The view from the other side.

An interview with search fund investors, Richard Augustyn and Larry Dunn

With Santiago Villalobos
 
As entrepreneurship through acquisition (ETA) continues to gain traction and interest in the investment community, current Chicago Booth MBA student Santiago Villalobos recently caught up with two prominent search fund investors, Richard Augustyn and Larry Dunn of NIP Group, Inc. (NIP), one of the nation’s largest specialty business insurance firms. Augustyn is NIP’s founder and CEO, and has 25 years of experience as an entrepreneur, investor, and business leader. Passionate about partnering with promising entrepreneurs to help them buy and then build great companies, Augustyn enjoys sharing his practical business knowledge with first-time entrepreneurs and CEOs when he is not busy serving on the Board of five U.S. and Canadian companies. Dunn is CFO of NIP and has 25 years of experience in the insurance, banking, and real estate finance industries. Dunn lends his expertise in accounting treatment, internal financial controls, and tax structuring considerations to searchers throughout the search fund lifecycle. Augustyn and Dunn have invested in more than 85 search funds over the past six years.

In the interview below, Augustyn and Dunn share their collective expertise and experience in the search fund space as well as their opinions on growth and change in the future.

Villalobos: When did you start investing in search funds and what prompted your interest?

Augustyn and Dunn: We first became aware of the concept of search funds more than six years ago when we were introduced to an aspiring searcher who was seeking guidance in connection with acquiring a company in the insurance industry. As you can no doubt imagine, our initial reaction was a mixture of skepticism and curiosity. However, as we researched and learned more about the search fund model, any doubts we had quickly diminished, and our level of engagement grew very rapidly. Our first search fund investment was actually made a little over five years ago; we helped the same searcher and his partner fill an equity gap in their acquisition round raise.

Villalobos: What’s your take on the search fund model as an asset class?

Augustyn and Dunn: First and foremost, the search fund model is more a form of craft investing rather than a large-scale asset class. Search fund investing provides an opportunity to invest in and help mentor top-notch early-career entrepreneurs and collaborate with other like-minded, highly successful entrepreneurial investors. We believe it is truly the sense of community and reciprocity that sets the search fund model apart from other forms of investing. Often times, we liken the search fund model to a craft guild wherein members are constantly sharing knowledge and honing their skills in order to improve the trade.

Villalobos: How many search investments have you made to date? How many are still searching? Acquired? Exited?

Augustyn and Dunn: In this case, the numbers really don’t tell the full story. What is most important to us is our desire to actively engage, be highly responsive when called upon, and able to add value during our interactions. We do not view ourselves as desiring to cast the widest net possible. Having said that, we have invested in more than 85 search funds — 100+ searchers if you count partner teams — over the past six years. Of those, 44 are actively searching, 25 have acquired a company, and, of those, roughly a dozen have exited or recapitalized.

Villalobos: What makes for a good search fund entrepreneur in your opinion?

Augustyn and Dunn: We think Professor Rob Johnson’s November 2014 paper puts it very well — the searcher is the Jockey: highly talented, demonstrated accomplishments, worked through setbacks but generally lacking in experience as a CEO managing a full spectrum of responsibilities. A great search fund entrepreneur is also an exceptional listener, authentic, emotionally intelligent, and has taken the time to internalize and embraces the core principles of the search fund model. So we constantly ask ourselves if the searcher has the skills of a hunter and a talented CEO, will not only be receptive to river guides’ and Board counsel, but also willing to follow through on it and has a broad enough field of vision and the true grit to achieve success.

Villalobos: For students and young alums that are interested, what can they do to best prepare?

Augustyn and Dunn: Pardon the cliché, but they should know what they are getting themselves into. While the prospects of owning and running a business as a young CEO and the allure of 25–30% sweat equity are enticing, the challenges may be like none previously experience in their careers or personal life. Talk to as many current and former searchers, including those who didn’t acquire a company, and current operators as possible. Also, thoroughly understand what it takes to get off to a fast and very strong start to the search.

Villalobos: For those entrepreneurs with whom you are invested, what kinds of things do you encourage them to do to increase their chances of success?

Augustyn and Dunn: Our recommendations and advice are:

> Buy a good business with recurring revenues and a straight forward business model for a fair price in a growing industry.

> Time is their most scarce resource. Every week is 1% of their search life. Act with an extreme sense of urgency and purpose.

> Efficiently communicate with your investors, solicit and demonstrate an ability to synthesize their “Consensus” feedback while incorporating your own views, and then be willing to act on it with conviction.

> Don’t be industry or geographically biased — you’ll dramatically reduce your chances of being successful.

> Don’t go down the rabbit hole too early in due diligence thus sacrificing time and resources.

> Avoid buying a business where revenue growth accelerates into a stall point. Try not to rationalize “BYOG” (bring your own growth) in these situations. It’s very difficult to determine if the stall point is the start of a reversal in the company’s long-term prospects as opposed to a temporary stumble.

Villalobos: How important is luck in the search fund model?

Augustyn and Dunn: Let’s substitute “good fortune” for “luck” since the best outcome sometimes means a searcher was prudent and disciplined enough to not acquire a bad business. We have seen some of the most talented searchers run the search fund playbook to perfection, but had to walk away from deals for a number of reasons, most commonly seller overstatements and material events in the business.

Villalobos: What is the most common mistake search funders do?

Augustyn and Dunn: If I had to pick one thing, it would be not appreciating how fast 100 weeks ticks. That’s why maintaining a sense of urgency at all times is a cornerstone for success.

Villalobos: What do you consider to be a failure in the search fund model?

Augustyn and Dunn: Acquiring a “bad business” is the least favorable outcome for everyone — searcher and investor alike. This is more damaging to a searcher’s career than not acquiring a business. The searcher will have invested, on average, 18 to 24 months to acquire the company and in all likelihood several more years operating an underperforming business that may redefine success as paying back the lenders and returning capital to investors. In this scenario, no one benefits.

Villalobos: Are there any aspects of the model that could use improvement?

Augustyn and Dunn: The search fund model is extremely sound in concept and we are fully supportive in every respect. Naturally, we are constantly looking for ways to improve our execution and sharing of objective knowledge with others in the community.

Villalobos: How do you see the search fund landscape evolving from here? Has it grown too fast? Is there a search fund “bubble”?

Augustyn and Dunn: We don’t see a bubble. We do see a temporary imbalance between the growing number of searchers that need real-time and actionable mentorship and the number of investors with the bandwidth to engage with them. We expect investors and searchers will find innovative ways to correct this imbalance and the next wave of successful searchers turned investors will go a long way to help.