Rob LeBlanc – Designing an International Search Investment Firm

Live Oak Bank — Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle-market companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.

Hood & Strong, LLP — Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected].

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.

If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to August directly at [email protected].

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(3:47) – Which countries have features that make them attractive for searchers and which countries are on the come up?

(8:52) – How is conducting a search in other countries like “going back in time?”

(13:37) – What business models seamlessly transition overseas from the US?

(15:06) – How valuable is it to have an investor from the country you’re searching in?

(18:02) – What are some “bad” reasons to have a certain investor on your cap table?

(21:37) – How do you think about which companies where you want to be on the board vs. having a partner on the board?

(26:39) – What’s a situation where you wouldn’t be a good fit as an investor?

(27:53) – What have you seen with searchers struggling to fill board seats?

(30:22) – What personalities are best for leadership roles in search as the industry develops internationally?

(34:24) – Where do you typically find international searchers? Would you ever go overseas and try to find people who would be good fits in Search?

(40:00) – Where do you see Ambit over the next 5 years?

(42:17) – Where do most of the exit opportunities exist for international searchers?

(44:20) – What college class would you teach if it could be about anything?

(46:18) – What’s a strongly held belief you’ve changed your mind on?

(48:41) – What’s the best business you’ve ever seen?

Alex Bridgeman: We chat with mostly US based search investors, so one thing that makes the US really unique is the US has a really good mix of lots of businesses for folks to acquire, it has an investor base, so lots of folks who are used to investing in small companies, and then there’s all the support networks for transactions, there’s investment bankers, CPAs, law firms. So, the US is like a perfect place for small business M&A strategy. I’d be curious, from your investing in international searchers, what countries have enough of a mix of those features that make them investible to search? And which countries in your opinion are almost there, like in the next 10 years, they might become a little bit more interesting and more palatable for searchers?

Rob LeBlanc: Well, I think all of those things speak to some of the headwinds that searchers face in launching search funds in new countries, that you have to first convince an investor base that it’s viable. Then you have to build the structure and the template that requires legal and tax work to get a template up and running. And if you go even a step in reverse, you’ve got to find service providers who get it and are willing to apply their mind to the search fund problem in a new place. And then you’ve got to drum up your own deal flow and do your own investment. And so, the fact of the matter is it’s hard anywhere new. There are some markets that lend itself more to it because it’s easier. There’s more of those, call it, antecedent inputs there to make the ecosystem go. So, there’s big markets like that that have been scratching at search at greater scale for a while now. Germany is a good example with a very deep small business sector with sophisticated service providers and investors, but still, it has its hiccups there. It’s not flying by any means. Most of Western Europe falls into a similar bucket. Spain being an example where it’s really building steam and scale for a number of years now. Abroad, Brazil is building some pretty significant momentum, and then there’s brand new places that are just the tip of the iceberg that you would expect it to flow, like Australia being a good example. There’s less than a handful of traditional search funds there now, but you can see it evolving in a direction much like Canada has over the last 10 or 15 years where it becomes still a distant but not a far second to the US in terms of deal flow and number of searchers. Australia is a reasonably sized market and has all of those things that you mentioned, it’s just the precedent hasn’t really been set yet at great scale. So, it’s still relatively under the radar.

Alex Bridgeman: Yeah, I feel like some of that interest or increase in activity is partly just getting the existing market which has the ability to support a search, a couple searchers, just to get them familiar with what the model is and its purpose. And it sounds like Australia’s one of those. Are there a few others? I’m thinking of like Japan for instance, where there might be other options or other countries where this could survive or like this could work, but you just have to get the market used to the search model versus like building the infrastructure from scratch.

Rob LeBlanc: Totally. Japan’s a great example. There’s been, I think, two traditional search funds. There’s also been a search fund accelerator launched there with the support of a large investment bank. And with some of the structural factors in Japan, like a really aging population, big component of small business in the GDP, favorable debt, various government regulations and sort of tax incentives to keep small businesses alive and flourishing and transitioning from generation to generation. There’s a lot of structural tailwind to Japan working. We watch that market very closely. Another is in the region of South Korea. We worked on the first traditional search fund that’s just launched in South Korea. That’s another one that has some of those same call it demographic and regulatory tailwinds, we think. But I’ll say all this, your question sort of led us to maybe cherry-picking markets across the top that are big and interesting from a lower middle market and search perspective. But the funny thing about search is it’s a little bit like undertaking or setting out to date to get married, which is that on some level, you really only need to find the one, and there can be different shaped funnels all the world around that still yield a great looking asset at the bottom from the search process. And so, not to counter argue everything we just discussed about those sort of big and maybe obvious countries that might really work, we’ve invested in some very small markets but behind some very talented searchers that have a very, very clear and differentiated search strategy, albeit in a small market, that has led to great assets being found fast at a good price with great prospects in places that you wouldn’t really expect. They are very, very much under the radar. So, one example is like the Ivory Coast in West Africa or Paraguay, a small country next to Brazil that not a lot of people would pick as necessarily a headline destination for investment. But there are unique search strategies even though the top of the funnel might be laughably small to a US searcher. There might be like 80 firms on thesis in the country, as an example, or maybe 200 at the top of the funnel. And that would seem like a slow month for a searcher in the US maybe, let alone your entire search universe. You know what I mean? But perhaps counterintuitively, when the search is narrow and there’s few other people looking and sellers have even fewer options to exit, the right building blocks can still fall into place that it ends up making really good sense.

