New search fund rolls dice in Canada

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Rob Cherun and Erik Mikkelsen were already living their dream, working in investment banking, management consulting and real estate private equity out of New York, Toronto and Los Angeles.

But that wasn't enough for Mr. Cherun, who enrolled in his MBA at Stanford's Graduate School of Business in 2008. There he met professor Joel Peterson, founder of private equity firm Peterson Partners and current chairman of JetBlue Airways Corp.

Mr. Cherun took Mr. Peterson's class and prepared a report on the value of investing in Canada. The document was compelling, noting that Canada has the world's second-largest oil reserves, large timber reserves, a strong dollar, and low debt-to-GDP. More important for private equity investors, he found that Canada has about a quarter of the money chasing smaller companies than in the U.S., on a per-capita basis.

Mr. Cherun realized he should act on his own advice. And after reading the report, Mr. Peterson said he would even give him some money to start a fund.

To do that, Mr. Cherun would have to turn down a guaranteed job back at McKinsey & Company in Toronto, where he had started his career. He thought about it and decided to take the plunge. "You know what?" he told himself, "I'm going to take the risk. I'm unmarried, I don't have any kids. I might as well roll the dice before it gets too late."

Before he could get the ball rolling, Mr. Cherun needed a partner, so he accosted Mr. Mikkelsen, whom he knew through mutual friends at the Richard Ivey School of Business where they had both obtained their undergraduate degrees. They hashed out a business plan: Find companies with $2-million to $10-million in EBITDA whose owners want to sell, then take over the business using the fund's money, and actively manage it to take it to the next level.

Starting with a few contacts from Mr. Peterson, the two men went through a round of fundraising last spring. They explored every avenue possible, including the entrepreneurial networks at Harvard and Stanford, as well as every professional connection they could think of through ties to their former employers McKinsey & Co., Barclays Capital, Morgan Stanley and real estate private equity player Regent Properties.

They pulled it off, bringing in 24 investors, including Paul Rogers, a former president of CIBC World Markets in New York, and Howard Stevenson, a senior associate dean at Harvard Business School. The slate of investors is a big deal for two men who average about five years of working experience each, and who both grew up without any ties to big money.

Now they must find a company to buy. This next step will likely be their most difficult, said Kevin Taweel, a Stanford professor who advises Auxo. In the early '90s Mr. Taweel started his own search fund and bought a mobile insurance company that now generates hundreds of millions a year in revenue.

At this point, "the pressure is high, because the results are pretty binary: you either buy a company or you don't," he said.

He commends the two men for trying something different. "It's a pretty pressure-filled time, especially when you look at your [MBA]classmates," he said, referring to Mr. Cherun. "You're making a third of what the others are making and you're in nowhere land trying to figure out if you can actually buy a company."

Mr. Taweel isn't worried about the two men's ages, because he admires their drive and previous experiences. But he said real success depends on how well they listen to their mentors. "To be really good at anything, you need years of experience, and that's where the advisers help."