How I Invest with David Weisburd
E145: Is a 35% IRR Really Achievable? Exploring Search Fund Returns
Tue, 11 Mar 2025
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.
Chapter 1: How did Robert Cherun find and scale a successful business?
We ended up finding a security business called at the time UCIT Online Security in Toronto. And six months later, we bought it from the entrepreneur.
And how did that play out?
Amazing. It kind of exceeded my expectations. So we bought this 5 million revenue, 2 million EBITDA strip mall security business. And the entrepreneur Sydney agreed to stick around and kind of help us run Toronto sales while we focus on strategy and growing the business. And we grew organically 20, 30% a year for the 12 years I was CEO.
We just sold to a strategic as 150 million ARR business with 2000 employees, 40 plus offices, five countries. It was an amazing platform for us to kind of completely change the profile of the business and make it the largest independent remote video monitoring company in North America. What is a search fund?
Chapter 2: What is a search fund and how does it work?
So it's a model for acquiring a small established business where a group of investors would provide funding to an entrepreneur, 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 24 months to find that business. And then they would take over that business and run it day to day.
So they would be the actual CEO and or president of the business. It allows the searcher to take over leadership and create value through operational improvements, market expansion, and strategy changes. What are the historical returns for search funds? There's been over 681 search funds formed in the US and Canada since 1984, when the concept kind of started out of Harvard and Stanford.
Chapter 3: Are 35% IRR returns realistic in search funds?
And based on a 2024 search fund study by Stanford, we're still tracking to 35% net IRRs and a four and a half times ROI.
To play devil's advocate, assuming these kinds of returns, why hasn't the space gotten bigger? Why haven't institutional investors piled into it and unpack that for me?
Chapter 4: Why haven't institutional investors dominated the search fund space?
The most obvious answer is you're dealing with a micro caps, small cap space where you can't put real dollars to work. You're buying five to $30 million businesses with call it million dollar checks and institutional investors just can't put enough money to work.
And so it's typically been an asset class for high net worth individuals, but that's why it hasn't scaled to kind of the institutional platforms.
Unpack an individual search fund or search fund opportunity and tell me how it's capitalized 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 or so entrepreneurs, investors that they've reached out to. And so each investor would have 10% of their cap table. Then those investors get pro rata rights when the searcher finds the business.
Chapter 5: How are search funds capitalized and what is their lifecycle?
So let's say I find, you know, the best HVAC company known on earth. And I write a 50 page SIM. I then present it to my investors and say, I want to buy this business. It's doing 10 million in revenue, 2 million of EBITDA. I want to buy it for five times EBITDA. I'm going to put 50% leverage on it. So I need a $5 million equity check.
So each of those investors would have their pro rata rates for 500,000 in that example. And they would then kind of buy that business on behalf of the searcher.
You run a fund that invests into search fund opportunities. How do you go about constructing the portfolio? Talk to me a little bit about your strategy.
I'm investing in the entrepreneur to then look for the business. And then I'm investing in the businesses that the entrepreneur buys. My construct is. having at least 10 to 20 searchers a year in my portfolio running and looking for businesses. I then choose which businesses I want to invest in as my fund.
And then my portfolio construct would typically be about 70% through those acquisitions, about 15% in follow on capital and about 50% in management fees.
How do you look at the TAM of search fund opportunities and walk me through from a top down level?
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Chapter 6: What is the strategy for investing in search fund opportunities?
The space has grown significantly over the last 15 years. To give you context, when I did it in 2010, There was no traditional search fund out of HBS. There was no traditional search fund out of Wharton. And there was one other group out of Stanford. And that was one of the first ever Canadian search fund stories. Now, there's dozens coming from each of those schools doing search.
And the reason being is I think the returns speak for themselves, but it's become more institutionalized. There's larger investors. There's more of a playbook. Call it more of a traditional path now because of the opportunities in the microcap space.
And how does that play into what kind of searcher is attracted to this model? Has that changed the dynamics in terms of who's approaching the space?
Chapter 7: How has the search fund ecosystem evolved over the years?