Alex Bridgeman: One thing we talked about was investing in search internationally is similar to going back in time in the US where search was very small. There was only half a dozen or a dozen searchers a year that were graduating business schools. What elements do you- Where do you see that play out, where like the search concept is still so new? Like, what does that kind of result in in some of these countries? You mentioned a little bit about that it’s just faster to acquire a company, but in what other ways is it like going back in time?

Rob LeBlanc: So, I think first and foremost, the way we think about that going back in time dynamic is in the searcher, him or herself. So, when you actually profile like the talent or the nature of the entrepreneur that wants to embark on pioneering a search in a new place, we think that that’s importantly, subtly but importantly shifted over time. In the US, it’s arguably a little bit more of a mainstream opportunity, and that’s not to take anything away from anyone launching a search fund now. It’s still a ridiculously difficult entrepreneurial endeavor. There’s no question about that. But the people who wanted to do it earlier in the US were maybe a little bit more maverick, a little bit more off the beaten track, a little bit more willing to swim upstream to make it happen. And that, at least to us, from an investment perspective, we gravitate towards that DNA, wanting to sort of break new ground in new places, because we think that there’s, on some level, a greater boldness and willingness to take risk and resourcefulness to figure it out and not fail. In that sense, we get excited by backing that pioneering talent, like I’m sure it might have felt like to back the first searchers in the US 30, 40 years ago.

Alex Bridgeman: Do you tell the going back in time story as part of fundraising with investors as well? I imagine that’s a pretty compelling idea that would be exciting to a number of folks, that not only can you get international exposure with search, but you can get a lot of that same early year dynamics in other countries.

Rob LeBlanc: I think that’s right. We do bring it up as part of our fundraising narrative to people that are interested, of course. And it resonates often with some of the oldest investors in search that were there for part of that pioneering. They recognize the distinction and are excited about doing it in new places more often than not. But I think on some level, our thesis where we’re trying to pioneer traditional search in new places leverages on that talent dynamic I’ve been describing quite explicitly. It’s find the pioneering talent that wants to go do it in new places and try to catch some of those outsized returns from people who go early. Because if you look at the distribution of outcomes across search historically, some of the biggest were earliest, and they’re still super compelling, but they are slowly contracting around the median. Not in a bad way – the median is still really high. But some of those huge outlier events were a little bit earlier than later. I hope I’m proven wrong in that statement over time. I hope there’s still enormous wins in North America in the years to come. But that’s a part of it for sure. And there’s another element that I think comes out in this replaying time. It’s never perfect, but it’s not just the type of talent that wants to go early, it’s also that they benefit from being able to copy paste ideas. So often what informs a search strategy in a new market is look for industries and in particular search assets or business models that have performed exceedingly well in the US. You have the luxury of searching for those types of assets by design from the start. So, in a way, you can find perhaps a better asset that has a little less execution risk in it by virtue of having seen the blueprint before. And we try to take chance out of that equation by making sure that, through our network, we bring in co-investors and even sometimes the former searchers that did it in North America to co-invest and even sometimes take board seats alongside of us in the emerging market so that you’re not guessing, hey, are we replicating that blueprint? It kind of looked like it worked this way. We actually try to get the folks that were in the room in the US that did it to co-invest and even sometimes, as I say, take board seats to take that guessing game right out of it. They can now directly help with and work with the searcher in a new place. Now, of course, even in saying that, you have to adapt to local context, and it’s never a perfect copy paste because it’s a different world and a different place and a different time, interestingly, so different resources and technologies are available to the entrepreneur. But that basic idea of sort of talent and idea arbitrage in the strategy is paramount for sure.

Alex Bridgeman: What are some examples of business models that you’ve seen carry over from the US to other countries more or less fairly seamlessly? And then I’d be curious also what models are you most surprised by that will work in other countries?

