Episode Transcript
[00:00:00] Speaker A: Both an art and a science. Valuations are complex things, and their impact is enormous, making the difference between generational wealth creation and a comfortable retirement. At Biswaal, we know how tough it is to grow and run a business, which is exactly why weve made valuations simpler. Whether you are using our online tool Biswile live, or reaching out to us for a concierge offering where we spend more time on your numbers and your business and give you detailed feedback, you can be sure that the same techniques being used by professional investors are also being used by us. And with Biswal Bootcamp, we will prepare you for those discussions with investors.
Welcome to this episode of the Biswile podcast with Sibosiso Mbunambi of Cosworth Capital as our guest. As you hopefully know by now, if you've listened to a few of these, I'm your host, the finance ghost, and I'm very excited to chat to someone today who has brought an investment structure to our shores. Awabi in South Africa, in case you're listening to this elsewhere in the world. And it's a structure that is pretty well understood in the US, but not in South Africa. And we actually had a webinar with you. Sibosis not a bad thing, because for those who missed the webinar, they can now find out what a search fund is. And for those who attended the webinar, they can get some enrichment. Yes. So thank you for doing this podcast, especially so soon after the webinar. It's really good to have more of your time.
[00:01:16] Speaker B: Hi, Gus. Thank you. Thank you so much for having me. Indeed. The webinar was super fun and super excited to obviously get into the thick of it even now.
[00:01:24] Speaker A: Yeah, there were so many questions on that webinar. I mean, there's clearly interest in the structure, right? And I think it's because people don't really know what it is. So the name of the structure is a search fund. And I think on this podcast, the only place to start is a couple of minutes on what a search fund is and how you think this addresses a gap in the market, right?
[00:01:41] Speaker B: Yeah. So a search fund is effectively an emerging asset class that takes a strong blend between a talent model as well as a private equity model, but effectively what it is, it's a form of entrepreneurship through acquisition, where an aspiring entrepreneur is able to set up an investment vehicle, gain commitment from several investors with the objective of then using those funds to acquire a single business. And the real kick is that upon actually acquiring that business, that entrepreneur or pair of entrepreneurs install themselves as sort of the CEO's or any other meaningful leadership roles. Right. So it's a really exciting path to becoming a CEO really, really young, and that's what most searches are in it for. But I think the key question is, what is it that search funds actually seek to solve? And I think the real opportunity is that there's a perfect storm always constantly happening as it relates to the long tail of businesses that have succession crisis. If you think about the south african context alone, we estimate that almost half of privately owned businesses will be sold over the next 20 years. And that correlates to about 3.5 billion random changing hands in the south african context.
[00:02:56] Speaker A: Right.
[00:02:56] Speaker B: And so this is phenomenal, phenomenal opportunities of baby boomers who need to sell their businesses, whether as it relates to just them requiring to retire or getting into new ventures or death or divorce or whatever it might be. But there's this phenomenal opportunity for aspiring entrepreneurs to, instead of starting a business, get into an existing business. And that's kind of the fundamental premise of the model is that what might it look like if we took young aspiring entrepreneurs and instead of getting them to start businesses, take over an existing one?
[00:03:31] Speaker A: The keyword there is aspiring entrepreneurs. So I want to dig into your background a bit because it's so interesting. So you studied at one of the best business schools in the world. You've done some really, really cool stuff. I think let's not do a ten minute cv, but just some of the high level stuff that got you to this point, I suppose. Is it fair to say that a search fund is really just taking business education and some experience and kind of then meshing that together with the right backers and giving you that accelerated jump into the top job in the hot seat? Because it comes with a lot of pressure as well. But we'll get to that later, perhaps. I think let's just dig into a little bit about your background. How did you get to this point where you were able to raise this money and get backed into this?
