Perth investors set up innovative PE fund

A select group of Perth investors led by Tim Moore’s Dorado Capital and Nev Power has established Australia’s first specialist fund investing in private equity search funds.

Widely used overseas but little known in Australia, a search fund backs individual entrepreneurs who are looking to acquire established businesses with high growth potential.

They address a perennial issue facing many private businesses, where the owners fail to develop a succession plan but want someone to continue their legacy.

Search funds flip the traditional private equity model, in which the fund identifies a business to purchase and then seeks out the right people to run it.

Instead, they identify ‘searchers’, who go out and find a good business to buy.

At first blush, it’s an unusual concept: investors are asked to back an individual before they know what the individual is going to buy.

The concept works, judging by extensive experience overseas.

Stanford University, which played a big role in popularising the concept in the 1980s, has tracked the performance of search funds ever since.

It has estimated that at least $US1.4 billion was invested in search funds in the US, Canada and Europe between 1984 and 2019.

Those funds have delivered an internal rate of return of more than 30 per cent over that time.

That track record helped Dorado Capital attract keen investor interest.

It has raised $10 million for its PE Search Fund 1 and plans to invest that money in between 10 and 15 ‘searchers’.

Another Perth group looking to put together a search fund is WayFinder Capital, established by experienced business executives Lui Pangiarella and Akram Sabbagh.

They have spent the better part of four years quietly building a searcher community in Australia through their sister company, Second Squared.

Mr Pangiarella said their interest in search funds stemmed from their work as business coaches.

“We were starting to work with owners who need to sell their business but had never planned for it,” he said.

Akram Sabbagh (left) and Lui Pangiarella established Second Squared to support the ‘searcher’ community across Australia. Photo: David Henry

After undertaking extensive research, he and Mr Sabbagh concluded search funds could provide part of the solution.

Their research has included trips to the US, where they have found a thriving community of investors and entrepreneurs around search funds.

“It wasn’t planned, it just happened that way because the early searchers ended up becoming investors in the next round of searchers,” Mr Mr Pangiarella said.

“They have a ‘pay it forward’ culture.”

They found a handful of people in Australia applying a searcher methodology and hope to cultivate a community like what is in the US.

He said there was a clear logic behind search funds.

“The investors are along for the ride because it’s the individual that has the talent,” Mr Mr Pangiarella said.

“This is all about what creates value and it’s the person, not the business.

“The value is the passion, the drive, the enthusiasm, the smarts that they bring.”

He said the concept was widely accepted in major US universities, many of which taught courses in ‘entrepreneurship through acquisition’.

“In the US, this is viewed as being just as entrepreneurial as startups,” Mr Pangiarella said.

WayFinder, which has conditional registration as venture capital limited partnership, is aiming to raise $10 million.

So far it has raised $5 million from external investors and the founders have put in $1.5 million.

Mr Pangiarella is optimistic of reaching $10 million, adding that he already has plans for subsequent raisings to reach $25 million.

Dorado, which has extensive experience raising money for private equity, venture capital and property investments, is sticking with $10 million, for now at least.

“We specifically targeted a modest raise,” Mr Moore said.

 “We very purposely said, this is embryonic, it’s the first time this has been done in Australia.”

The fund will be run day to day by Mr Moore, who founded Dorado more than a decade ago, and investment director Jake Maisey.

They will be joined by two non-executive directors: Jad Reuben, whose family previously owned Textile Traders, and Mr Power, who formerly ran Fortescue Metals Group.

“Nev and Jad were really engaged by the idea,” Mr Moore said.

“It wasn’t just writing a cheque.”

Dorado is one of several new board roles Mr Power has accepted this year, along with being a director of listed company Genesis Minerals, private company APM and US investment company Metals Acquisition Corp SPAC.

Mr Moore said the four directors had put in about half the fund’s capital, with the balance coming from a small number of high net-wealth investors and family offices.

Mr Power said search funds appealed because they purchased companies that were established and profitable, and had often been around for many years.

“These companies are usually much smaller than the types of companies that larger private equity funds would look at,” he said.

“And they are purchased on substantially more attractive metrics, especially since most of the compensation for the searcher is tied to the eventual successful exit from the company.”

Nev Power is a non-executive director of the Dorado Capital fund. Photo: Gabriel Oliveira

The Dorado fund will typically hold about 20 per cent of each business it invests in.

The balance would come from investors lined up by the searcher.

“If would be very unusual for us to take more than 20 per cent and the reason is that we want other people at the table,” Mr Moore said.

“We are saying, get some serious people around the table with good, operating business experience, people from different backgrounds, different skills, different industries, different geographies.”

Mr Maisey said Dorado’s role included doing due diligence on the searchers.

They are typically entrepreneurs aged between 30 and 40 years, well-educated, and have four to eight years of management experience.

Dorado has already backed Australia’s first traditional search fund searcher, Rob Gaunt, who bought Victorian business ACE Training earlier this year.

Sydney-based SMEVentures, which describes itself as an ‘accelerator’ for searchers, supported Mr Gaunt during his search.

Mr Moore emphasised that the Dorado fund was not interested in startups, nor was it looking for ‘turnarounds’.

“We are focused on medium-sized, sound, existing businesses with persistent recurring revenue from loyal clients,” he said.

That is likely to create some competition for traditional private equity funds, albeit these funds often focus on turnarounds: troubled businesses that need financial and managerial support.

Perth has just a handful of private equity funds, most notably Banksia Capital and Viburnum.

They already face competition from east coast funds, such as Potentia Capital and Five V Capital, which have both been active in WA.

However, there appears to be no shortage of opportunities; in fact, Banksia director Mark Dutton told Business News he could close more deals if he was able to attract the right staff.

Finding the right people is, of course, pivotal for the search funds.

Mr Pangiarella said searchers came from a wide variety of backgrounds.

They usually have an MBA, and some have worked at big consulting firms such as McKinsey and BCG, but also come from backgrounds such as consulting, engineering, technology and management.

While there are always numerous individuals looking to buy businesses, Mr Pangiarella said a searcher had a different mindset.

“The core difference is that a true searcher is not just looking to own and operate a business; they are not just buying a job," he said.

“They look at it as an investment, to create real equity value for themselves and their investors.

“It changes the characteristic of the business they buy.”

Mr Sabbagh said the search process was taxing.

“Many people try to do it themselves,” he said.

“It’s a very lonely process when you do it on your own.

“It’s good to have a community to fall back on.”

Mr Sabbagh illustrated the challenge with a few numbers.

One searcher he is working with identified 1,200 opportunities over the past year, contacted about 400 of them and submitted letters of intent to six.

None of those have transacted.

The searcher has an active pool of 107 opportunities he is evaluating.

Mr Sabbagh said another defining trait of searchers was that they had co-investors and directors who provided support.

Mr Maisey said the search process was intense.

“They have interns and are making outbound phone calls and dealing with trade associations,” he said.

“They are sending emails, checking databases, talking to suppliers, it’s a hard graft.

“They are finding businesses for sale way before it goes to a business broker or accounting firm to sell."

Mr Moore said a successful search solved a major problem for business owners looking to sell.

“The two most logical people to sell to are the staff, who don’t have the money or the inclination, that’s why they are employees, and the guy he’s competed with for the last 30 years who he hates, so he doesn’t want to do that," he said.

“So, when a young lady or a young guy comes along and says, I’ve studied your business, I’m backed by a bunch of well-funded individuals and I’m keen to buy, that sounds good.”

Mr Moore said vendors were attracted to searchers because they planned to retain the staff and the name and take the business to the next level.