Rob LeBlanc: Well, in the newest countries, it’s obviously difficult to say. A lot of searchers are still even searching. So, they’re still in their two year search period. But for those assets that have been acquired, I mean, the transaction we participated in in West Africa is a remote video monitoring business and sort of fleet telematics or tracking of moveable assets. And both of those have done very well in North America, similar business models historically in search, especially the remote video monitoring. So that’s a business that we like a ton. And the West African sort of security, electronic security, and remote monitoring through technology is just so nascent, so greenfield that we think there’s just a huge wave to catch there. And again, with the benefit of some of the people in the room that have sort of been there, done that in North America, we’re hopeful that we can take a little execution risk out of the whole investment, although that remains to be seen. It’s pretty new. The searcher acquired the asset only in August last year, so it’s eight, nine months in the seat still. So, it’s early days.

Alex Bridgeman: Yeah, certainly. When you think of co-investors, it sounds like having someone who’s been in that industry before, run that type of model, is obviously really valuable. How valuable is it for you to- like, if you’re investing in a searcher in Paraguay, how valuable is it to have an investor of yours from Paraguay who can help the searcher with stuff that you might not be aware of? Like you might be, I’m sure you’re great at helping folks understand running a business and different business models and pairing with investors who could help, but for local customs in Paraguay that are very specific or specific laws or accounting rules, how helpful is it to have local investors in each of these markets to help with your searchers?

Rob LeBlanc: I wouldn’t say it’s helpful, I would say it’s indispensable actually. So, for us, it’s a must have, and we often try to solve for that upfront in scrutinizing the cap table of the search fund before we decide to invest. So, we look for typically four buckets of co-investors. Some in some other international serial search fund investors like ourselves. The other is ideally ex-searchers from the region, if not the country itself. Sometimes, obviously, if you’re first in a country, it’s impossible to find a searcher directly from that market, but then someone who’s experienced in an adjacent market or who maybe, although they didn’t run a traditional search fund, might have gone self-funded or an entrepreneur in residence model in an adjacent or similar country, just their experience with the lower middle market entrepreneurship through acquisition journey more generally. The third bucket is what you mentioned; it is local investors with deep market expertise and knowledge of all the things you mentioned – customs, norms, market trends, regulation, accounting and tax provisions, et cetera. And then the fourth bucket is often local, but not always, but we see them as more like character-based investors that have known the searcher for a long time outside of the search fund context. So, it could be like a university professor, a grad school professor, a mentor, a former boss, even an uncle or a father-in-law. And the reason for that is that it’s someone who can actually vouch for the searcher’s integrity and character and work ethic over a longer period of time than just a capital raising cycle that we get to know the searcher through. And that’s someone who can vouch for how they deal with adversity, how they problem solve, the types of relationships they maintain over time, et cetera. So those four buckets, international, serial search and ex searcher who’s experienced in the region, very, very sophisticated, capable local investors, and then character investors, family and friends basically. And then come deal time, we also like to add a fifth overlay, which is industry expertise. But of course, at the beginning of the search, you don’t necessarily know where that’s going to land, but that’s a fifth thing we try to pile on in a cap table at the end come acquisition time.

Alex Bridgeman: At least one other thought I was having, which is when you’re thinking of the reasons you want certain investors to invest with you, and you laid out basically the core buckets including I want someone with industry expertise who knows me, someone who’s familiar with the search fund model, that sort of stuff. What are some bad reasons to want a certain investor on your cap table?

Rob LeBlanc: It’s like a how long is a piece of string type question, I guess. I guess there’s a lot of bad reasons. I think one that jumps out-

Alex Bridgeman: What are some common ones?

Rob LeBlanc: One that jumps out is probably name brand or sort of signaling or like the gravitas of like a big-name investor. That can help, but I think a lot of people would argue through experience that it’s actually sort of capacity and availability that can matter more than name brand or gravitas because if you don’t get that- Look, top firms are top firms for a reason, and great investors develop a reputation for good reason. But if that great investor or that great shop is not focused or attentive or responsive or ultimately able to allocate the resources to your own search for the transaction that you expect, you can find, I think, a disconnect there between sort of reputation and lived experience. So, that’s one piece. The other is probably speed. So, it’s impossible as an entrepreneur to turn the shock clock off, so to speak. You always want to go fast, and sort of dollars in the door now I think sometimes are inappropriately weighted for the time it takes to get there. Because it’s just so pressurized, if you’re trying to raise your search at the outset or you’re trying to close a transaction, like the LOI exclusivity period has a clock to it and you’re trying to close and you’re trying to finish, and it’s so easy to take the first dollar available. But I think it’s important to maintain some perspective and process discipline, which is that if you get this right as a searcher, you’re probably going to be operating the asset for 5, 7, 8, 10, 15, even a career actually, years. So, try to keep perspective and not trade weeks or months for what could be decades by hustling in the wrong cash. You want people who understand the thesis to bring that type of outside expertise you mentioned, and super importantly, that you share values with. It’s really a long-term partnership, so you want to see that people look at the world in similar ways and want similar outcomes from working together rather than just, it’s a lot more than a check so to speak. So yeah, probably chasing names and chasing quick cash, I would say, is what it boils down to. That’s just two that come to mind. There are many others, I’m sure.

