Is Australia a good market for EtA? - with Jake Nicholson from SME Ventures

Search funds are still in their early stages in Australia. For that reason, one of the big questions that those of us that are early movers in the space have, is around what the opportunity really looks like. That can be difficult to define with limited data, and this is why Jake Nicholson’s presentation at our inaugural EtA Forum is so essential.

Jake has done an incredible job to collect data on the local market, build comparisons between what Australia and the (more mature) US market, and draw analysis on just how deep the opportunity is for Australian entrepreneurship via search funds. The results should be very encouraging to everyone. As Jake says, there are three primary “ingredients” in defining a healthy market for EtA. There needs to be companies to acquire, capital to do so, and the right talent to both make the acquisitions and then run the companies as CEO. The data suggest that across two of those three metrics, Australia is primed to boom.

Australia has many companies that fit the ideal profile of companies to acquire through search. Furthermore, while getting funding isn’t guaranteed, there is an appetite to invest. It’s only the third “ingredient” – the talent question – where we need some attitudes towards entrepreneurship to change. Australia does have some ground to make up there, both in terms of our social outlook on entrepreneurship, and within our education system. Nonetheless, despite the current roadblocks, there is good reason to be bullish there, too.

Overall, Jake’s presentation was deep and interesting, and instrumental to the EtA Forum being such a successful event. In fully breaking down and articulating the opportunity, Jake was able to present a vision for search acquisitions that should appeal to anyone with an entrepreneurial spirit.

Connect with Jake: https://www.linkedin.com/in/jakenicholson/

Connect with Pete: https://www.linkedin.com/in/peteseligman/

Register for the next Eta Forum Event, download speaker presentations or watch the video of this episode here: https://www.peteseligman.com.au/eta-forum-sessions

What we discussed

1:08: Pete introduces Jake and his background.

4:10: Jake starts his presentation on the research of search funds by defining the methodology of the research and defining search funds.

6:00: Jake highlights a research study by Stanford that found high rates of returns with search funds over the past 30 years.

7:10: On the question “why has it taken so long for search funds to get to this side of the world?”

9:28: Now, on to the big question: “is Australia a good market for EtA?” There are three primary ingredients for making a healthy market for EtA, so does Australia have them?

10:36: A summary of the common criteria that searchers use when looking for companies to acquire.

17:17: Finding capital – is there enough capital to fund search fund entrepreneurs in Australia, and where does it come from?

26:53: Finally, talent. Simply put, are there enough searchers in Australia?

31:30: Pete provides an analysis and further insights around Jake’s presentation. Key

Quotes

“If you believe that you are an average searcher, then according to the Stanford study, you have about a 48 per cent chance of making money, which is a much (much) greater percentage than your chances of coming out on top with a startup.”

“The status of search funds today in Australia is that it is still early days, but the trend line is moving in the right direction.”

“For a healthy market for EtA, we need companies to buy, capital to fund the searchers and their acquisitions, and high-calibre CEOs to run the search, buy the business and operate the business as a CEO.”

“Most acquisitions to date have been in services, you don't see a whole lot in construction or manufacturing.”

“In the typical search funds story, the seller is a retirement age founder or owner, who doesn't have a succession plan and likes the idea of transitioning the business to a hungry younger operator who will carry on the legacy of that business and take it to new heights.”

“When I launched SME ventures, I noticed that Australians are a very friendly bunch. You would accept coffee meetings with me and give me very encouraging words, but the only people who wrote cheques were the ones that had some prior tie to the space.”

“There are several investors throughout the world who are private equity executives and have spent their lives investing in these bigger businesses and seeing all the smaller businesses with very attractive value creation opportunities. But, because of the structure of their firm, they can’t do something about the opportunities.”

“A search fund doesn't see consumer discretionary or raw materials, activity and private equity as a threat, typically.”

“Early-stage investment activity is even greater in Australia than then in the US as a percentage of GDP. And this to me signals an appetite a willingness of investors to invest in high risk and entrepreneurial activities, which is part of what we need and one of the one of the big questions about new markets, and has been a frequent question about Australia is are investors too conservative to back ventures like this? This data suggests that that might not be the case.”

"I’ve been very lucky to partner with a very few talented entrepreneurs in Australia, but I currently see talent as the bottleneck to the growth of the EtA and search fund ecosystem.”

“One thing that’s important is the correlation in people's perceptions of high status to being a successful entrepreneur. There's a higher correlation in the idea that entrepreneurship is a good career choice in the US than in Australia, and it’s actually quite significantly higher, by about 10 per cent.”