Emerging Market Search Funds with Andrew Locke, co-founder of Ambit Partners

Ambit Partners is a search fund investor that enabling entrepreneurship through acquisition across traditional and developing markets, including Africa, South America and Asia.

In this episode, Ambit co-founder and Partner, Andrew Locke, discusses the impact and business potential for search funds in emerging markets and what he looks for in entrepreneurs that he invests in.

Visit Ambit Partners at www.ambit.partners and join our emerging markets community on LinkedIn at https://www.linkedin.com/groups/13949631/ .

Transcript

Andrew
Sure. Yeah. So happy to kick off, I think a lot there. Yeah, so maybe, yeah, happy to define a search fund to start us off. So a certain search fund is kind of an alternative path of entrepreneurship that's typically undertaken by by an individual or a pair, who will form an investment vehicle that's capitalized by a by a small group of investors usually 10 to 20 or so with the purpose of searching for acquiring, and then stepping into lead, a small privately held SME for the medium to long term. So these are typically kind of five to 10 years, those initial investors in the search fund, many of whom will be will participate in the actual acquisition of a target company when that time comes. And that's kind of what a search fund is. They were started in 1984, in the States, out of Stanford, and Harvard, and it's getting popular in the US before jumping over first to the UK and then to mainland Europe, have kind of been proliferating across the globe. Since then, it's been having an increasingly attractive and interesting career path for typically, young MBAs with not a lot of perhaps direct management experience, but who are smart, motivated, entrepreneurial, and are looking for a path to run their own company?
Nick
Yeah, definitely. It's a it's a very exciting area for MBAs. I know. It's something I thought about doing directly after the MBA myself. And it's something that I hopefully will do in the next few years. So that's how we originally got in touch. And then I found out that you were doing this based out of Africa. I thought that was super interesting. So I'd love to learn a bit more about how you ended up in Africa and then eventually how you got involved in search on the continent.
Andrew
Yeah, so I've been working American by birth and have been working internationally for most of my career. The first half I spent in development economics. So my my first job, actually Out of undergrad was in Liberia and West Africa. But I jumped around a bit spent some time in the Middle East work in microfinance, some time in India, working in behavioral economics, before making a transition into more private sector work. So the kind of problems I'm interested in solving have persisted. But I think the tools that I think are best suited to solve them have changed. So I'm taking a more private sector market based approach to do my work. So I came back to Africa, this time to to the east based on Nairobi for fears and management, consulting, supporting small businesses to to kind of build a strategy to raise the money to build teams that have particular focus on developing talent, which is a huge factor and a differentiator and success for small companies everywhere, but particularly in the in the social enterprise space. And Africa, was there for a few years, spent significant time in Kenya and Rwanda, and Uganda as well, before going to NCI for my MBA in 20 2018, for the 18. d in this exact part of time between France and Singapore, and then came to South Africa after graduation. So actually, with a business partner, who was part of my MBA class, we decided to come and join the firm that he was working out before school. This is a social enterprise private equity fund based in Johannesburg. So we operate four portfolios, comprising a total of 26 small businesses. So the proximity search fund size that this this initial work was not called search funds, it is more traditional kind of small cap private equity, that had a lot of the characteristics of search, which kind of speaks to where we are now. But so we went and acquired as a firm these 26 businesses in South Africa or South Africa, and then, at the same time, went to market to recruit principals, young entrepreneurs, to come into those businesses in executive equity roles. This was all within legislation, South Africa called broad based black economic empowerment. So legislation targeting it attempted to rectify many of the wrongs of apartheid, and to encourage the transition of business ownership from personally white hands to younger black ends. So the principles that we brought to these companies were all black South Africans, who were super high talent, but but generally didn't come from the intergenerational wealth. That is that is often needed to take the entrepreneurial risk and start a business in your garage, for example. This is not possible for many people in Africa and other places as well. So it was within that context that we that we operated this in this fun, myself, at this point, we're there for a few years, and then helped actually sell those funds to a secondary PE fund for Africa. And then together with a third partner, so there's three of us, we founded the current front of the workout called anti partners, which works in these traditional search funds, investing in search all over the world. So we are no longer just in South Africa, but take a global approach to investing. We've been operating for almost exactly a year. Actually. We are about halfway through our actually a fundraise of our first fund. And we've invested so far and 24 search funds in 16 countries around the world that touches South America, North America, Europe, Africa. And we're proud of some of the first people in Asia from the first to go into Australia. So we're trying to build a portfolio that balances traditional markets like the US and Europe, with what we call nascent search markets, which is often emerging markets, but not always, to help encourage those who are interested to pursue this as a career to do so, and help them raise capital and give them the resources they need to be successful.