Alex Bridgeman: Yeah, that’s been the challenge with a few searchers – when they take a check from someone who is on a lot of boards or invests in a ton of searchers, they’re not able to glean a lot of that person’s expertise, which can be unfortunate at times, although they’ve usually rounded out their cap table with others who can, so it’s not necessarily an issue. But I just find it interesting how investors decide to allocate their time amongst the companies that they’re invested in and how some will share board activities with another. So, if they work with one particular investor a lot, then they might split boards. So, each of them will go on kind of half the companies that they invest in. But when you think of yourself, I imagine there’s- it sounds like there might be a handful of other search investors who are on a couple of these boards. But when you think of your own time at your own firm and being helpful and attentive to the companies that you’ve invested in, how do you think about which companies you try to be on the board of versus ones you try to have a partner on the board of or someone else who you know really well who can be on that board and kind of be your voice and ear to that company?

Rob LeBlanc: That’s a great question. And it’s not an easy problem to solve, I think, for any investor in their portfolio. The way we think about our first fund and the construction of it and the allocation of our time is we think that we’ll end on between 20 and 25 acquisitions. There’s three of us. So, it’s myself and two partners, Andrew and Neil, and it’s all we do. This is our full-time job. We work with searchers around the world, especially pioneering in new places. And we’re pretty active and pretty responsive, we try to be anyway, with all of our searchers. We think that we’ll end up taking between 3 and 5 board seats each. So, I mean, do the math, that’s between 9 and 15 of potentially 20 or 25 assets that we’re directly in the room helping as a director. And that leaves anywhere from say 5 to 10 companies, depending on where the portfolio lands, that are uncovered, and there, you’re right, that’s where we work on cultivating strong trusting relationships with some of our most frequent co-investors because it’s never explicitly by design, but there is sort of a quid pro quo. It’s like if we know you guys are on that one, it gives us some comfort that you guys are on the other one. And there’s a degree of certainly uncoordinated but practically quite effective coverage across a lot of these boards. Especially in new markets, there’s a pretty recurring list of co-investors that we work with a lot. And in that sense, we hope to get coverage there. And then of course you have to have a good relationship and ultimately be invited by the searcher. I mean, it’s not our place as a minority investor to dictate our place on a role, let alone everyone else’s. So, the first lens we apply to boards is we want it to be a highly functioning board that maximizes the searcher’s chance of success, first and foremost. That’s the engine room of returns for any search investor, that the searcher shoots the lights out. So, it’s about actually getting the best board, not whether or not we’re on it. We recognize we’re not the best fit in the investor group on every given portfolio company that we do invest in. So, we try to solve for those buckets we were talking about earlier, which is great industry expertise, great local knowledge, ideally an operator’s lens in the mix, ideally an investor’s lens in the mix, and then at least one serial search fund investor who brings sort of the norms and pattern recognition and sort of model expertise from the US, if it’s not us. And so, once all of those things are covered, if it happens to be us and we’re invited, great, we’re thrilled to step up. If we’re not, we want to make sure that the searcher’s thinking about it the right way and building the best possible board she or he can. That’s that. Then the way we think about our allocation is there’s some practical elements, like where do we live in the world? Where is the portfolio company? Is travel relatively expedient? Are there ways to cluster those boards? So that if, say for example, it’s me living in Vancouver taking one trip to Sao Paulo for a Brazilian board, do I also work with a company in Paraguay and maybe Columbia so that it’s twice a year, you can do one trip and get back and be home with the kiddos and not be away from home too long, as an example. So, there’s some clustering. There’s also industry expertise. And related to that clustering, there’s some, even though we’re a global search fund investor, you can start to develop some local market expertise in countries and industries that you invest in a lot. And that’s probably, let me see, yeah, geo, industry clustering, practicalities of travel, overlaid by whether or not the searcher thinks we will add value in the seat is sort of the factors we think about. We’ve done- So for context, our fund one so far has invested in 32 search funds in 20 markets, and we’ve done 5 acquisitions now; we’re working on sort of our sixth, seventh, and eighth right now. And of those first 5, we’ve taken four board seats. So, a little bit more active early on in the portfolio. It obviously won’t scale, as we get a little bit bigger, we’ll be full soon enough, for fund one anyway. And then we’ll probably revisit in a few years’ time. But it gives you a sense of our activity to date. And I think the newer the country, the more likely we are to step on because we’ve been more active in supporting those ones. To illustrate the one board we’re not on, it is our one investment in the US, which is oversubscribed by tremendous co-investors that are way better than us, so they’ve taken board seats, and we’re happy to sit back and observe and learn.