[00:04:08] Speaker B: Yeah, sure. So my background is predominantly in strategy consulting. So I did a just over half a decade at Bain and company there. We were doing really exciting large scale turnaround of performance improvement efforts across sort of sub saharan Africa and did a bit of a stint as well in the Middle east. So a really strong sort of foundation in critical thinking, strategy development, the typical high performance kind of scenario. Off the back of that I went, then joined the family owned businesses, which is a wholesale and retail play within the. Within the meat, specifically within the township sort of gray market. So I did that for about two to three years, and I was super, super energized by that. And I think one of the key reasons is that working in strategies that you were always kind of arm's length away, you never really got the opportunity to be hands on. And so you develop these really great strategies, formulate them with the teams, but you never really got stuck in. And so the opportunity to help support our family owned business was super exciting.
But moving on to the MBA, I was actually a bit despondent.
[00:05:16] Speaker A: Right.
[00:05:17] Speaker B: And part of the reason for that is I was super energized by the recent entrepreneurial experience that I had being in the top seat.
But I was also acutely aware of some of the limitations my specific family sort of business scenario had. It was a lot small. It wouldn't have the kind of impact or personal balance sheet impact that I'd be looking for. And quite frankly, I couldn't really leverage all the skillset that I had learned in my prior career. So once I'd optimized for the bureauvos recipe, it didn't really matter that I could do a discounted cash flow model or develop a go to market strategy. And so headed off to Barcelona to do my MBA and then really discovered this model, the search fund model. And for me, it was a bit of a kind of a scarlet thread, right. It combined the ability to be an operator, the ability to really move the needle and be a CEO. But it also did it kind of at the right scale, at the right impact.
And that's kind of a little bit of my story. And so it was kind of hook, line and sinker. I was like, what investors will back a young guy who's inexperienced to go buy a business? This is great. This is exactly what I want to do. And a part of the process of fundraising, there's a really, really great network, at least within the business school fraternity, of investors that actively invest in this asset class. And so whilst it's a bit of a pioneering project here in South Africa, it's very well developed in West Europe, North America, as well as Latin America. So there was a very easy kind of network of investors to plug into.
[00:06:57] Speaker A: What made you choose Barcelona out of interest for your MBA? It's quite an unusual choice. That must have been quite an experience. Spain must be amazing. I haven't traveled there myself, but it's definitely on the bucket list.
[00:07:07] Speaker B: Yeah. So I traveled there before, actually, you know, doing business school, and I quite enjoyed it, to be honest. I started with rankings. And so I kind of said, you know, I want to be in a top ten, top 20, and so automatically that, that, that limited. And then I had to make a call between, do I want to be in the US? And do I, or do I want to be in Europe? And one of the big sort of differences are, I think people usually say, the US business schools open you to the US and the european business schools open you to the rest of the world.
And I had no inclination to be in the US.
And I think that was a big thing. A second key thing was just the time zone.
I'd still be in the same time zone, be able to connect with my wife and family and all those type of things. But when I also looked at the data, I also found that Europe was a lot more supportive of Africa or african entrepreneurship. I think I'd already known that anecdotally, in a way, we have a strong cohort, east european entrepreneurs in the country. We have strong cohorts of european descendant people in private capital. But even if you look at the numbers, for example, Sawka, they publish funds under management. And where they come from, about two thirds come from Europe. So of non south african private equity lP's in terms of value of money, two thirds of that come from Europe, and just under 4% comes from America. Right. And so, you know, when I kind of played that all out in this kind of mini rubric, you know, family, personal rankings, proclivity to support because I knew I wanted to come back to South Africa, it just kind of really, really made sense to join EEC business school.
[00:08:57] Speaker A: Sounds fantastic. I must spend one hell of an experience. And of course, you are back in South Africa, and it sounds like that was kind of always the plan. To what extent did the business school kind of lay this path to go and raise a search fund? I mean, I've looked at your cap table. It's an incredibly interesting one, right? You've got people. I mean, it almost looks like the United nations. It's so interesting. There's so many interesting people on there. A couple of big names in South Africa as well.
How did that jump work from coming out of business schooling to actually raising that search fund?
[00:09:23] Speaker B: Yeah, so, like I said, the business school is kind of really where the action is at when it relates to this asset class, and it's also a legacy reason. So the pioneers of the search fund model were sort of Harvard and Stanford, where some 40, 50 years ago, an increasing number of students would come to their professors and say, I've had a really great MBA, but I really don't want to go back to corporate and I don't have a really smart idea what might I do.