Great question. You know, I'd say in my case, we're driving around all across the US and Canada, pitching people, sleeping on friends' couches. We're getting pro bono work from accountants and lawyers trying to craft together this concept of a search fund in Canada. And now it's a little bit more, you know, this is the PPM templates that typically people use.
Here's the five law firms that people use. So with that, it produces a wider range of searcher. I will say there's still a lot of my personality in search, but there's also a lot more, call it, you know, sales CEOs or technology CEOs or strategic type personalities that would have been probably less interested in the asset class through the risks 15 years ago.
$3 billion has been invested in search and search acquired companies from 1986 to 2023 from the Stanford study. $700 million, 25% of that, was in the last two years. So the asset class is blossoming and the risk profiles are definitely changing quickly.
A lot of these searchers are from elite business programs like Harvard, Stanford. How did they even come about deciding to be a searcher?
Maybe I'll give you my example, and then we can kind of triangulate. So here I am, right? I'm 27. I go to the GSB. I spent my summer at a hedge fund. I'd worked at McKinsey and Morgan Stanley before. But everyone I look up to is a business owner, entrepreneur. So what do I do?
Do I go work somewhere institutional to then get the corner office, then wonder what am I doing in my 40s when I have dependents? And that's where I stepped back and said, you know, this is a really interesting asset class. The risk is not taking the risk.
Had offers from those 3 previous employers with bonuses to help pay my tuition 1 had prepaid my tuition and I ended up having to pay the tuition back. And so when I look at, like, my profile at 23, when I was working at McKinsey.
when I look at the salary, who I was living, my roommate situation, my net worth, and then I look at 29 after the GSB, after paying back my tuition, I had the same bank account, I had the same salary as a McKinsey analyst, and I actually ended up living with the same roommate in Toronto.
And so it felt a bit bizarro world six years later, but the profile is someone who's not doing it for the monetary reasons, they're doing it for, call it the career path and the experience.
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Chapter 8: Can the search fund model work in startups?
So in 2000. I wrote an independent white paper for one of my professors named Joel Peterson on the microcap opportunity in Canada. And it was clear that that space had opportunity. And so he's like, I'd be your first investor Rob. It's a good sign. So I was like, okay, maybe this concept makes, it's a good sign. So then I decided the risk would be higher if I didn't have a business partner.
So I found a business partner named Eric who lived in LA at the time having done banking in New York and private equity in LA, but also was Canadian. And we moved back to Toronto and we started our search in September of 2010. The concept was unknown, so we labeled ourselves more as a private investment fund than a search fund, just because we didn't want to spook people.
And then the deals just started coming through. And we ended up finding a security business called, at the time, UCIT Online Security in Toronto. And six months later, we bought it from the entrepreneur. And how did that play out? Amazing. It kind of exceeded my expectations.
So we bought this 5 million revenue, 2 million EBITDA strip mall security business, and the entrepreneur Sydney agreed to stick around and kind of help us run Toronto sales while we focus on strategy and growing the business. And we grew organically 20, 30% a year for the 12 years I was CEO.
We just sold to a strategic as 150 million ARR business with 2000 employees, 40 plus offices, five countries. It was an amazing platform for us to kind of completely change the profile of the business and make it the largest independent remote video monitoring company in North America. So walk me through the economics on the UCIT deal for you and your co-founder. Sure.
In that example, we bought the business with investor capital. And for that, we had a 30% call it upside scenario where 10% of it would invest upon buying the business. 10% would invest over a four to five year investing period. And 10% was based on 20 to 35% net IRRs on the return. So we actually, in this example, each had 15% of the upside of the business.
So you and your co-founder both had 15% in the deal. How did your investors do?
Three years in, we had, I'll call it a board misaligned perspective on EBITDA versus unit economics. And so at that point, we offered our investors 2.55 net return, about a 35% net IRR. And at that point, about a third bought, a third sold, and a third held.
From there, five years into the search, so a few years later, we did an acquisition where it was around a four and a half times net return to investors called 32% IRR. And then in 2019, we sold two thirds to a private equity fund at an eight and a half times net 30% IRR. Then we transacted five years later to Garda in October of 2024, which the purchase price was confidential.
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