Alex Bridgeman: Nice. You mentioned a little bit that there might be some companies or boards or searchers where you’re maybe not the most helpful investor for. What kind of situation would that look like?

Rob LeBlanc: So often it’s geography, more industry. I mean, of course, we bring a strong generalist skill set as a serial search fund investor. And there’s no board that we don’t feel like we could get in and roll up our sleeves and help out. But when we stack it up against other investors, other members of the cap table maybe with an operating background in the industry or a local context, we just don’t see ourselves as as good as or better than other people. But this is interesting coming back to your question earlier about capacity and availability. Sometimes you find deals that the searcher really struggles to fill the board seats because maybe those perfect individuals, from a skill and experience perspective, are not willing or able. And there, we’re actually very quick to put our hands up because we take kind of the opposite approach, which is if not them, then who, and we feel like if it should be anyone, it should be us because we can at least get in there and work hard and do the best we can compared to anyone else. So, in the absence of anyone better, we’re happy to step in.

Alex Bridgeman: You mentioned that some searchers in international markets have had a hard time filling their board seats, and then you quickly put your hand up. But I feel like there’s a deeper observation there. Like, what have you seen with some of these searchers trying to fill boards where there’s not necessarily that existing search fund ecosystem within that country? Like if they’re the first in that country, then they’re the first; there’s no other searcher who’s done it and done that playbook there. How do you kind of think about that challenge in a nutshell?

Rob LeBlanc: Yeah, so look, building a board is a challenge at any time, but in a new market, you really have to try to solve for those buckets we’ve been discussing separately and for the first time. So, you get some serial search fund investors from overseas, some great local family offices or high net worth executive entrepreneurs to fill some of the industry and country expertise gaps. But then that first group is really going to become the one and only sort of search board with experience in that country. So when you think of the ecosystem level, if a new searcher wants to raise and search in that country in quick succession, you immediately have sort of a directorial capacity gap, which is it’s unlikely that that board is going to copy paste and replicate because some are probably on other boards, the local investors are probably busy with other local pursuits, and the idea of or the notion of putting together that exact same board in the next search fund doesn’t exist. So, there’s a little bit of like local search community genesis work that any first searcher has to do. And there has to be like a multiplier effect into the community to get that going. And so those first investors have to probably crowd in more. Those first directors probably have to crowd in more. And for a second, third, fourth, fifth, and so on searcher in a new country, really a community needs to build around the search fund asset class. And you do see that happening. Like Brazil has got an incredibly buoyant and fast-growing community, particularly of local investors that it’s building slowly directorial talent. Australia, I would say, is even earlier, but another great case study of local investors really digging into the model deeply and building capacity and skill to take board seats in the future. In fact, there’s going to be the first search conference for Asia Pacific or Australasia later this year in September. That’s a great example of that community of investors and searchers in that ecosystem building in new places.

Alex Bridgeman: Yeah, it’s kind of interesting because the US had maybe a half dozen to a dozen searchers for a few decades until the past kind of five, six years of really rapid growth in the search model. And so, it kind of laid this foundation of all these past searchers who had exited their businesses and were now able to take on more capacity as an investor and leader with other new up and coming searchers. So, it’s kind of like there’s going to be a lag in some of these international markets of maybe four to eight years as the current searchers exit and become investors themselves, even though the model itself in the US is becoming really popular and it’s quickly becoming popular elsewhere, and folks have the internet or blogs, podcasts, articles to start reading up on it. So there’s more information than there was in the early days for the US searchers. So, it seems like interest in search is growing really rapidly as it is like in the US today. But that investor base hasn’t had time to grow to the same extent. So, when you think of like that gap, are you trying to fill it with kind of current business owners in these countries or find others in the US who can come over and help? Like what types of personas are really good fits for filling that kind of leadership gap?

