In a session hosted by Scott Miller of Greenhaven Road Capital, the audience was introduced to a niche but remarkably successful investment strategy: the search fund. The session featured JT Fitzgerald, CEO of Kingsway Financial Services (NYSE: KFS), and Adam Patinkin, Managing Partner of David Capital Partners and an activist investor in the company. They presented Kingsway as a unique, publicly traded vehicle for investors to gain access to this high-returning asset class.
The Search Fund Model: A Structural Anomaly
A search fund is a vehicle where an entrepreneur raises a small amount of capital from investors to fund a search for, and subsequent acquisition of, a small, profitable business. These target companies typically have $1 to $4 million in EBITDA and are being sold by a retiring founder.
The model’s success is rooted in a structural market inefficiency. These businesses are too small to attract the interest of traditional private equity firms, for whom a small deal represents a poor return on time. Furthermore, the imminent departure of the founder-operator creates a succession problem that most financial buyers are unwilling to solve. The search funder—a talented, ambitious, and energetic individual—is the “uniquely shaped key” that fits this specific lock, providing both capital and a successor CEO in a single package.
The historical returns have been extraordinary. A long-term study by Stanford University, which tracks the performance of the asset class, found that an investor who had invested pro-rata in every search fund ever formed would have achieved a compound annual IRR of 35% over three decades.
Kingsway: Institutionalizing the Search Fund Model
JT, who began his own career as a search funder, has spent the last several years transforming Kingsway from a failed insurance holding company into a “search fund accelerator.” The Kingsway platform is designed to institutionalize the search model and mitigate its key risks.
De-risking the Process: Kingsway provides its hand-picked Operators-in-Residence (OIRs) with a suite of resources that an independent searcher lacks. This includes a proprietary deal-sourcing infrastructure, deep underwriting expertise, superior financing terms from banking partners, and, crucially, post-acquisition operational support. This support is delivered through the “Kingsway Business System,” a set of playbooks inspired by the famed Danaher Business System (DBS). The OIRs are advised by a board that includes former Danaher CEO Tom Joyce and The Outsiders author Will Thorndike.
The Public Vehicle Advantage: As Adam explained, Kingsway solves the primary problem for investors wanting to access this asset class: scalability and liquidity. Instead of writing a series of small, illiquid, 15-year-lockup checks, investors can simply buy a publicly traded stock. This structure provides daily liquidity with no double layer of fees. The case is further enhanced by Kingsway’s legacy: over $600 million in Net Operating Losses (NOLs), which will shield the cash flows from its operating companies from federal taxes for years to come.
After a successful proof-of-concept exit—a home warranty business called PWSC that returned 10 times the original equity investment in four and a half years—Kingsway is now scaling its platform. It currently owns 15 businesses, focusing on sectors with recurring revenue like B2B services, vertical market software, and skilled trades, where it is executing a buy-and-build strategy in the plumbing industry. Kingsway represents a compelling synthesis of public and private market strategies, using a liquid public currency to execute a proven, high-return strategy in an inefficient corner of the private market.
Let’s go deeper.
Transcript
The following transcript has been lightly edited for readability.
Scott Miller: A quick show of hands. How many people in this room are investors? Raise your hand if you’re an investor. Keep your hand up if you like to make money. Keep your hand up if you like structural reasons why high returns may persist. Okay, keep your hands up if you’ve invested in a search fund.
Are we at zero hands up? We have Antonio, who’s maybe invested in a search fund. Okay, great. That’s an interesting data point.
We have a couple of goals here today. One is you will leave knowing what a search fund is and why it might be interesting. We’ll also hopefully touch on some activism. I’ll start with Adam; he’s an investor, he runs David Capital. He is also an activist in Kingsway Financial. And interestingly, I didn’t have to sit between the activist and the CEO. We had dinner last night, and they seemingly might even like each other. And then we have JT Fitzgerald who’s the CEO of Kingsway Financial.