Nick
A lot a lot of interesting stuff there on. I think I had a few questions, but maybe best to start off addressing what you just ended with, I'd be curious to know, on how that approach has gone in terms of the internationally diversified investment and why you chose to do that because it seems like a lot of search fund investors are very focused on just you know, their home country or their home region and they don't really stray from, you know, whether it's the US or Western Europe, they typically will stay you know, within a particular region. So Why did you decide to start investing in places like South America or Asia? And what? What learnings? Have you gotten either from your work prior to ambit or during Abbott that has led you to believe that those are good places to invest in search funds? So your first question,
Andrew
I think an important feature of search funds is the size and diversity of the cap table that that searches were raised. So, you know, the three of us at ambit would not be able to successfully support a South American searcher on our own. There's too much we don't know about the region. To do that, well, we bring a particular angle of experience in transacting and experience managing small companies and experience in emerging markets. That doesn't, I think it's important, an important component of a complete cap table. But but not sufficient. So we invest alongside other search fund investors that do take a geographic approach. So if we were to invest in Brazil, for example, we would require as part of our investment process, to see that there are Brazil, specific investors on that cap table to help us be comfortable with with with geography. That's true all over the world. So far in South Korea, we want to see industries that are specific to that, that geography. So I think the role that we play is we can help crowd in some other capital who is perhaps less experienced or a little bit nervous about going into a market that they don't know, or the emerging market. Can can provide. Some have asserted that. So we've seen that a few times that they were able to bring in investors that typically only go in Spain, or go into, you know, other more established markets to take a little bit more risk and be comfortable going into a new market. So that is sort of the role that we like to play in the industry. As far as what we've kind of learned. Yeah, I mean, so much. Maybe difficult to kind of summarize, I think the team brings a diverse set of perspectives. So we've we've worked in many countries around the world among the three of us from different different angles. So one of the partners has spent quite a bit of time and material private equity in Canada and consulting around the world. We've done a lot of deals together, and particularly my two partners, they were transactors, before coming down, but then myself, I've worked across Africa and India and Middle East. And I think it's difficult to identify exactly the lessons, but they certainly build an intuition around what could work, especially but the things you don't know things are probably different than build habits of how to find the answers to the questions you don't know. by Moses, huge opportunity here in these different markets. If you can navigate the properly unimportant pieces, we back really great searchers. So that's our first lens is talent is finding guys that are experts in the region are going to search in a lot of experience in the relevant kind of skill sets. And they're going to need it and who bring a really strong values. So they they leave this process, they direct it, we support in the background when we can but you know, the real trailblazers are the searchers going to these markets, and then they solve many, many, many of the problems that come up and pull it off. And when when it's relevant to help out.
Nick
What are some of the attributes of these successful searchers? Like how do you when you when you evaluate a searcher How do you say okay, this guy definitely is one that we would trust to go into one of these markets that we don't know as much about?
