Toronto-based search fund Auxo Management has tied the knot on its first relationship. Unlike private equity funds that invest in companies and then manage or oversee them from afar, Auxo’s managers Rob Cherun and Erik Mikkelsen set out last September in search of a company that they could get their hands dirty in.
To play in Canada’s fractured private equity market, investors must go head-to-head with huge established funds for big businesses, or battle venture-capital players for small but promising startups. But there’s an untapped middle ground, one that a different breed of investment fund is designed to access. So-called “search funds” seek out flourishing, small-to-medium-sized enterprises that want to sell but can’t find buyers. And thanks to a growing wave of retirements by baby boomer entrepreneurs, the number of these firms is growing. These enterprises are too small to attract attention from big players like the Canada Pension Plan Investment Board, and too big to interest venture capitalists, but they can be attractive investments that boast reliable cash flow coupled with lower risk. “The level of risk, I think, is substantially reduced compared to the venture capital market” because the businesses are established, said Paul Rogers, a former president at CIBC World Markets in New York, who recently invested in one of the newest entrants in the search-fund market, Toronto-based Auxo Management. Auxo was started this year by Canadians Rob Cherun and Erik Mikkelsen.
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.