We’ll start with JT and his background, what they’re doing now, the turnaround that has happened, and then we’ll layer in Adam and how he’s gotten involved as well. So, do you want to give us where you came from, how you came to Kingsway, that background, and what it was when you got there?
JT Fitzgerald: My background post-business school, after I got my MBA at Northwestern, I launched a search fund. This was in the early 2000s. Search funds weren’t really a thing. Many of you probably don’t even know what they are, and we’ll talk about it a little bit. I launched a search fund, raised capital from a group of high-net-worth investors, 12 or 13 folks, to fund a search for and acquisition of a small operating business from what turned out to be a retiring founder. We acquired the company and I transitioned into the day-to-day management role of that operating business. We ended up owning the company for over 10 years and ultimately exited.
But along the way, my group of investors, based on some of our early successes, said, “JT, to the extent that you meet other people that are doing what you’re doing, we’d love to invest with them too.” And so very early on, in the mid-2000s, 2005-2006 timeframe, I started as a gatekeeper for my LPs, investing in other search funders, their searches, and then the companies that they acquired. I have been investing in traditional search fund models since the mid-2000s.
I got involved with Kingsway through a personal relationship. I was involved in a business group called YPO and one of the folks in my forum was the then-CEO of Kingsway, and he was very interested in what I had been doing, backing searchers and doing some independent sponsor acquisitions of businesses. We happened to be both interested in a couple of the same industries and he encouraged me to come to Kingsway to help him build the business.
When I got there, this was in 2016, Kingsway was still sorting through its legacy as a property-casualty insurance holding company that had gone through some very difficult times. It was losing money, owned a couple of operating businesses that were not performing very well, and had a very messy basket of legacy assets.
Scott: And what year was that when you got there?
JT: 2016.
Scott: From what was held in 2016, is anything still held today?
JT: Virtually nothing. Two warranty businesses, but virtually nothing else.
Scott: Okay, so it’s basically a complete transformation over the last decade.
JT: That’s right. I got there and their insurance businesses were losing a lot of money, their other operating businesses were losing money. I was instantly promoted to COO to help turn those businesses around. That went well, and the board was dissatisfied with the direction of the company and promoted me to CEO in late 2018. And that’s when I really embarked on the strategic transformation and direction of the company, fully focused on first, cleaning up the legacy assets, divesting of the businesses that they owned and some of their passive portfolio, commercial real estate investments, etc. Then, using the proceeds to clean up the balance sheet and then redeploy that capital into buying operating businesses leveraging my experience in search fund investing.
Scott: And what were some of the early successes that allowed you to get the rope from the board to make this total change?
JT: As you can imagine, a board that had no familiarity with search fund investing—
Scott: Actually, let’s just back up for a second. What is a search fund?
JT: We’ll back up for a second. For those of you that don’t know, a search fund is essentially an investment structure where an ambitious, in some cases—not mine—talented entrepreneur raises capital from an investor or group of investors to search for and then acquire a small operating company. Small being one to four million of EBITDA, and typically acquiring it from a founder who was looking to retire. Those businesses are generally below the threshold of a platform-type investment for private equity. And often those founders, in many cases, don’t have sons or daughters to turn the business over to and are often leery about selling their company, their baby, to a strategic or to a private equity platform where they’re going to lose their brand, their people, and their legacy. And so the search fund has historically been a very uniquely shaped key to solve a succession problem for a retiring founder of a small business.
Scott: So that’s the structural piece, right? It’s too small for private equity, and people don’t really want to buy a business where the CEO is leaving.
JT: Yeah, one is size, right? Private equity doesn’t like to go below a certain threshold because it’s a terrible return on time. It’s hard to deploy a lot of capital doing small acquisitions. More importantly, when the primary decision-maker and operator of the business wants to leave over the next 12 to 18 months, that’s tough because it’s a terrible return on time to do a small deal and then have to reboot the entire management team. So there’s a structural inefficiency in that spot in the market.
Scott: What about historical returns on search funds? I know Stanford has published data on this.