And that's effectively how it started. And so it was always super, super close to the university fraternity or the business school fraternity. And so off the back of that, the whole ecosystem of investors and people that tie into that ecosystem are closely linked to the university. And so depending on which school you kind of go to, you would be a lot more exposed. It just so happened that I went to a school that is the second leader. So you kind of have Stanford as the leader of North Americas and Eise has literally taken the lead as it relates to rest of the world. Right. And that relates to the case studies they publish, conferences they hold. And so, unbeknownst to myself, I just landed on quintessentially the best search fund school to be in for the rest of the world. Right. But to put it into context, three of my investors are professors from the school.
So some of the more interesting fundraising components was the local cap table. And by local I'm speaking to getting south african backers on board. Effectively, international investors would say, hey, we'd like to invest, but we wouldn't invest unless there was a notable kind of syndicate of local investors who we can trust and who have a good name. And so that was a whole nother kind of less easy or soft landing approach to fundraising where I really had to knock on a lot of doors. I had to not only sell myself, but also the model, convince them that, hey, you're going to give a couple of million bucks to someone who's never raised, who's never raised a fund, who's never deployed funds, but has also never been sort of a CEO. And you're going to give them this fund to do exactly all those things, right. To manage your fund and buy a business and then become a CEO. Right?
[00:11:47] Speaker A: Yeah, it's an incredible leap of faith, right? But you've convinced people and you're ready to go and you're looking for your dream deal, which is fantastic. So I think it's worth just highlighting. What does that dream deal look like for you? What is the perfect, perfect company to jump in and acquire?
[00:12:02] Speaker B: So I'm looking for a bob, right? A boring old business.
And that's the fundamentals of the model. It's to say that there are businesses out there that have been chugging along for 40, 50 years, 30 to 50 years that are cash flow positive, have well established systems, have a strong brand, and are just great going concerns right there. But they also have tons and tons of latent growth potential. And the reason for that is that probably for the last 2030 years, or 20 years, rather, they've just been operated more kind of as a lifestyle business.
The guys are 60, 70. They're not trying to shoot out the lights out. They're not building out business development teams, they're not chasing off the school. The school fees are paid, the bond is paid out, and it's just a great kind of cash cow. And so that's kind of the social context of the type of business I'm looking for, really sort of clicking into some of the thematic properties and. Oi. We're looking for a business that's doing about 20 to 60 million rand EBITDA, which is just a fancy way of saying earnings. It's basically just taking your PBT and then adding back depreciation, a really good proxy for cash. And the reason for that is with a certain type of size comes a certain type of associated risk with it, right. And so we tend to find that once you start going to sort of the eight or 10 million EBITDA, the risk associated with it is significantly higher. A component of that is that there are also funds off search funds. So about four to five members of my cap table, or private equity firms that have raised capital to only invest in search funds.
And they have a certain deployment strategy. So they would spend just the same amount of energy efforts guiding me through a 5 million EBITDA business as they would a 60 million EBITDA business. And so just from a kind of allocation perspective. But I think the biggest point, just around the number is around the associated risk and all the potential to grow. Right. It's a lot more difficult trebling 150 million rand EBITDA business.
And that's effectively what we're on the hook to do. So in order to earn my full equity, so I get paid up to 25% equity in a deal, I basically need to achieve a 35% IRR within about five to seven years. And so there's an incredible kind of focus on really growing the asset.
The second sort of key thematic property, and I'm not going to double click on all of them, right. Is around recurring revenues. And so there's a big discussion around what is recurring, what is repeat, what is actuarial. Right. And so recurring speaks to revenue that does not only repeat, but is also predictable in timing. So a good example is sort of your mobile subscription with MTN, right? It's not only that MTN knows that you're gonna use them, but they know exactly when you're gonna pay them. Right. Like when. When you're gonna use them. Right. And, and that's. That's a quintessential sort of definition of recurring. Then there's repeat, which is pretty obvious. Then there's actuarial. Right. And so actuarial really speaks to, you know, so if I'm mowing a lawn, right, I know that ghost lawn is going to grow at some point. It's just, you know, it has, it has to grow, you know, or if.
