Pascal Wittet & Sandy Farmer (Orca Equity Partners): Why Orca backs first-time CEOs to buy their own business

- So I'd love to do two things. One is talk about the kind of people you're backing. That's what people listening to this can have think about whether they're the right fit. And the other one is maybe-- - And I almost threw the towel in there and I was like, I'm sick of this private entity business. I just get, you know, why do we bother with this? - Oh, that's a jealousy, like, periodically. - What I was actually, it was quite, it's quite jealous. We should just mothball the whole private entity side because we can't buy businesses at the sort of price. - Especially in UK culture, it depends on the country. Some people don't believe they could be the CEO of a business with no sector experience. There's a lot of different skills that are called upon through this journey. But one of the most important is you do need to be able to sit in front of someone when they're trust and then actually consummator a deal with them. So we look through some experience there and then operating, you'll look into it as well. - So there's three things. So one is stable business. The second is a business with a motor round it. And the third is good cash generation. - Got it. - So those are the three key business characteristics that we're looking for. - I'm quite relieved. I don't know, Pascal is a massive fan of high rocks. And I was worried you might say for a resident's profile. - 100 burpees in the corner. - Go. - We've tried so hard to not let make high rocks a thing in order, but I'm so sorry. - Sadly, I failed. - Hi, welcome to Ung Song, the community for people in career jobs or professions who don't realise how accessible it is to buy your own small business without your own money and also to help owners of businesses grow whether that's by top tips and sales or technology. And today, really lucky to have Pascal and Sandy who are the co-founders of Orca. Orca was the first and the most active fund of search funds in the UK. It's actively backing first time CEOs across Europe, not just the UK, I think they've been in just over 60 companies today. And they're going to kindly share their stories and what they're seeing and explaining what's happening in the world of solving the small business succession issue. So Pascal, Sandy, thank you very much for joining us. - Thank you very much. - Sandy, your pro, been in studios before some massive expectations for the podcast. Pascal and you, but thank you for giving your time. - To kit things off, it doesn't surprise me, but it may surprise you. Many, many people who should know about funds and search funds, which sounds a bit of a mouthful, don't know about it. And what fascinates me is the fact that you're backing first time CEOs who've normally never been a CEO before, who've never worked in a sector before to actually go and buy without their own money a traditional small business across Europe. And I love that, 'cause most of us see it as high risk. But could we maybe start with what brought you into that arena? I'm really glad you brought a gelat, 'cause that clearly means you used to be in private equity. So, you must pass it around here as well. So I'll text all the Dominicans. - I'm spanning the world at the moment. - Yeah, save our transition site. - Yeah, could it really start there with what enticed you into the world of small businesses and funders search funds? - So my journey's a little bit secutious. I actually both Pascal and I are from Northeastern Scotland. I spent the early part of my career in banking and then consulting. 2010, I left consulting, went to London Business School to do an MBA, wanted to go into something that was closer to small businesses, wasn't sure exactly what. And basically stumbled upon private equity when I was at business school and quite quickly gravitated to the smaller end of private equity where you could get really hands-on and involved with small owner-managed businesses. - When you say small, 'cause that can mean so many of the things. - Yeah, so to you guys, me and a small, one to three or four million of profit. So people talk about mid-market, lower-mid-market. I think it can mean different things to different people. This was very much the lowest end of the lower-mid-market. So you're often investing in businesses that are owner-managed, family-owned. Rarely would they be fast growth tech startups. They're often slightly more established, probably slightly more boring. - So you enter the private equity world, but not that many private equity people will then make the decision to jump into the search fund area. - So what was the catalyst for that? - Pascal and I actually joined after business school, a start-up private equity firm. It was a spin-out from Fidelity. And I actually then left, jumped sides of the table, and I spent about five years in the exec management team of two private equity back businesses. So I kind of had a bit of investing, a bit of operating, you know, quasi entrepreneurship experience. And then I went back into an investing role in 2017, so nine years ago, and I co-founded a small private equity business alongside two others. So at the smallest end of the lower-mid market, we were investing in businesses making one to three of profit. But this was really the segue into the search fund world. We didn't have any sector specialisms, our specialisms was much more situational. We were exclusively looking to find situations where there was a management transition or a retirement. So we set up that business called Ethos Partners in 2017, built it up to a team of 11. We were managing about 100 million euros, we'd done 15 buyouts. So we'd had some success in building that up. And on that journey, probably the most consistent problem we saw was we would often find really good businesses that we liked at all the characteristics we were looking for that we'd be interested in, but had quite an acute retirement dynamics, usually an owner manager or a founder that was still heavily involved in running the business, wanted to sell, but wasn't really interested in working for an institutional private equity firm for two or three years. So we were looking to kind of sell and move on. So unless we happened to have the right CEO or the right team that we could put in immediately, we'd often find these businesses and have to move on. So that was the catalyst to prompt us to say, okay, well, how can we think about solving the management problem ex-anti, finding CEOs or teams first, and then working alongside or with those teams or supporting those teams to then identify businesses that they would acquire and run. So we were really solving a problem that we saw after setting up this small private equity firm that was investing in succession situations. And Pascal probably talked about it as well, but I first become aware of search funds back in 2010 when I was at business school, but in 2010, it was almost nonexistent. So Pascal, for you, in private equity, small businesses, and Sandy brought to life the issue where you got succession, only managed business, owner's moving on, product you can't buy it because it's so dependent on the owner. So you looked at bringing someone in. What may be an aftermath of people is why you'd bring in someone young, I can say that 'cause I'm not going any more. We're more ahead of me. Someone young, intelligent driven, but zero-sector experience, never been a CEO before. Why did that appear