JT: Stanford—the Stanford Center for Entrepreneurial Studies at the GSB—is the cradle of the search fund model. They publish a study on search fund returns and they update it every 18 months to two years. The N is now like 400 searches over the last three decades. And if you had invested in every search fund ever formed—the ones that failed to find an acquisition, the ones that bought a bad business and failed to return 100% of the capital to the original investors, and the successful ones—if you had just invested pro rata across all 400, your IRR is 35%. It’s a tiny little asset class, but it has had astounding returns.
Scott: And your first foray into search within the Kingsway complex, how did you convince the board?
JT: Coming back to how I convinced my board that this was a good strategic direction to take, we bought a small business, an extended warranty business, actually providing home builder warranties. Basically a manufacturer’s warranty on a new home; they didn’t want that risk on their balance sheet. And so through this company, they could move that risk to an insurance company, in this case, Zurich. This little business was like an MGA for home builder warranties.
It was small, two million in EBITDA when we acquired it, but it had a very tired, worn-out management team. They had struggled through the housing collapse. They had been acquired in 2006 or seven by large private equity, bad balance sheet, and so they were just worn out. It was a small business that needed a new management team, but we really liked some of the underlying unit economics of the business and the prospects.
I encouraged the board to allow me to hire a searcher CEO. His name is Tyler Gordy. Tyler is just an exceptional young man. Tyler had gone to West Point, graduated first captain, which is the highest-ranking cadet in his class, had served his term in the military, and then went to Harvard Business School where he was a Baker scholar and a Rhodes scholar finalist. He learned about search at HBS and was introduced to us. We put Tyler in as the CEO of PWSC that we had just acquired and gave him meaningful economic incentives aligned with ours in the upside potential of the company.
As you might imagine, someone like Tyler was able to attract a really great management team around him, install some process improvements, and some technology to get the business growing. And over four and a half years, he more than doubled EBITDA. Ultimately we sold it to a strategic acquirer in 2022. But the board could see the trajectory of the business and so we just started hiring other people that look a lot like Tyler to do more of it.
We ultimately exited that business. When we acquired it, we paid $10 million, 50/50 debt and equity. It quickly paid back all the debt, started paying dividend distributions to the holding company, and then we sold it for $52 million.
Scott: So the board gave you a little more rope after that?
JT: Yeah, even after Tyler made a meaningful outcome for himself, we made greater than 10X our original investment in about four and a half years.
Adam Patinkin: It’s important to talk about why the model works. Why does search return 35% a year across an enormous sample size? It’s not just one factor; it’s a number of factors that all come together.
One, you have a business founder who’s looking to exit and doesn’t have a succession plan. Along comes a very high-attribute, talented, smart, hard-working, energetic individual who has the capacity to be a CEO. You put someone who’s really talented in that role versus someone who’s maybe looking to retire, looking to exit, not spending all that time—that’s a big change.
A second thing is you end up buying these businesses for anywhere from three to six times EBITDA. You’re paying a relatively low price, and those multiples have been consistent for 40 years.
A third thing that you’re doing is there’s often a relatively straightforward path to improve the business operations. Maybe you have a business that’s run on pen and paper, and now you have technology that you implement, or founder-led sales, and now you build out a business development team. You do all the steps to professionalize the business and allow it to go to the next level.
Another thing is these businesses are profitable. We’re buying businesses that throw off a lot of free cash flow, and when you’re buying them at four, five, or six times EBITDA, you rapidly accrue value to the equity by paying down the debt.
A fifth thing is you often put a little bit of leverage on it. You might put 40% to 50% funded with debt, which magnifies your returns.
And a sixth piece to it is it’s at the right size where if you grow it a little bit, the multiple changes in a big way. You buy it right below that threshold where the multiples are low, but then if you grow it by 50% or 100% or whatever the number is, all of a sudden the multiples double or, in the case of PWSC, triple. You put all of that together into one situation, and it’s like venture but where your batting average is 80%. You don’t have a high ratio of failure rate because these are all operating businesses that are cash-flowing, and you’ve set it up where the odds are strongly in your favor for success.
