Weekly Thoughts

Cal Park

Hippie Landscapers

ETA In The News

Seeing as how many of our peers think that sometime around 2015 we took a hard left turn and moved to Maine to become hippie landscapers, we always get a kick out of seeing our niche corner of small business acquisitions and operations highlighted in “real” financial media.  It’s sort of like seeing a picture of your hometown in the NY Times and thinking “Hey! I know that place!!”

Whether you call it a search fund, entrepreneurship through acquisition “EtA”,  small business acquisitions, or something else entirely, it’s all basically the same thing.  Rather than starting a business from scratch, this community focuses on buying and operating existing companies.  The WSJ explains the traditional search fund model

“Consider the model a SPAC of sorts—akin to the stock-market trend in which a special-purpose acquisition, or ‘blank-check,’ company raises money and lists its shares, then finds a private business to merge with. In this case, the investment vehicle is a fund for a newly minted M.B.A. graduate.  The M.B.A. uses the money to search for a privately held, under-the-radar business and run it as chief executive and part owner…

…The companies that M.B.A. searchers target aren’t flashy startups or well-known brands. Many are family firms without a succession plan or companies too small to attract typical investors.  The searchers typically hold the businesses for six to 10 years before exiting, sometimes selling to private equity.  Recently acquired companies operate in insurance sales, security, software services, pest abatement, and construction, Stanford said. “

Sounds familiar.  Of course, there are many nuances in the approach — from investor base to growth objectives, from capital structures to time horizon, and (our favorite) operating approaches.  Chenmark is a self-funded holding company that most frequently gets associated with the monikers “HoldCo” and “Permanent Equity”, but we essentially buy and operate the same types of companies that are attractive to searchers.  Regardless of the nuances, the space is gaining popularity, as outlined in a recent Axios article: 

“There was a 31% surge in this practice in 2016, and we’ve been hitting new records every year since. Professors are now teaching this as a way to do business at Harvard, Stanford, NYU, and beyond. ‘There’s not just one way to success,’ says Stephen Garrow, a professor at NYU’s Stern business school. ‘You don’t always need to brainstorm some genius idea.’ Scores of businesses in the U.S. are doing well but have been stagnant for a decade, he says. The right executor could come in and make that company grow — fast.”

From our perspective, there remains plenty of opportunity in this highly fragmented, inefficient space, so the more the merrier (especially if they want to join us and run a company of their own!).  On that point, the ability to attract talent to the space is paramount, as highlighted by Money Stuff

“What a great trick! If you get your MBA from Stanford and tell your classmates ‘I am taking over a family-owned pest-control business in Scranton,’ and they have fancy offers from private equity firms and tech companies, they will look down on you. But if you tell them ‘I am running a search fund’ then that is, you know, cool, and finance.”

The fact that we still get asked things like “What on earth do you do in Maine?!?!” is exactly why the space has opportunity.  Yes, interest is growing at fancy business schools.  However, the reality is the vast majority of talent doesn’t want to move to a small town to run a largely anonymous business, regardless of the upside.  And solving that puzzle, dear readers, is why Chenmark exists.

Have a great week,

Your Chenmark Team

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