[00:15:39] Speaker A: I'm giving my lawn history way too much.
[00:15:41] Speaker B: Right. So you can kind of bet on that industry to a certain level that, hey, I'm going to. I'm going to do a bolt on strategy of, you know, landscapers because I know their loan is going to grow. It's just a function of just a curly. Or you can say I'm Baldwin and I'm going to do a development because I know there are about, you know, a million people migrating into Johannesburg every year. It's just a curly. I don't know when they're going to buy or how they're going to buy, but for sure within an eight year horizon, they're going to be at a certain income level and they're going to buy. Right. And certainly what we're after is recurring revenues. Everyone is after recurring revenues. But I think there's also a specific reason why search funds are specifically after recurring revenues. And that's the idea that no matter how smart the guy is. So you're taking guys and girls from management consulting, hedge, private equity, corporate finance with a strong action bias. But they still are novices as it relates to whatever business they buy. So if I get into textiles or I get into medical equipment, I know nothing about it in the first, even sort of 18 months or two years, not really. Right. And so you ought to get into a business where you not kind of trying to refill revenue from day one. You know, you need kind of that bandwidth or that space to learn. Right. And so that's another really, really key kind of visceral thematic property that we, that we look for in a business. And the last is probably the social engineering around it. Right. Like, you know, I've seen so many different permutations of potential deals on my desk and, you know, their divesture or they're this or they're that, or. And I've come to actually learn that, you know, the true guardrails of a search fund are the way that they are for a particular reason. It almost has to be a person who's aged, who's mature, sort of 65 is requiring an exit, you know, for whatever reason, but non business reasons. Right. And that's just kind of just the sweet spot, right. Because you want the type of person who cares about the legacy, who cares about the fact that, you know, their employees, they built that relationship. So they're the type of person that in two years time, if the CFO resigns, you can call them and say, mate, the CFO just resigned. I don't know what to do. And they would, they'll probably pick up the phone and, you know, and come and help you. You know, it really is a succession play, right. And whenever I kind of move one or two degrees away from that, I actually end up realizing that it doesn't make sense for a couple of reasons. I'm not going to get it at the right price, which is a really important thing in search funds. I'm not going to get the right advocacy post acquisition, which is also a really important kind of, and I probably won't have the real vacuum to operate. Right. So if you get into a convoluted structure that's not really a succession play, you know, it's got a, you know, it's got governance structures, it's got people, it's got things. It's, you know, am I, am I just going to be a cog in the system or am I going to really be able to drive the new growth strategy? And so, and so the third point is really around the social engineering of.
[00:18:42] Speaker A: It makes a lot of sense, I think. You know, one of the things I wanted to ask you was what are the pain points facing the founders that you speak to? But I think you've answered the question already, which is this is someone who's typically done their time, their 20 or sometimes 30 years to build this business, and it's time now, it's time to move on. And succession is incredibly, incredibly difficult. And I suppose the problem facing founders is to achieve succession, what often happens is they have to take a big risk and go and hire in CEO of some kind who doesn't necessarily come in with skin in the game. They have to almost incentivize that skin in the game, and then they have to hope that this person doesn't break what they bought. They can't get a clean exit because now bear in mind, that's an exit in terms of time, not money.
[00:19:25] Speaker B: Right.
[00:19:25] Speaker A: What you're offering them is an exit in terms of time and money in.
[00:19:29] Speaker B: One shot, hundred percent. And then, and that's really the unique value proposition. It's both a liquidation event as well as a change of control event, which is. Which is hard to come by. Right. And so to answer your question, what are some of the pain points just to kind of add just a little bit more? Businesses are hard to sell.
And I think that's a little bit of what you guys at biswaal kind of interface with and are trying to solve for. Right. They've never done it before. They don't know how to think about pricing. They haven't set up their business for an exit. You know, so that's one key thing. The second key thing, again, is no succession planning, right. Their kids want to become podcasters, with all due respect, ghost, right, or influencer.