Scott: So, in that context, the board gives you rope, you’re making a transition, you’re divesting assets, and you eventually try and build a search machine. What does that look like? What have you built, and what are you trying to buy besides the multiples? You’re trying to buy certain types of businesses.
JT: Yeah, absolutely. We approach it by looking at the reasons why search has failed historically when it does fail. It could be the wrong person, it could be a failure to find an acquisition, it could be buying the wrong business, using the wrong capital structure, or operating it poorly. So when we set out to build and institutionalize a platform and a model to do this ultimately at scale, we started with trying to solve those problems.
Working backward, we developed a business system—we can get into that—a set of playbooks for our operators, who are new operators, based on our experience to help them be effective operators of small companies. A whole set of underwriting criteria and industries—game selection is really important. And then a search platform, both for proprietary outreach to business owners and also broker and intermediary deal flow, just to get the volume of opportunities coming through the door a lot faster for our searchers. And then, obviously, we identified what we think are a handful of attributes that, if not predictive, are at least indicative of being a good leader in a small company as we’re recruiting new what we call OIRs [Operators-in-Residence] onto the platform. That’s what we set out to build.
Scott: Let’s spend a minute on what types of businesses you are buying.
JT: We start industry-first. We’re looking for industries where the industry is growing at greater than two times GDP and that growth is supported by long-term secular trends. We want these inexperienced operators to have the wind at their back. And ideally, those industries are also fragmented. Not because we’re looking to do roll-ups per se, but that fragmentation may speak to even small companies having some sort of durable advantage and competitive advantage in their niche.
So, we start with industry first. Then within that, we’re looking for businesses that have a set of attributes focused first around revenue quality: businesses with a high percentage of the revenue coming from truly recurring sources at high margin and low capital intensity. Shorthand: predictably high returns on tangible capital. What that ends up defaulting towards is B2B services, vertical market software, healthcare services, and then more recently, we’ve done a few acquisitions in what we call skilled trades, like plumbing services.
Scott: So you’re trying to create an ecosystem where a searcher is more likely to be successful than if they operated on their own, both on the sourcing of the deals, but then once the dog catches the bus.
JT: That’s right. We try to mitigate left-tail risk.
Scott: And in terms of the business systems, if you could talk a little bit about the people you’ve attracted. I think that’s one of your prides, both the quality of the searchers and also some of the advisors.
JT: On the operating side, the business I bought was a manufacturing company, not a business I would buy today. More capital intensive, lower margin, not recurring revenue. I have some scar tissue and figured out how hard that was. It was a long slog. But we were lucky in that one of the first people that we hired came from Danaher to be our plant manager, and he taught us DBS, the Danaher Business System. So I have been using DBS tools and applying them to small companies for a long time.
One of our operating scaffolds that we provide these young operators is what we call the Kingsway Business System. No points for originality. We’re lucky, I have a personal relationship with Tom Joyce, who is the recently retired former CEO of Danaher, and he’s on our advisory board. So he and a gentleman named Will Thorndike, who many of you guys probably know—he’s been a speaker here many times. He wrote that wonderful book, The Outsiders. What a lot of people don’t know about Will is he’s both one of the first and probably most prolific institutional investors in search funds. That’s how I got to know Will. Both Will and Tom, and now Tyler Gordy, who’s very close to the fire having run a business in our structure, are our board of advisors for our young presidents. We meet quarterly, and it is a board meeting. Tom, Will, and Tyler are very active and engaged in helping our young presidents be amazing managers.
Scott: Will Thorndike may or may not be a reasonably large shareholder through his family office, Son Mountain.
JT: All of those advisors are also shareholders.
Scott: Let’s layer Adam in here. Adam, you decided to become an activist in this situation. A lot of things sound really good that I’m hearing so far. What did you see that made you say, “This is what I want to change,” and how did you go about your activism?
