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The growing pool of private capital chasing small to medium-sized companies has added a prominent Canadian investor to the mix, with private equity executive Glen Silvestri running a search fund to bet on businesses facing succession issues.

Mr. Silvestri, a former executive at Ontario Teachers’ Pension Plan who has also worked in mid-market private equity at Imperial Capital, has teamed up with Jon Piurko, a former corporate lawyer with more than a decade of experience investing in small to medium-sized enterprises, to put a new spin on the search fund model.

Unlike traditional private equity buyers, which tend to acquire sizable companies, install board members and then restructure the businesses, search funds often raise money from a group of individual investors and use it to buy small companies. These funds are often led by fresh-faced business-school graduates with entrepreneurial bents and after closing their deals they become chief executives of the acquired firms.

Sage Capital Partners has adopted this model, but with a twist: The fund will serve as an institutional backer of business school graduates, saving them from having to drum up funding for their acquisitions from multiple sources. It will also back mid-career executives who want the challenge of running a small business.

To do this, Sage is raising up to $40-million in capital from investors such as BMO Capital Partners and Mattamy Asset Management. This money will be used to buy small businesses that have the potential to grow, but are currently run by owners who want to cash out.

The search fund model gained popularity in the United States, particularly in the alumni networks from Harvard Business School and Stanford’s Graduate School of Business, but the model made its way north of the border in the wake of the Great Recession. Recently, a number of Canada’s early funds have cashed out for substantial gains, including Auxo Management, which sold Stealth Monitoring, and High Park Capital Partners, which sold eCompliance Management Solutions Inc.

The successes have proven the search model, and that is increasing competition for good deals. “In the last eight weeks, we’ve probably seen eight new search funds attempt to come to market," Mr. Silvestri said.

On top of this, U.S. small-cap private equity funds and family offices are looking to invest in Canada.

However, Mr. Silvestri said more small businesses are struggling with succession, increasing the supply of opportunities.

In 2014, Statistics Canada found that 60 per cent of owners of small and medium-sized enterprises in Canada were 50 years of age or older. “As a result, the number of business owners planning to retire is increasing rapidly,” according to a joint report in April from the Canadian Venture Capital and Private Equity Association and Business Development Canada.

To this end, Sage has already inked two deals – one for Hathorn, which makes sewer video-inspection equipment, and another for Voxco, a software company that specializes in survey data collection and design.

Still, Erik Mikkelsen, who co-founded the search fund Auxo in 2010, said the market has certainly changed over the decade. “Over all, you’d expect to be buying a small business for under five times EBITDA [earnings before interest, taxes, depreciation and amortization] back in the day," he said in an interview. “Today it’s widely accepted to look at other metrics." These include paying a multiple of revenues – not operating profit – and making major one-time adjustments when calculating EBITDA.

Mr. Mikkelsen also said that given the current market, it pays for search funds to specialize in certain industries. “In the early days you could say, ‘I’m a pedigreed, young, hungry person,'" he said. “Because competition is higher, you need to figure out what differentiates you."

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