Rob LeBlanc: I think it’s a mix. It’s probably an and or all of the above. Truthfully, it’s probably search fund investors like ourselves that are building their team and capacitating their team at the next level. So maybe it’s not just the founding partners, but it’s a group of younger principles or even associates that over time are growing into director-like roles at portfolio companies, especially abroad. So that’s bringing that sort of serial search fund investment skillset to new markets. And then there’s local investors in those markets that almost need to be trained up in reverse, which is sort of what is the search fund model and how does that work, and why is the search fund board different than other boards, and how can you best support the searcher, et cetera, in market. And the most common we see is usually family offices that have created wealth scaling and exiting small private companies, usually. Or the wealth has been created usually investing in alternative assets but traditional ones, so like venture or private equity or real estate or infrastructure, and they come to search by sort of looking at it as a new but different alternative asset. But regardless of how they’ve created their wealth as a family office, they have deep sort of local market expertise but usually less familiarity with the traditional search fund model from overseas. So, the training for them needs to be almost the inverse of folks coming from the traditional model in North America. But all of those things need to happen probably concurrently because you actually want that mix of skills and experiences on a good board. So, you need all buckets of talent to grow concurrently in all of these markets if you’re not going to be faced with a sort of wholesale constraint. At the searcher level, each new fund in a new market, if it has to solve for its board and two years from now, we need to be sort of thinking a little bit about the directorial talent upstream now, which is what we spend a lot of time as a firm thinking about because we know that we’ve got maybe 10, 12 board seats and us, three of us, and then we’re done, and most immediately for the next sort of six to maybe eight companies in our portfolio, if there aren’t great boards on those portfolio companies too, then we worry about the quality of oversight and support in our own portfolio, just speaking only to our little, tiny fund one effort. If you think ecosystem wide, it’s an even greater constraint. I would argue that, just crudely doing the math on the number of search funds launching and the number of active investors in the game, it’s probably, if the number of searchers launching is growing at like 8X, board talent is probably growing at like 2X, I would say. So, those lines diverge pretty quickly. And I think it’s a binding constraint on keeping returns high and searcher and investor experiences rich.

Alex Bridgeman: Where do you typically – I have two questions here –where do you typically find most of these searchers in other markets? Are they reaching out to you? Or do you go to speak at different MBA programs or schools or business communities? And then would you ever go to a country that you find really interesting, like India, for example, and you just go and look around and see if there’s anyone there who should be a searcher and you try to convince them, I mean, not convince them, but you just show them the model and see if they’re interested in it?

Rob LeBlanc: Both great questions. So, from meeting searchers, let me start there, we find we connect with folks four ways. For better, for worse, the most common place to connect is still on campus at the top business schools that teach the search model. So, there we have relationships with a lot of the profs who teach ETA at those schools. We, ourselves, actually are working on the first MBA level course here in South Africa to teach search for the first time at the MBA level on the continent. That academic connection is rich because if there’s one searcher at Stanford who’s thinking about Vietnam and they’re in the class, they’re going to be the one that stands out to faculty there. And if you’re the one person interested in search in Southeast Asia, of course, uniquely true, but it’s likely that you get a little nod and an intro. So, from profs. The other is the on-campus clubs, which you’re familiar with. We often do some search and frontier market type webinars for those clubs. We meet students that way through the clubs. So, on campus is one. The other is co-investors. So, as I mentioned before, there’s a relatively small subset of serial search fund investors that have interest in new and emerging markets. So, because all of us, no one takes a majority position, everyone’s looking for complimentary minorities on the cap table, we often are introduced to searchers from co-investors, and we do likewise all the time. The other is our searchers. So, we’ve invested in, as I mentioned, about 32 now. And so, often, searchers as part of their own due diligence on whether it’s possible to launch in a particular market or new market, reach out to frontier market searchers that they sort of find them in their due diligence and their research. And then sometimes our searchers refer those searchers through to us from those conversations. Then the last is just the open market, like LinkedIn or info at Ambit Partners, we hear from some searchers. And in general, it tends to be inbound. We’re quite a small firm and a small team. And so, we don’t have like outbound marketing, or we live, for most of the year, most of us are in South Africa. So even getting over to the US campuses, where most searchers still come from, is a big effort. So, we’re not able to do that just yet. On the country question, that’s a great one, and I think it’s probably something that surprised us. If you thought about when we launched the strategy or we first matched our passion and interest and experience with doing search in frontier places, we probably would’ve taken a top-down view of country, a little bit like you started out with the first question, which is like what market is obvious, like Germany, Japan, Australia. And on some level, that’s true. And searchers are seeing that too, so there’s sometimes a correlation between a country you think would be obvious and a searcher, a great searcher who launches a fund there. But we’ve actually found the opposite to be true, which is we’ve almost in the end taken no view on country and simply let the talent take us there. So Ivory Coast and Paraguay, the two I mentioned earlier as being quite small, quite frontier and quite obscure if you think of like a global investment strategy, purely based on talent; it was the searcher’s own conviction to go there, their own investment case in their PPM and raising that we just found so compelling that then we did the work on the country, if you get my point. So, it’s sort of like the talent first and then the country. And the unique thing about a search investment structure, as you know, is you get the search period to sort of really make a more informed decision on whether you want to cut a bigger check. So, in both instances, we’ve been able to do more work on the country in parallel to the searcher searching such that come acquisition time, we then develop our own sort of independent comfort on the market. But we’ve found that our country views are much less relevant to whether or not there’s someone talented who wants to go do it. And the other thing, too, is we’ve convinced ourselves, rightly or wrongly, that you should never convince a searcher. We would go so far as to push the idea that you should never even suggest to someone that they do it, and then if they end up doing it, still invest in their search fund because you wouldn’t know if the origin of the idea was sincere enough to be sure of the real conviction that it takes to go succeed in something that hard, if you get my drift. Like we, from past experiences, have struggled sort of presenting opportunities to people and then feeling like the urgency and ownership and drive behind that idea was wanting when it got really difficult. So, with a search, we just know it’s so hard and it’s so difficult to pull it off that we would want that to be a hundred percent self-starting, if you know what I mean. It’s got to be someone who’s independent of us, thought about it, and developed their own conviction on a market. If we felt we tainted that exercise at all, we might not believe they were sincerely sold on doing it.