Adam: Quickly, I’m Adam Patinkin. I run an alternative asset management firm based in Chicago with offices in London. Our main strategy is a long-short equity strategy. It hearkens back; we try to be a throwback hedge fund from the ‘90s and 2000s where you try to outperform and put up numbers on the short side. We’ve done 21% a year for the last 10 years. We’ve made money on shorts since inception and we’re uncorrelated at 0.3 R-squared since inception. We’re out there looking for what we call “value plus a catalyst.” We’re looking for usually great companies, but there’s a reason why they’re meaningfully undervalued and there’s a clear catalyst event path for why they’re going to re-rate.
For Kingsway, what attracted us is if you think about all the asset classes you can invest in, we’re all investors here. Equities over the last 100 years have done 7% or 8% a year, corporate credit has done 5% or 6%, government bonds have done 4%, private equity and venture maybe 9% or 10%, real estate 7%, whatever the numbers are. And then there is search that’s done 35% a year. For me, for my net worth, for my fund, I don’t understand how I can run a portfolio without having search. It’s ignoring the highest-returning asset class. It should be 20% or 30% of my net worth. Some people would argue it should be higher. You’re missing something, there’s a hole in your portfolio if you don’t have search.
We were really attracted to Kingsway because it’s really hard to invest in search. That’s one of the big problems. You could meet with 50 potential searchers, pick your five favorite, and write a $200,000 check to each one, which essentially is not scalable institutionally. You could invest with a search fund of funds or a search accelerator where your capital is locked up for 15 years and you’re paying a double layer of fees. Or there’s Kingsway, which is a publicly traded vehicle where you have daily liquidity, there’s no double layer of fees, and you’ve got a CEO who’s got a 25-year track record of doing in excess of what the Stanford Business School returns say. To me, this is an amazing model. This is what I want a big chunk of my net worth to be invested in.
The opportunity presented itself because of two things. One is, Kingsway used to be an insurance company that blew up in the financial crisis and generated a billion dollars of NOLs. An activist came in named Joe Stillwell who threw out the board, threw out the management team, shut down the insurance company over time, and tried to transition the business to being a merchant bank. A merchant bank doesn’t really work as a public company because it’s very opaque. You own lots of minority investments that are hard to value. Eventually, the board got tired of that and found JT’s pitch compelling about moving to a search fund model. So for the last half a dozen years, the company has been moving towards being a search fund model.
The problem came because Joe Stillwell, who’s a famous regional bank activist, when the Silicon Valley Bank crisis happened, all of his LPs were like, “Look at all these cheap banks. Why do you own this, which is not an activist situation and it’s not a bank?” He almost became a forced seller and was sitting on the stock for two and a half years, just selling in every open window.
Scott: And how much did he own?
Adam: He owned over 30% of the company. The stock couldn’t go anywhere. I saw an opportunity, one, to help do a cleanup trade. I raised a bunch of money and arranged a deal—it was a $40 million transaction and we brought him down to a reasonable number. Now he owns a high single-digit percentage of the stock, so that massive overhang just isn’t there anymore.
The second bit was JT has been so focused and working so hard to transition this business from this merchant bank with all these random, scattershot assets into being a pure-play search business that he didn’t have the bandwidth to go out and tell the story to the public markets. When we looked at Kingsway, we said if you wanted to be a company that no one knew about, you couldn’t do a much better job than what Kingsway was doing. A small-cap company with zero sell-side research. On Bloomberg, it says it’s an insurance company even though there hasn’t been insurance in 12 years. On Yahoo Finance, it says it’s an auto and truck dealership company. Even the name of the company is Kingsway Financial Services; there are no financial services.
I think that there was an opportunity where you could come in and help. Josh Horowitz, who was the other guy who joined the board with me, flew to Chicago and we sat down with JT before even doing any of this stuff and we said, “JT, do you want us?” And JT was like, “Oh, thank God, I’d love to have more hands helping here because there’s so much to do.” So then we went and met with Stillwell in Puerto Rico, we met with the board chairman up in Toronto, and essentially did activism but front-door, positive activism. I’ve done the hardcore activism. I’ve gone and banged on the door and thrown out a chairman and thrown out a CEO and replaced the board. I’ve done that. The brain damage is enormous, and I’ve got that company headed in a good direction, but it took me three years.