[00:20:10] Speaker A: Look at this, look at this.
[00:20:12] Speaker B: Or influencers or whatever it might be. So they're just not that interesting in running, you know, boring old businesses.
[00:20:19] Speaker A: And that's that boring. I was about to say it's that Bob concept, right. That's specifically what it is, is it's typically a boring old business. So basically, you're an old man trapped in a young man's body looking for that business that kind of makes cardboard boxes really well, you know, not necessarily looking to build Africa's next education app. And there's nothing wrong with that. I don't say that in a bad way. I think it's a specific type of business that you're looking for, and it's a completely unloved space, which is the opportunity for you. There's just no capital flowing into these businesses. People just don't. Don't buy them. They should buy them.
[00:20:50] Speaker B: And then I think the third thing is that, you know, most buyers are financial buyers, right? So they're not interested in operating, they're not interesting in carving out an opportunity for the entrepreneur to exit. And for all intents and purposes, their whole retirement plan is baked into the business.
So as an entrepreneur, you kind of feel trapped. You know, you just, you know, you're kind of in it.
Also, just to touch on your point around boring old businesses, it's, I think the real opportunity is to take a bob and make it super dynamic. And the opportunity is there. Right. Precedence in the asset classes is not kind of continuing the going concern of the boring business, but it's really to scale it, right? It's to add technological enhancement to it, to drive efficiency. It's to acquire more businesses, acquire more sort of staff for sales or business development.
So whilst kind of at the face of it, it's a boring old business. But what it really requires is that energy from a young entrepreneur to not revitalize it, but to kind of let it live through its next phase of growth.
[00:22:00] Speaker A: Yeah, completely. That's exactly what it is. It's that energy thing. And I, you know, for entrepreneurs, they've taken risk in their lives. I almost feel like there are very few people who can just keep taking risk for 40 years. You know, it's stressful for a lot of entrepreneurs. They took a very big risk up front. At some point, their business probably faced an existential crisis or two, and by the end of that, they are tired. And when they are sitting on a cash cow and they can see their family and they can play golf enough, you know, they kind of sit and go, this is great, actually. This can now just tick over for ten years and I will retire very wealthy and happy, you know, and it needs that young energy, them 30 years ago, willing to take those risks and take it to the next level. I think, above all else, you know, that's largely what you're bringing to the table for these sort of businesses.
[00:22:43] Speaker B: Sure, sure. 100% agree.
[00:22:45] Speaker A: So I think to finish off just conscious of time, and I want to tap a little bit into some of your bain experience. Just some advice from your side to any founders listening to this podcast, you know, just how to think about strategy in a critical way. I mean, people talk about the word strategy and it's this very big word and incorporates that often means, you know, everyone goes to a hotel for the morning and they have finger food and they make polite conversation and someone draws on a whiteboard and someone else falls asleep. A lot of strategy days are like that. Some of them are excellent, genuinely. But people think strategy is that once it, like once a year thing, you know, and that's not, that's not strategy. We know this. So from your side, what advice would you give to founders on what strategy really is? How to think about it in a critical way, just a little bit from your life as a management consultant?
[00:23:27] Speaker B: Yeah, sure.
Yeah, that's a great question. I think it really just starts with deciding whether you want to grow or not.
That's kind of step one. I interface with a lot of businesses that for whatever reason, and maybe some of the reasons that you just explained, like, I'm okay, it's a lifestyle business. I'm taking the cash and I'm focusing on family. But, you know, you ought to make the call. Do you really want to grow? Do you really want to scale? Do you really want to do more or not? Is a little bit of what I see kind of as I, as I, as I, as I interact with entrepreneurs, right. Otherwise, there's no real need for a new strategy. Just keep chugging along on what's working.
But I want to share just three key things, the first of which is, I think it's super important to begin with the end in mind, right. And really try and articulate very effectively what is your desired end state, what is your goal? What does the beach look like for you? And it's not just you, but it's kind of a version that includes all the stakeholders.
