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The rise of search funds and a new generation of bosses

A man looks at an electronic board displaying Japan's Nikkei average (top C) and various countries' stock indices, as passers-by walk past outside a brokerage in Tokyo April 16, 2014.

Toru Hanai/REUTERS

A few years ago, they were consultants, or on the middle rungs of private-equity firms or investment banks.

Now one is the president of a chain of salons, one is running an electronic surveillance firm and one is head of a software company. Where is Canada getting these much-needed entrepreneurs? From a growing boom in what are known as search funds.

Justin Dumitrescu, president of Caryl Baker Visage; Rob Cherun, chief executive officer of UCIT Online Security Inc.; and Adrian Bartha, CEO of eCompliance, are all young investors who have started the mini private-equity funds.

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Instead of buying a few companies, in the traditional private-equity portfolio model, these funds usually buy one company at a time. There's no sitting on the board opining on strategy. When you start a search fund and buy a business, you step into the executive role and start tackling the problems, with your own money at stake.

"I was up at 2 a.m. typing in general ledger information on some of the accounting," recalls Mr. Cherun of his experience at UCIT. His partner Erik Mikkelsen spent weeks on the road "staying at budget hotels and flying economy."

Still, Mr. Cherun says it was absolutely the right decision to try search funds after stints in accounting, consulting and investment banking firms.

"Being the boss, setting the culture, [living more] ups and downs, it's exciting. It gives things more meaning."

There are still late nights. There is still time on the road. But you are doing it for yourself, and maybe, just maybe, you can find a business you can run for the rest of your life. With the financial crisis having made some other career paths less lucrative, search funds are attracting more and more interest.

"The traditional path of banking, private equity has to a certain extent become less attractive. The money is not what it used to be, the perceived allure is not what it used to be," said Mr. Dumitrescu.

Search funds usually find investors who will bankroll a year or two of searching for the right business to buy, and then put up money alongside the fund's founders to buy the company.

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It could be in almost any business. It's a safe bet that Mr. Dumitrescu didn't dream as a child of owning a chain of salons. But he had a strong desire to run some sort of business.

"For me personally, we put in our years, and spent our years in banking, in private equity," he said. "If you want to be a good private-equity investor in my opinion, it's hard to be world class if you don't have operating experience. It's as simple as that. You have never sat on the other end of the table. You don't know what that operator is going through."

Mr. Dumitrescu and his partner looked at an education company for a year, and when that fell apart, they began to look at buying Caryl Baker Visage, a franchisor with about 30 locations in Ontario. The owners didn't have a succession plan and there was an opportunity to take the business national. But there were also smaller ways to increase profit. One staffer was writing addresses on letter and envelopes. Introducing envelopes with windows cut the time spent on that job by half.

Because search funds are looking for smaller transactions than traditional private-equity funds, they provide buyers for a whole range of business ownes who might be looking to sell but were previously below the radar. Stanford University has been tracking search funds for years. More than 150 have been founded. Numbers on Canada are hard to find, but in addition to the three funds run by Mr. Dumitrescu, Mr. Cherun and Mr. Bartha and their partners, there are more looking to launch in Canada.

Stanford's numbers show the funds have achieved an average return on investment of about 11 times, though there are funds that fail completely and funds whose success buoys the average.

There is no rush to sell. Private-equity funds usually move on after seven years or so. A search fund can own a company for decades. As Mr. Cherun notes, many fund managers have become "lifers," trading an identity as an investor for that of an entrepreneur in a business they probably never expected to be in.

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Mr. Bartha can't see selling for a long time.

"We are having so much success with this business, I can't see us leaving anytime soon."

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