Here, you come in on day one, and the board of directors is like, “Oh, thank God you’re here. Here’s the rope.” And we love working with JT. I mean, I’m speaking for Josh now, but we’re all rowing in the same direction. We’re all shareholders here. We all want to create value and we see how big the opportunity is. It’s a much better way to do activism. Not to be the big scary monster at the door, but to do it in a positive way where you’re on the same team and you build trust, and then you trust each other to make progress.
We executed the transaction at the end of March and joined the board at the end of March. And quickly on Josh, because I want to be his hype guy for a second: Josh runs the public equities portfolio for a family office in Connecticut. He’s chairman of the board of two public companies right now. One is called Limbach Holdings. He joined the board four years ago when the stock was at $5, now it’s at $100. The other is a company called BK Technologies. He joined the board when the stock was at $10 two years ago, now it’s at $70. He’s phenomenal, he’s terrific. To have two guys come in to help out, I think has made a huge difference internally at the company.
You look at what we’ve done in six months: we came in, we overhauled the equity story, we redid the investor presentation, we redid the corporate slogan, we redid the company bio, we held a successful investor day, we raised a small amount of capital so that we could accelerate growth and step on the gas, made five acquisitions, now hit a record high run-rate EBITDA, and really focused this business so that it can go towards what this can be, which is essentially an N-of-one company. This is a one-of-one company. It is a public search fund model where you can get those 35% returns, hopefully, and not pay any taxes on it because you still have over $600 million of NOLs that are available to the company. And do it all with JT, who’s built this infrastructure to make search more successful, to turn the dial every way that he can to make the outcomes just a little bit better and to avoid the downside just a little bit more. It doesn’t mean that we’re perfect. We’re not and we won’t be, but you really set the odds in your favor by doing it the way JT has structured this business.
Scott: Adam, since you’ve joined the board, what are some things that you were concerned about that you are now less concerned about, or perhaps more concerned about? You now have a different perspective as a board member versus just a shareholder.
Adam: I’ll say two quick things. One is, one thing that I was not expecting was that Josh and I helped with a mindset shift at the company. Maybe the company was so focused on doing this turnaround that it hadn’t gotten to the place of, “No, you’re a growth company. Let’s be a growth company.” We’ve really encouraged JT and encouraged the board to think about the company as a growth company. That’s been received really well and I think it positions the company really nicely. That wasn’t something that I had expected ex-ante, but I think that’s definitely the case now.
The other thing I would say just being a board member and being able to see everything is everything is as promised. This company receives 20 or 30 applications a month to be an OIR, to be a searcher internally, and JT picks the best two or three. It’s an amazing group of people that we have access to that we can bring on and help and support as they go out to buy and run a business.
Then the other thing is when you look at the transactions, the transactions are exactly what you’d want them to be. I’ll give one example. We bought an industrial services company. It services large, multi-million-dollar electric motors in the Permian Basin. No E&P, only on pipelines. This business has been growing 50% a year and we agreed to buy it for six times trailing EBITDA. It took a handful of months to close the deal. We ended up buying it for less than five times trailing EBITDA and a lot lower multiple on forward EBITDA. It’s a business that is 90% recurring and reoccurring revenues, 25% EBITDA margins.
The Permian Basin has seen 15% a year growth of capex in pipelines, plus maybe five years ago, 10% of motors in the Permian were electric and 90% were combustion. Today, it’s probably 20% or 25% electric. Five or 10 years from now, it’s going to be 90% electric. That’s a huge additional tailwind to this business. When I think about it, I have a finite amount of capital that I can deploy. If I can buy a 90% recurring revenue business with 25% EBITDA margins growing very fast for a long time to come with a really talented operator and the support of Kingsway, I’m in. Kingsway has this ability to do this over and over again. It’s a repeatable process. It’s really impressive.