Andrew
Yeah, so there's sort of, like resume skills that we that we look for. There's one vertical, that's typically, you know, kind of consulting or private equity or venture capital, sometimes operations at a high level working for reputable global firms, and then find a lot of success in those early years of their career usually means kind of top pedigree schools. So Business School undergraduate programs. I just give a lot of, you know, credence to the idea that they can solve problems and work hard and do the the kind of nitty gritty hard work that's required to be successful. It's not always the case. It's not always indicative, because we have invested in and in searches that are what we call less traditional or non traditional, become different backgrounds. But that's a typical profile is one of the kind of top business schools and pedigree consulting and private equity firms. You know, a second vertical for us is value alignment. So we've we've spent a lot of time just kind of talking to the guys that we want to invest in, understand what motivates them, why they're doing this, you know, what were their families, our kids are brown with the kind of understanding what success looks like in non financial terms, which we think is really important, both as a predictor of success, but also as an indicator that we're gonna be able to work successfully together, or, you know, over five or 10 years. And then the final vertical is knowledge of the geography that I go into. So a typical profile for us is, someone who's often left their country of birth has worked in typically Europe or the states been educated abroad, is in baking, or consulting or somebodies group has decided that we all want a business, they want to go home, we want to invest in their communities, and then move back. But there aren't many options for them, that are kind of exciting within the ways that they care about. But we want kind of a credible narrative around being able to navigate the geography of their search. So connections to the financial markets, connections to the Small Business ecosystem, connections to kind of top talent sources in those countries. And these are things that we won't be able to bring, but we, you know, sort of look for in searchers. So these are some of the questions we asked across those three kind of resume value, or values and real connection to the place that they're going to search. And that's what we look for.
Nick
Sure, yeah. those are those are definitely seem like, very important areas to look, in terms of the value alignment. I'd be curious if you have values or mission at ambit itself, and what sort of values you look for in these entrepreneurs when you decide to invest in them.
Andrew
Yeah, so we do we have a constitution that we've that was actually the first thing we wrote as a team. It kind of lays out how we work what we care about, you know, it's not the same for everybody. And it doesn't have to be perfectly aligned. I think I could distill themes. You know, I think one is, you know, things like integrity, which I think are not many value statements, but the desire to be an owner, desire to take responsibility, a sense of community. A sense of fun, a good sense of humor, I think, is quite important for this, this process. And so it's one of the questions where we share that constitution with with the searchers that we invest in very soon in our process, and have a conversation about which pieces resonate, which ones they disagree with. I think that's quite personal. I think it's hard to sort of distill that. But understanding if these are questions people think about and care about is really important to us to build a successful kind of working relationship. Sure, I
Nick
mean, I'm sure it's a very personal journey. So who the person is matters quite a bit. I guess more and more in terms of the search fund ecosystem in general, I'd be curious to know where it is in Africa today, and how the search for ecosystem in search of search and businesses themselves may be different in Africa versus the US or EU.
Andrew
Yeah, so yeah, so I think business in Africa has, you know, is changing very quickly and developing quite fast. So there's, you know, robust and growing venture capital scene across the continent, there's kind of hubs of tech sprouting up in Nairobi, in Lagos. And in Cape Town. There's more money and more opportunity being seen by by large global investors on the continent, which is which is great to see. There's also the Small Business transacting exists everywhere and as for a long time, and there's been a lot of that, that the search fund industry specifically is quite nascent. on the African continent, so there has only been a few launched ever has been in Kenya, Morocco. Those searches did not lead to a traditional acquisition. We have we've backed a searcher in Ivory Coast right now is very close to me. Hope will be the first Baptist on the continent. We'll see if that is able to complete and there are some others, launching in Egypt, we've seen guys think about going in Madagascar, some guys going in Ghana. So it's coming. But it's it's very, very new. And you can kind of on one hand, but I think it's it's a product of war of awareness of search funds as a possible career path. I think the the economies here are many countries are really primed for this as a as an option. But search funds themselves are very new, and particularly new, is more emerging space. And so I expect that we'll see more and more of these coming online the next couple of years. And it's actually we teach a course on search at the domain business Business School in Johannesburg, as well as a seminar at University of Cape Town. These are we think, kind of seeds that we're planning for the next next decade or more. But spreading awareness that this is a viable option, what it means how to raise the search fund, what the lifestyle is like, for you. So we really spend time and effort to try to educate people on that and show them what's available. We also do the same. We we talk at NCI be taught at Harvard, we talk at MIT and other schools, since many of those those physical populations are quite diverse with with many Africans as well studying there. So we're trying to strive to spread the word as we can, but it's really a personal choice. So we're not trying to twist anybody's arm, but rather just show as possible, remember those that are interested in trying to help facilitate?
