How I Invest with David Weisburd
E145: Is a 35% IRR Really Achievable? Exploring Search Fund Returns
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.
Full Episode
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?
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.
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?
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.
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