Scott: JT, maybe you want to talk about a couple of other investments you guys have made? People here don’t really know Kingsway. How big is the portfolio?
JT: Yeah, sure. We currently own 15 businesses. Twelve of them are run by searcher-type CEOs. We own businesses in healthcare services. We have a healthcare staffing business and an outsourced cardiac monitoring business, which is very exciting. We own two vertical market software companies. We own an IT managed service provider. We own the business that Adam just talked about. And we own now three businesses in commercial and residential plumbing under a platform we call Kingsway Skilled Trades.
Scott: When you say plumbing, I don’t think 35% IRRs. What’s the math there?
JT: First, we consider ourselves talent-first investors. Let’s talk about the young man that’s running these businesses for us. His name is Rob Casper. He’s a Naval Academy grad. He was a Marine infantry officer and went to Harvard Business School. And by the way, if you have daughters, you want them hanging out at the Kingsway offices. After business school, Rob first worked in a family office doing a veterinary care roll-up, and then he went to work for Graham Weaver at Alpine Investors. Graham is actually also a search funder back in the day and a search fund investor. He executed a roll-up at Alpine in HVAC and some plumbing.
He came with a very specific thesis around plumbing, largely driven by the service level agreement required to be a good plumbing operator. You’ve got four hours to respond, whereas in HVAC, you might have 24 hours; roofing, you might have a month. But the service level agreement between you and the customer in plumbing is very high. So if you have a good business and an enviable market share in a geography as a plumber, it’s very easy to then add ancillary trades to that brand. It’s much harder to go from HVAC into plumbing than it is plumbing into HVAC because of that service level agreement you have with your customer.
His thesis was to buy plumbing businesses in second and third-tier MSAs by population that are number one or number two in their geography. He’s got benchmarks and a playbook, having done this, about how to take a founder-led business that maybe is operated a little more inefficiently than it could be, turn on the marketing engine, streamline the efficiency of the business in the back office, and improve EBITDA margins. That’s what we’re out trying to execute.
Adam: Just to throw this out there, if you need plumbing services in Omaha, Nebraska; Evansville, Indiana; or Cleveland, Ohio, please contact JT after this session. But it’s really impressive. The way Rob goes in, a lot of these businesses are just undermanaged, and we know what the EBITDA margins of these businesses should be. You walk in and you can buy them at less than half what the EBITDA margin should be. The fixes are operational, they take work, but an example that Rob has given publicly is we bought one plumbing business where for every single job, they sent two plumbers. You don’t need two plumbers for every single job. There’s some jobs you need one plumber. So he got it right where, hey, this is the percentage that are one and this is the percentage that are two. All of a sudden, you released a bunch of bandwidth to improve the profitability of the business. There are 25 different other fixes, probably more, but 25 different major fixes that he’s doing at each of these businesses to just make them run as a professional, well-oiled machine.
JT: To answer your question more fully and concisely, the path to the high returns within plumbing, which grows at population growth, is a combination of accelerated marketing and search engine optimization to gain market share in the geography, and then the operational improvements to improve margins that we would underwrite to doubling EBITDA not in three and a half years, but more like in five years.
Scott: Let’s talk about the ability to reinvest capital for long periods of time. What is the size and duration of the runway?
JT: A couple of things that were really attractive to me against the backdrop of my experience investing in search: The first was the permanency of the capital of being a public holding company structure, and the other was the large NOL. The idea that you could buy a business and own it for a very long time without forced motivation to sell and protect those cash flows from being a federal taxpayer was super compelling and it improved the math.
Will Thorndike, who I mentioned earlier, having been a long-time investor in search and a Stanford grad, has access to that data set from the Stanford study. He has done some primary research on the returns to the investors that acquired the search fund businesses at their exit from the search fund investors and entrepreneurs. It may surprise you all, but the returns to the next owners are just as good. The N is like 50, I think, in that data set. And the returns are just as good, 35% IRRs, and not a single instance of a loss of capital. That just says that search has historically sold their businesses way too soon. They cut the tulips. So the idea of permanency of capital, not being forced to sell, and the ability to own these businesses for 10 or 15 or 20 years and continue to compound tax-free was super compelling.