Your spouse should input into it, your employees, your customers, et cetera, et cetera, right? And so once you kind of have this, this vision, this bold vision, right, like we want to be the go to retail shop for sweets or whatever it might be, right? We want to be the leader, we want to be the number one exporter. Or, you know, it really does start with a really ambitious goal, I think is one key thing. I think I see often strategies, but people don't really have the desired end state in mind. Like, why are we doing this digital transformation and why are we hiring more people? And people can't quite articulate that. So it's super important. I think the second key thing that I drew from my experience in strategy consulting is to be evidence based, right? And so, you know, back in my consulting days, you couldn't go back to your manager and share an insight without having the data to prove it, right? And it's an incredibly important sort of discipline, I think, because it takes away, it takes away you from the issue, right? It takes away your perceptions, your beliefs and whatnot. And so if you are, if you're trying to architect sort of a strategy, like every single assert assertion, you almost have to ask yourself the question, what do I have to believe for this to be true? Or what am I implicitly believing is true for my statement? So you're saying, oh, you know, we're going to offer our suites in the township. So while implicitly you're agreeing, you're saying there's a reliable supply and distribution chain to the township.
You're implicitly saying, you know, I believe that there's a way to hedge that cash carrying risk. You're implicitly saying there's enough disposable, you know, disposable income on it, on a typical sort of township dweller to buy sweets versus just maize meal, right? And so, and so this evidence sort of based approach where every time you say, okay, we're going to do XYZ, understanding what are you implicitly believing and going out for the proof points on that. And the data is available, whether through people or through the desktop research. And so, and there's an incredible sort of opportunity for entrepreneurs in general to start leveraging data and information in their decision making. And I think just the last point was really around deciding what you won't do. Right. And so a part of, like, you could develop a strategy and say, hey, we want to be doing XYZ. It's as important saying we're not going to do EFG, right. Kind of what is, what is the trade, what is the trade off in the decision that you're making? And being very, very intentional and explicit about, about keeping to what you won't do is also incredibly important because we do live in a dynamic world, right, where opportunities are popping up and, you know, you could put online this new production line or you could employ more people, but, you know, I won't employ more people because our focus is in intensifying the skill sets of our current guys, you know, or if that is your strategy. So you also have to just be really alive to what you agree not to do.
[00:28:03] Speaker A: Yeah, I love that. I think there's some fantastic advice in there. And the last thing that I'll add to that is the earlier you are in the life of your business, the faster you need to move on. Strategy as a startup, your strategy is something you're developing by the day, literally a mature business that takes a lot longer to move a big ship. But also that's how mature businesses lose out, because a startup can come in and move very, very quickly and innovate and pivot and all those fancy words. And basically that just means every day they are making those incremental changes and little tweaks to what they are doing in response to what they are seeing in the market. And that's what big companies often forget to do. So that's where I'll leave it. And Sivasis, I just want to say thank you so much for your time. Again, it's been really, really cool to get to know you. And I like the search fund concept. It's really interesting, and I have no doubt you'll make success with it and find the dream business. And obviously, to anyone listening to this podcast who fits into those criteria and wants to sell their business or know someone who does, what is the best way to contact you, right?
[00:29:03] Speaker B: Yeah. So we have a website, Carswithcapital Co? Za. I'm also available via LinkedIn. Bonambi I think just through those two channels, you'd be more than.
More than able to reach out to me. Also, want to thank you for this opportunity, Ghost. Just speaking with you and your listeners, it's always awesome to connect. Hopefully, I'll be back talking about the recent acquisition and our growth plans, and then I think it'll be a great sort of longitudinal study, potentially, to see the whole journey from origination to exit. Potentially.
[00:29:38] Speaker A: Yeah, I fully agree with that. And that is Cosworthcapital Co? Za. If you know anything about motorsport, the name Cosworth will be familiar to you. Siber Caesar, thank you so very much. And, yeah, all the best. Look forward to staying in touch.
[00:29:50] Speaker B: Awesome. Thank you. Stay well.
