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.