Nick
Sure. One thing you said there just piqued my interest when you said that a lot of these economies are really primed for for search for entrepreneurship. I was warning if you could expand on that a bit more and why you think that's the case?
Andrew
Yeah, so yeah, well, we look for kind of any any in an in a country and in potential search economy. One is economic growth, kind of good economic tailwind. And Africa scores very high here. You know, at the top 10 fastest growing economies and six or seven are African at the moment. And says there's really impressive growth in in East Africa and West Africa and Egypt as well. Just pure kind of macroeconomic tailwinds as these countries grow. And along with that, you know, emerging middle classes are important. So they can have a consumer class or a broad based economic opportunity. It's great to look for capital and financial market sophistication. That's both practical things like the availability of debt, but also just the general business environment, and to grow a business and then potentially to sell it and then five or 10 years to to a strategic buyer or private equity. So we look for kind of developed capital market. And the final pieces we look for is is political stability, which can relate to like what's happening in Ethiopia right now. That's a really high growth economy. That's that's been rattled by political instability and the war so soon as different categories. Not every country in the continent falls into it, but but many do. And so we see, you know, Kenya, Uganda, Rwanda, it's very promising places, as well as many countries in the West. In both Francophone and Anglophone Africa.
Nick
Sure, yeah. I know there's a lot of exciting stuff going on. I know even like West Africa, they have a common currency. Now if I'm not wrong, good monk, a lot of this country's Yeah.
Andrew
Yeah, they have the the Central African franc and the West African franc, which is, which is both a common currency which allows for trade among countries, it's also pegged to the to the Euro, and backed by, by the French, or it's in Paris, but it's backed by the Eurozone. Which, which is great. And in some ways, it kind of it's difficult in some ways to but but it does help with some some currency risk. There has been some talk of relaxing that pegging. But I don't think that'll happen. Soon, at least, that idea does help for international investment, to reduce some of that foreign currency exchange risk.
Nick
Sure. I was wondering if you could give, maybe whether it's a specific business or, you know, case study of one of the companies you've invested in, or if not just maybe just a general idea of the sort of businesses that are good search acquisition targets and in Africa?
