):
Let's bring in our head of marketing, and wecan have a real conversation here and get to
somewhere as opposed to two people in a roombattling it out for no good reason.
There's this odd governance in search fundswhere you have the investors or LPs own a
majority of the company, but the CEOs actuallyhave control.
How does that play out?
In the end, it plays out in a few differentways.
One is board composition.
Right?
So the the investors control the board and thentherefore control a lot of the big productive
(18:02):
positions such as CapEx, spending, additionalfundraising, change in strategic direction.
The second is, performance based incentives.
Right?
So setting the compensation of the CEOs, makingsure that burnouts and and bonuses are based on
achieving specific targets.
Those are some of the ways to kind of aligninterests.
What would you like our listeners to know aboutyou, about Legate, about anything else you'd
like to share?
I'd like to let people know that that, youknow, in the end, I've learned a lot over the
(18:25):
last fifteen years, and I really loved thesmall cap space.
Right?
You can really make a difference.
You roll up your sleeves.
Everyone's doing as opposed to thinking.
And and it's that operator focus, isn't privateequity.
It typically is much kinder.
The SearchPoint community, is is focused on theculture and the people of the business and and
making sure that the first time CEO getssupport.
But what's probably been the most, aspiring forme is betting on intellectual horsepower over
(18:48):
experience.
And that has been amazing to see a 30 year oldtake a business and transform it when no one
would have probably given them a chanceotherwise.
And so this alternative route toentrepreneurship that may have not happened.
If you have a former Google CS girl or guy thatwas at Stanford, they're probably gonna figure
out
how to do a start up
at some point, but the search fund might createthat incremental entrepreneur.
(19:09):
Exactly.
Like, if if you you
know, coming out at 29 and having worked at ahedge fund, you know, in in New York, that's
$10,000,000,000 plus AUM.
To say, hey, Rob, you're gonna be running ahundred million revenues video surveillance
business with hard hats and steel toed bootsten years later, I would have said you were
crazy.
But in the end, it was the most meaningful partof my career path so far.
What do you wish you knew before starting thiswhole search fund process over fifteen years
(19:33):
ago?
I always glorify the CEO role until I realizeall it is is dealing with problems and
negativity all day.
So you have to be a bit of an eternal optimist.
You know,
I I'd say the the the resilience that you'regonna need in this role is insurmountable, but
the meaning that you'll get is way greater thanthan most other career paths.
(19:53):
The other thing I would say is underestimating,the talent that you're buying into the business
and making sure that they're all feeling likethey're part of the story, because you're
you're brand new and typically new to theexperience and new to the industry, and that
can be quite overwhelming for people that havebeen around for a very long time in the
original business.
Allowing and getting getting buy in fromeverybody.
(20:14):
Yeah.
A lot of them have seen, you know, MichaelDouglas and Wall Street, and that's their
experience with buyers.
And so you have to very quickly let them knowyou're not that guy, or gal, and that you're
you're in it for the right reasons and and andlooking for growth as opposed to restructuring.
What is the biggest misconception about searchfunds?
One of the biggest misconceptions of searchfunds is that people think that the young
(20:34):
entrepreneur has no right to running a businessand that you need to have a lot more gray hair
and experience.
What I've learned is there's a lot you canlearn on the job, and you put a hardworking,
really smart person in a role, they can dowonders a year or two in.
Well, Rob, we've been friends since 02/2009, '2thousand '10.
I don't have the exact date, but it it's beengreat friendship,
and I appreciate you jumping
(20:54):
on podcast.
Thanks, David.
Looking forward to many more years.
Thanks,
Rob.
Thanks for listening to my conversation withRob.
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