Adam: And to add one last thing, we’re just in the first inning here. We haven’t even changed the name of the company yet. We’ve got a bunch of things here to do, but it feels like we’re just in the first inning. We still have a couple of assets left that aren’t search, but it’s not going to be too distant where we’ve fixed all the things that make it hard to recognize that there’s a publicly traded company doing search, making it a lot easier for people to find Kingsway. We’ll have a nice war chest to be able to accelerate our growth through search.
The opportunity is massive. The data point to put out there, given all the baby boomers that are retiring, you literally have two million businesses up for sale and there are like 150 search funds that are active right now. We just don’t come across other searchers very often or at all because there are so many of these businesses for sale. Now you’ve got to know which ones to buy and you’ve got to hire really talented searchers to run the effort, but those are things I feel good about with Kingsway and what JT has built here.
Scott: Full disclosure, we all own the stock.
As a next iteration, do you think about using the search engine as a way to consolidate across larger geographies and grow even bigger businesses from these grassroots campaigns?
JT: Specific to the skilled trades, that is certainly a big part of the aspiration. It’s a huge and fragmented industry nationally, and we have a great operator who has a track record of having done a buy-and-build campaign in the same or an adjacent industry. So aspirationally with Rob, it is that we will be doing several acquisitions a year, applying his playbook, and building a much, much bigger business.
Adam: We can do both. We can do rifle shots and we can do platforms where you do a roll-up. I would say that we have three or four platforms right now. We have the plumbing platform, which we call skilled trades. We have an accounting business, it’s like a mini version of CBIZ that we’ve been rolling up. We have an IT services business, the IT MSP. We haven’t done any tuck-in acquisitions there, but it absolutely can be a platform. And then in the SaaS business, we’ve made one tuck-in already.
Scott: Could you talk a bit about the competition in this space? Thousands of MBA graduates come out every year looking to do a search fund. Do you run up against them, and why is your platform better?
JT: It’s a great question. Search funds and ETA, it’s now called, Entrepreneurship Through Acquisition, has become very popular in the last 10 years. It’s now taught at all the top-tier business schools. But still, there are only 80 or 100 new search funds formed every year against the backdrop of the demographics that Adam was talking about, this gray wave or what I call the silver tsunami of retiring baby boomers. Even though there are 150 active searches at any one time, we just don’t really run into them when looking to acquire a business. And being a public company, we’re a little bit differentiated as well.
Adam: There’s another angle to that question, which is, why is Kingsway attractive for a searcher to be on the platform rather than doing it on their own? The simple answer is the economics are the same, but we provide all of these resources. You can talk to Will Thorndike if you have an issue. We’ve got an infrastructure built out. I think when searchers start their search, they spin their wheels for the first six or nine months just figuring out how to get deal flow. We have an infrastructure set up from day one with 5,000 business broker relationships. We have JT’s expertise and the expertise of other people in the organization: this is the kind of business to buy, here’s what to look for in the purchase agreement, here are the landmines along the way.
Scott: You have one LP to convince also to finance the deal.
Adam: Yeah, you don’t have to go around and say, “Hey, hold on, seller, I need to go find the capital.” We’ve got the capital, we’ve got banking relationships, and we have the banks compete over us. The financing terms end up being not an 11% SBA loan with a personal guarantee. With Kingsway Skilled Trades, we just did a 7.5% fixed loan with no personal guarantee, a 10-year amortization, and one year of interest only. No searcher can get those terms, but we can under the Kingsway umbrella. You put that all together and it makes it a really compelling place. If you are a really talented searcher, there is no better home than being in the Kingsway ecosystem.
My email is adam@davidpartners.com. If you want to email me, I’m always happy to talk Kingsway.
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