Alex Bridgeman: Yeah, that’s a really good point. Where do you feel like the next five years for Ambit Partners will go? Like what are you most excited to see play out?

Rob LeBlanc: Well, headline, we’d love to see our first fund be a great success. And underneath that, a layer, just this idea of traditional search working in new places being validated across the cycle from great new pioneering talent, wanting to go into more frontier markets to those individuals finding less competition on the buy side in those markets because they’re underserved by private capital at the lower end of the middle market. Then once they buy those assets, we believe that there’s perhaps more scope for professionalization and digitization and more fragmentation and lack of competition in those markets. So, we think that they’ll be able to grow faster and build, especially in a regional context, assets that are more exciting. And then another thing, we haven’t really got on this yet, but at the tail end, we feel that there’s a surplus of later stage growth private equity that’s been raised in a lot of these markets that’s struggling to find deal flow because a lot of the companies, the size that they want to buy are either part of a messy family business, a venture backed startup, or say a division of a multinational, and they’re not sort of like a small searcher led business getting ready for exit at $8 to 10 million of EBITDA. Whereas if you take, especially in Africa where we’ve done a lot of our work, there’s such a scarcity of that type of deal flow, even in the mid-market, but there’s huge mid-market private equity firms that have been raised and have generally struggled to find great deal flow. So, we think that the chance for multiples expansion could be even higher in emerging markets than in North America. So, we hope all those things prove true and that we concurrently don’t get smoked by currency devaluation working too far against us in too many currencies. And yeah, by then, hopefully we’re onto a fund two, and it’s not such a novelty that search can work in frontier places.

Alex Bridgeman: Your exit point was really interesting. I’d be curious where most of the exit opportunities exist for these international searchers. Is it mainly some of these private equity firms that are really hungry for deals, family offices, other larger strategics? I imagine kind of a mixture of all, but what are some of the most interesting ways that searchers tend to exit these companies or might exit these companies?

Rob LeBlanc: Yeah, I mean, in new places, of course, we’re devoid of any feedback just yet. It’s all still just cooking rather than ready. And that’ll be true for a number of more years. But I think, in terms of buckets of exit strategies, I don’t think they’re any different than back in the US. It’s going to be gross stage private equity as strategic, leverage recap. And maybe one thing worth pausing on is we do think the long-term hold is perhaps of greater likelihood in emerging markets because there’s a chance of building a real regional leader that is sort of a number one in its market or even its region and continuing to hold it and scale it with the market lead actually just continues to make sense. But in terms of those other three conventional buckets, we think that most exits will still come from that, those avenues, but probably more likely the sale because I think the leverage refinancing debt is generally not as available or as cheap, or the banks don’t have the same kind of appetite that North American banks do to lending into a small private company for something like a dividend recap. It’s just culturally and commercially not as viable in some of these places. But we do think, as mentioned earlier, that there’s a lot of hungry private equity firms, family offices increasingly, and then regional corporates make a whole lot of sense for strategic exits. But it’ll play out sort of asset by asset over time. And so, it’s a little bit too early to say.

Alex Bridgeman: Certainly. It’ll be interesting to see how that plays out as well. We’ll have to keep chatting about that as we go. Moving to closing questions. What college class would you teach if it could be about any subject you wanted?

Rob LeBlanc: I thought about search funds because often they’re only taught at the MBA level. So, if by college, you mean undergrad using sort of American vernacular, then search might be interesting. If I had to get out of my comfort zone but stay on business, I would probably actually say a sales course. Weirdly enough, there’s tons of business school classes on marketing, but no one teaches sales, and sales is the lifeblood of any business, especially a small private business. You’re going to sell your investors raising capital. You’re going to sell your team joining, signing up for the vision. You’re then actually going to sell customers on your products and services. And then you’re going to sell to someone buying your company to exit. So, it’s remarkable to me that there isn’t more just boots on the ground, tactical sales courses. I, for one, in my business school program, my MBA, there was no sales course. There was negotiation, which can touch on sales, but it’s not exclusively a sales thing. So, sales. If you had to push me out of the business realm entirely, I would teach something on the intersection of sort of religion, philosophy, and environment, and that replaced humanity, I guess, in the context of just the ecosystem, sort of reframing us as, instead of like lord and master of the earth, having dominion over it as is taught in sort of Judeo-Christian worldviews, rather just a citizen of a whole and that we’ve got a bigger part to play, but just as a lowly but perhaps sentient citizen. And I think that that would move a long way into tackling big problems like climate change and clean water and clean air if we thought of ourselves in a more humble rank order, I think.

