Hadley Family Office finds success through search investing

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As principal at Hadley Family Capital, based in the Greater Toronto Area, River Ewing is one of a small but growing cohort of search investors in Canada. But this is an unanticipated direction for the business his grandfather started in his garage.

Ewing, also principal at Hadley Family Office (of which Hadley Family Capital is the direct investing arm) is the third generation in the family business, but the first to go into higher education. And it is there that he learned about search investing.

Search investing, sometimes called entrepreneurship through acquisition (ETA) is a form of private investing that, in contrast to venture capital or private equity investment, is about financing the purchase of a small, established, and enduringly profitable company for a young, entrepreneurially minded first-time CEO to run.

And key to the search model is supporting the new CEO through successfully managing the business and then potentially to an exit.

Stanford’s Center for Entrepreneurial studies has tracked more than 500 search funds raised since 1984 in the United States and Canada. A 2022 analysis by the centre of 526 qualifying search funds found the aggregate pre-tax internal rate of return to be 35.3 per cent.

While the search fund model was developed at Harvard University in the 1980s, the concept is just now beginning to be offered to entrepreneurs in Canadian universities, such as at Ivey Business School at the University of Western Ontario and Haskayne School of Business at the University of Calgary.

This model is also an opportunity for small- to mid-sized business owners who do not have a succession plan in place to have a viable route to transition their business. It is also a path to entrepreneurship for people without a startup idea. And it is an option for investors with patient capital to add private assets to their portfolio.

Ewing started the Hadley Family Office in 2018 after graduating from Ivey Business School to professionalize the family’s holdings and develop a long-term vision for the family. While pursuing his MBA at Harvard Business School in 2021, he was introduced to the search model.

Here he talks about his experience, what they look for in an acquisition target, why he thinks it is key to get Canadian investors interested now, and why this model was the answer to how to make the transition from a small business to an investing family while retaining their entrepreneurial spirit.

How did you become a search investor?

“It’s really the story of a third-generation family business. I saw that we needed to steward the family and our business through succession, figuring out how to execute what was well-planned by my grandfather.

My grandfather started a foundry in his garage. He grew it into a great operating company, sold it and started another foundry business, based in St. Louis [O’Fallon Casting]. It’s still our family’s main operating business. So, we knew we had the operating skill to help Canadian acquisition entrepreneurs, and I was already well-integrated into the search ecosystem at Harvard. It was a relatively organic process beginning to back searchers who believed we would be valuable investors to help them succeed.”

Why did you focus on the search fund model?

“I found out about it in business school – we’re a blue-collar family and I was the first to go to college. At the time [before 2021], search investing was really only accessible to students of a handful of top U.S. MBA programs, but it seemed like an obvious answer to our family’s challenge — how to make the transition from small-business operators to an investing family while retaining our entrepreneurial spirit.”

How is search investing working out for Hadley Family Capital? How do you differ from venture capital investors (VCs)?

“It’s going great. Searchers really seem to appreciate having family offices as investment partners. Our ETA portfolio includes eight search partners and four businesses.

We differ from VCs in our investment philosophy – VCs look for some really big winners to pay for the losers. That’s not our style – we don’t want any losers. We are more similar to private equity in this regard.

We look for businesses that are cash positive and which are growing in their cash generation. Our businesses would not be large – usually between $1 million and $5 million (EBITDA); they’re small businesses that already have a product fit in their market and are more mature than what a VC would invest in.”

What does the market in Canada look like for search investors?

“It’s obviously smaller than the U.S. market – even smaller than the standard benchmark of one-tenth the size because search investing is growing so rapidly in the States.

But there is definitely a lot of opportunity here for searchers and for family offices; I think there are only a few dozen searchers in Canada. It’s an open field until we get to a search market that’s as developed as the U.S. one. That being said, the growth in both markets has been and still is exponential.”

What kinds of opportunities are there to invest in Canadian businesses?

“There are hundreds of thousands of attractive small businesses in Canada [from a total of 1.21 million in 2022, according to Statistics Canada]. Three quarters of these small businesses are expected to be sold by their aging owners in the next 10 years. It’s a silver tsunami, and over half of these businesses have no succession plan.”

What type of investor in Canada is suited to search investing?

“It works really well for family offices in general, and especially well for family offices that are out of their initial operating phase as a family business, who haven’t yet deployed their capital and would either like to retain the entrepreneurial spirit that helped them grow or support other business keep and grow that spirit.

Search investors also need to be comfortable with long-term holds, comparable to the long-term expectations of private equity investors. It’s similar to a private equity investment, in that it’s longer than a two-year investment; the difference is in the size and types of businesses. Search investments are smaller businesses.”

What are some of the challenges in setting up a search investment program?

“It’s a lot of work to do it individually, especially if you’re a large family office that already has a lot of moving parts.

And search investing requires engaging with and mentoring the business you’re investing in.

The search target is probably a family business, as well, so it’s important to understand the dynamics of family businesses. It requires active participation. You don’t just write a cheque.”

What kinds of companies do you look for in Canada to invest in?

“You’re looking for companies that are already generating revenue and have a sticky customer base – the language the search investment community uses is ‘enduringly profitable businesses.’

In some ways it’s a matter of identifying what kinds of companies you don’t want to buy. You don’t want to be involved in a turnaround as a search investor. You also have to work with the company to manage their transition to a new CEO.”

How do you manage the CEO transition?

“The conventional wisdom in our space is that in the first six months you learn the business and don’t make any large changes. You’re working with enduringly profitable businesses.”

Are there certain types of businesses that are attractive to search investors?

“It could be anything, from companies that rent musical instruments to fire safety testing services, to fleet logistics software.

It’s really less about the type of business and more about whether the business is a good fit for a new, first-time CEO. We look for a story about how the business can drive value rather than focusing on specific industries.”

Where do you see your own firm growing and the search sector growing in Canada?

“For us, ETA or search investing is going to be a major aspect of our family office going forward. That’s where we’re putting our energy. The key for us and the sector is to attract more Canadian investors to the capital investment table. Otherwise, Americans will come in and fill up the space at the table. We’re trying to be evangelicals – we want to help build entrepreneurship in Canada. I think it’s a rising tide.”

Responses have been lightly edited for clarity and length.

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