Andrew
Yeah. So So yeah, so we mentioned beginning we're a very new firm, we've been around for a year. So we have not made we're in the process of making our first acquisition, which would be this this boring company, but I'm to date, we will We've got a company we're looking to acquire is in many ways, kind of a typical search of an acquisition. You know, we look for companies that are between half 1,000,005 million in operating profit or EBIT da, we look for pretty healthy margins, usually above 10%. Very crucially, we look for recurring predictable, mostly business to business or b2b revenue streams, companies that have low capex requirements, and low levels of professionalization, but a strong management team. And crucially, also, we never look first for startups or turnarounds. So take all together, we look for businesses that are fairly simple to run by the grand scheme, not super complex doesn't require a lot of day to day sales company that someone can step into, who is not an expert in the industry, and it has not run business before and spend the first 100 days or a year just observing learning the ropes, getting comfortable in the business, before making meaningful changes to to the to the business. So all the businesses that we would invest in anywhere in the world would need to meet more or less those requirements. As far as the industry we look at, we like industries that have limited customer and supplier concentration that have a fragmented competition you're not competing with with two big players, and that are that are growing, so that have a strong, strong tailwind to them. So those are the broad categories that we look at. If you look at the difference between us two, the difference between kind of America or Europe or North America and Europe, and emerging markets, I think that the style of business, we try to keep as conservative as possible, there are some important ways that that searching in emerging markets differs from searching in kind of the more established markets, we often talk across four categories, the model itself, the availability of talent, the availability of small businesses, the addressable market of acquisitions, and then the availability of capital. So on the model side, and traditional search markets, there are many ways to pursue search. There's the traditional funded search that we do. And there are many guys who do self funded searches, there are accelerators that specialize in and search funds. And in finding acquisitions of the style that exists in Europe, in the States, there's there's one starting in Australia as well, or different hybrid models. So there's there's many different flavors that you want to buy a small business and step at a CEO. That's not the case in emerging markets. So there's there's, it's, it's far more limited, and what in the ways you can pursue this. And then the funded, you know, you can always do a self funded search. But outside of that, it's really these traditionally funded searches that we do. In addition, it's we see mostly solo searchers in emerging markets, that's primarily due to just a smaller pool of people interested in takes a little more specific profile to partner up. That's not always the case. But it's primarily solo searchers and new markets and more often than not, you'll see pairs searching and established markets. On the talent side. It's you know, there's a larger talent base than many established markets. So it's, that's, that's a kind of two edged sword on one hand, it means that you're entering a very competitive market with a lot of very experienced companies and individuals to compete against, whereas if you're emerging market less, so it's a little less competitive, but you're usually the pioneer in that space. So it's, you got to figure out everything for the first time. And it's more difficult to hire talent in your business and replace guys when you when you lose them.
Andrew
On the on the SME side, in crypto markets, there's a lot of databases to search for companies. there's far more robust kind of marketplaces and brokers and such that you can bring on to help you find businesses. Whereas again, not the case in emerging markets, it's it's, it's pedaling far heavier on your own networks. People you know, and just kind of, you know, feet in the ground look into businesses. And then follow up as I mentioned, was was capital availability. So debt is if you kind of run the numbers debts, the real important piece of the search fund model. to finance the acquisition is usually about a third of the acquisition prices is debt financed. A third is equity and the third is a seller note. That's not always the case. But that's the standard formula. In the US, that's very cheap. And sorry, available, there are public and private sources, the emerging markets is very difficult. But without that it's a difficult model to get to work. So knowing the FAS institutions, is really important. In addition to looking for businesses that are more or better able to secure debt, it's often more consistent cash flows, predictable cash flows, contracts with larger companies that are more secure, or actually having assets to back back the debt as well. So different strategies, different places. But the overarching theme is that if you go to new market, you're doing a lot of it yourself. So you got to be able to read each of those categories. brilliantly, the first guy through the through the gate. So it's, we have a lot of obstacles to overcome, but the opportunity is there if you can do it.
Nick
I'm sure yeah. Maybe I'd be interested in in learning a little bit more about the search process itself, you mentioned that, you know, in a more developed market, there's usually a database for people to look into, um, you mentioned that, you know, people may use their personal connections and so on. But my guess with that is that would only be able to take you so far. So after that point of, you know, what, what have your searches had to do in terms of, you know, finding businesses that they find interesting, and finding the information that they need on those businesses?