Alex Bridgeman: Yeah, I like all those; those are really good ones. What’s a strongly held belief you’ve changed your mind on?

Rob LeBlanc: That’s also a good question. I think for me, I’m doing away- let me back up a second. In undergrad, I did a BComm, but with minors in environmental studies and economic development, so always interested in sort of profit with purpose, social enterprise, impact investing, these terms that even 15 or 20 years ago when I was in college didn’t yet exist in the mainstream. But as I spent time in my MBA program, I spent a lot of time on impact investing and social enterprise. And I think 10 years ago, if you asked me, I had tons of conviction that was the future. And I think now I don’t. I’m not so sure it’s a thing that social enterprise or impact investing is a thing because I think it’s difficult if you chase- it’s too easy to put an impact narrative in front of things that are sustainable commercially. So, it’s very easy to chase sort of a feel-good story and not worry about the fundamentals. And I’m more and more convinced, this could just be age and getting a little more jaded and cynical, but I think that you have to deal with sort of commercial fundamentals first but make sure that value is created in a way that looks after all stakeholders and that companies are led by good people with sound morals and lots of integrity and good character. So, it’s sort of like doing good old fashioned normal business but doing it well. And impact investing, social enterprise will not so much be a sleeve of investing. It’ll just become good investing, actually, thoughtful, long term, sustainable investing that the things out there attracting capital are things that are going to look after our kids and our neighbors and the air we breathe and the water we drink, et cetera, just almost by definition. Otherwise, it’s just sort of destructive investing and like long term value destroying actually. So, I think my own journey over the last 15 years has been very outspoken, almost militant sort of impact investing to like maybe it hasn’t done as much good as just normal fundamental stuff done well, if that’s been at all clear.

Alex Bridgeman: Yeah, that makes a lot of sense. That’s interesting. I like that one. What’s the best business you’ve ever seen?

Rob LeBlanc: So, lots, but I would argue, having lived in South Africa for the last 10 years, I’m going to share a local name here which you may not have heard of, but it’s called Discovery. It’s originally a health insurance company, but it’s dabbled in a lot more stuff now. And in particular, one product innovation that they had here is called Vitality. And now Vitality is scaled all over the world, and it makes Discovery one of the more valuable companies on the Johannesburg stock exchange. The one thing they fine-tuned is they got human behavior and incentives working in the same direction. So, it’ll sound simple in hindsight, but their pretty game changing innovation is that they allowed people’s health insurance premiums to go down if they lived a healthy lifestyle. I know that sounds crazy, especially in an American system, but they set up very simple things first. It was just if you got a health checkup every year, they just had very like causal metrics from that checkup, like your heart rate, your resting heart rate, your cholesterol, your blood pressure, a few normal- hours of sleep you were getting, the amount of caffeine you were having, sugar, how much and how often you drank, how often you had fresh fruit and vegetables, et cetera. And they were able to, in their actuarial science, just know from that data, if you were going to be a claim against your premiums or not. So, what they were able to do from the data is to start basically saying, if you keep doing this year on year, your premiums will come down. They were happy doing that as a business because they knew that you would claim less. And everybody wins; their economics improve, your life improves, you tell all your friends about the cheaper health insurance premiums that you’re getting. So that like behavioral insurance innovation – this is nothing new, they started this like 20, 25 years ago – but it scaled here locally quite quietly for a long time. And then it diversified into other stuff. They now have like Vitality insure for cars and Vitality insure for basically anything you can apply your behavior to, and the better you get at it, the cheaper insurance gets. And they’ve now scaled all over the world. I mean, you can get it now in the States and Canada and the UK and Japan and Australia. Sort of everywhere, you can get Vitality products overlaid on top of your insurance, where your premiums come down if you do the things ironically that are better for yourself. So, I find that a compelling example of just alignment of fundamental business done well with a healthy alignment of incentives and then a beautiful like recurring business model with light CapEx, highly sticky customers, all those things that we love from the search fund world.

Alex Bridgeman: Yeah, that’s a really good one. I haven’t heard of that one before, but that’s definitely an interesting one. Thanks so much, Rob, for coming on of the podcast. It’s been great to chat with you. I’m glad Alex Meers was able to introduce us and get us to chat. So, thanks for sharing a little bit.

Rob LeBlanc: My total pleasure. I’m also very grateful to Alex for connecting us. It’s been a distinct pleasure chatting. And thanks for having me on.