Andrew
Yeah, so there's a lot of different strategies, and people have had a lot of success with with different tactics. So there's no one right way to do this. A lot of it is desk research, a lot of it is cold calling. There are guys who will, you know, send handwritten letters to business owners, you know, by the hundreds. But, um, you know, even having a database, you know, again, it's very helpful, but it's also generally public. So, you know, you're still competing with everybody else who has access to the database. And you're looking for, for good deals. So it's not always it can help. It's not always a golden bullet to sell things. So there are there searchers that take them far more personal approach to have a smaller funnel, they pursue their leads in person, sometimes even go in there on foot, knocking on the door, making phone calls, write letters. On one side of the spectrum, on the others, you know, a much more automated approach where you you can you can buy some CRM systems that will will send emails and categorize responses, and you can go through 1000s and 1000s of businesses that way. So it depends, you know, we've seen both work, and you know, it and it really depends on the market. So are to use the example of our var and search or Everquest is great connections to the local market and business scene. So his funnel was very, very small, probably, you know, on the order of dozens of businesses, not hundreds. But he had a really distinct thesis that what he wanted to look for, and then knew many of the main players already, so it was, his hit rate was much, much higher than you'd typically have in the States, for example, which is usually more of a numbers game.
Nick
Yeah, no, that makes sense. And it's pretty interesting on one other question I have is, are there any industries or sectors that either you're most interested in or you see that they're going so you kind of push your searches towards them? Or is it pretty industry agnostic, and you just try to, you know, fit the business end to be the other attribute attributes that you mentioned previously?
Andrew
Yeah, so more of the ladder. We're industry agnostic, we're business model pedantic. So we make sure that whatever industry or business is in it, it's never perfect never checks every box exactly as you want it. But, you know, it doesn't have any major red flags, and hits most things that we care about. So the actual industry is dependent on the interest expertise and, and backgrounds of the searchers, primarily, and the fit in the market. And a credible grocer story. So we will interrogate the thesis for growth quite closely. But you can have, you can imagine, you know, there's there's many, many industries that can be compelling in different markets. So we wouldn't basically push guys in one direction or another, by interests are very closely aligned here, because there's been kind of an increasing emphasis on SAS and software businesses. In search. That's traditionally there's Quickly not been your style of business because it's it's, it's a little more difficult, a little more malleable. But um, there's been great success in SAS. So I think pushing a little more willingness in the industry to fund acquisitions of software companies. We've seen the last kind of five years or so. There, we're seeing that also in emerging markets as well. So I think what another distinguishing feature of emerging markets is that typically, in many industries, they're lagging, established markets by the US and Europe, which provides a great roadmap on how different industries may grow. So you can get a security company and Ivory Coast, you can look to see how security companies look like 20 years ago and Canada and how have they grown? Since then, can we talk to the guys who've done it to understand if we can translate those growth strategies to a new market? It won't be the same, but you can sort of see what the roadmap might look like and have a little more visibility on the future, then you made a pure kind of app that cutting edge already?
Nick
Yeah, that's really cool, I think, sort of the the rocket internet model to just search funds in a way. But um, yeah, I guess one final question would be just personally, what do you enjoy most about living in emerging market countries and doing business? Mm hmm. Yeah. I
Andrew
mean, it's, there's, I think you asked that question. Well, I think it's both for me, a personal interest, I enjoyed kind of the dynamic lifestyle, I like, you know, being in new cultures and new places, and traveling and kind of being challenged by the place I live. And kind of come in, sort of, more in contact with kind of the more difficult aspects of development that I've kind of worked in for most of my career. So, you know, I enjoy the diversity of the lifestyle. from, from a personal point of view, and then from a professional point of view, I think there's great opportunity here, there's great possibility for impact if you can bring good ideas and good people into these communities and markets and counting power, the investment to do great work. I think that in development, there's, there's an under emphasis on just building great businesses, building good jobs, bringing your values to work, not strictly speaking, kind of social enterprise personal impact investing, but just strong, reliable economies, and strong and well paying jobs. So I think it's, it sort of fits kind of my values, I think, what could be really valuable to the world. And then just sort of purely commercial standpoint, there's, there's some really compelling, you know, that's fast changing. And there's a lot of really interesting trends you can get behind it is parts of the world that you don't necessarily see, it's a little bit faster moving in than you would get in the US or in Europe, which would be a lot of fun. Also, there's also a bigger risk, you know, it's it's riskier place to work as well. But I'm gonna be quite fun.