as a solution? And why did you guys decide to take that track as opposed to traditional private equity? So as Sandy alluded, we were both ad ethos partners together, and we were running two divisions, one that focused on traditional private equity, and one that focused on search funds. At the investment committee level, we saw these deals coming through, which we then needed to terrigate and pine on, which ones we wanted to participate in, and time and time again. And I was running the P side of the business and Sandy and Joe were on the search fund side of the business time and time again. I would see the deals that Sandy was bringing to investment committee. I'd look at them and I'd just be like, how is it possible that they're buying a business that's this good? That's got this sort of EBITDA at that price. I can't find businesses like that. I'd be paying 25, 30% more, and they'd have quite a lot more hair on them, and the diligence that we would inevitably be able to get into would always be one layer less deep than that, which one of the searches we were backing had gone into. And after about a year of seeing these come through, I remember I was very clear, it was on August, and we just had another investment committee, and we all, as part, as went down to go and have lunch together. And I almost threw the towel in and I was like, I'm sick of this private equity business. I just, you know, why do we bother with this piece? That's a jealousy like, I was quite jealous. We should just mothball the whole private equity side because we can't buy businesses at that sort of price. And increasingly what we had seen when we were on the boards of these businesses that we had backed is we could see the delta and the talent that was running it. You could see that in the, and just in the speed at which change was happening in organizations, they could undertake M&A at the same time as hiring at the same time as getting to understand all the customers and getting around all the customers, putting together a property, a proper strategy deck. So when you're at the board meeting, which would be one or quarter, you'd be talking about long-sighted decisions that needed to be made. Is this a winner-take-all market or not? I've got to say, I think many CEOs would be watching this thinking, I wish I had a board meeting once, of course, if not. (laughing) That's interesting because I find, especially in UK culture, it depends on the country. And I think they put small business owners on a pedestal, probably because of all the podcasts and blogs and the stories of fantastically successful tech-started founders. But whilst small business owners were incredibly hard and intelligent people, actually, I think a lot of the talent in the corporate world to your point, don't realize what they can just naturally bring with the natural talent, hunger, drive, ability to work through problems quickly. And you know, You don't only see that delta in practice, but you see it in the numbers as well. Yeah. Am I right in thinking that in private actually land, you'd be happy with an 18 to 20 percent IRR, so for the viewers, it's like yearly return. But in the small search fund space, actually from the data so far, it's about 35% to getting close to double. Are those the kind of returns you'd be expecting and you kind of see income through? It's a really interesting question, actually, one of the things that you're right is it's against private equity orthodoxy that you would unleash a relatively inexperienced person. Totally agree. And they deliver fantastic results, but over time it's now certainly North America, there's 40 years of data, suggesting that average returns are in the mid 30s IRR at 4x. But to get the maximum equity package, the CEOs were back and actually have to deliver a net return of 35% IRR. So I don't think it's any accident that over 40 years, what's roughly shaken out is the average returns are like 34 or 35% because incentives drive outcomes. And you are taking really high caliber, really ambitious, really focused, driven, aspirational people, and unleashing them into a small business where you're right, actually, and small business are probably rightly put on a pedestal for a number of reasons because often they've taken it from maybe in some of the other startup contexts, that's the zero to one journey. I'd argue actually quite a lot harder. Now we're coming into the businesses when they're still small, but they're usually established for a reasonable length of time and they've got a long track record of profit and cash generation. So all that sort of zero to one hard work and risk has gone, but they're still relatively unsophisticated businesses. So when you take someone that has probably operated in a slightly more professional, sophisticated, perhaps sort of digitised, perhaps slightly more system oriented and with all of the good things that goes around that, they can come into these organisations and really make quite transformational change. So it's at the right stage for that change to happen. Your question is correct and so far as, I think, on 18 to 20% IR and most small private equity context would be a really good outcome, I'm not sure we expect 35% and everything, but the incentive drive outcome point that you make is very true and so far we're seeing that in the portfolio today, there's some really fantastic outcomes and some really encouraging progress towards fantastic outcomes. Because I'd love to bring to life the incentive structure, so guide me if I'm wrong, but this is applicable across the board. So for anyone watching, Stanford has a, I think, 62 page Bible on funds of search funds that is constantly updated and the model is used, whether it's from the US to South Korea to the UK to South Africa because it works. And it's for an individual CEO, 18.5% at the point of acquisition, 18.5% investing over time as a CEO and then a further 18.5% based on performance towards that 35%. And then if you want to bring in a partner in crime, that might be 10%, I suppose, 18.5%. Correct. So I can see those incentives like really driving someone's outcomes over that three to five of your journey, but back to you, Pascal, on having a fresh, wet behind the ears CEO come in. And why do you think it, it like works? So it's a pairing, actually, it's a pairing of a type and a style of business with a talent. And that pairing is very deliberate. And so it's not every business that would suit, as you would describe it, a wet behind the ears CEO to come in and run. So if we start with the ferrispa, which is what's the type of business that typically suits a search fund? Yeah. It's one where we use proxies for these in the business, but it's one where you've got really stable, really stable core business. It's one where it's got a company. And can I just interpret that? So if the stable is in, it's not got lumpy projects with cash coming in. I will explain. Okay. Thank you. So there's three things. So one is a stable business, the second is a business with a motor around it. So competitive mode. And the third is good cash generation, got it. So those are the three key business characteristics that we're looking for. So on stability, that probably links to recurring revenue, repeat or higher recurring revenue. So when you when you start in the first January, you know you've got a certain level of revenue that's coming into the business. That is absolutely key because that gives the incoming CEO time, time to learn the business, time to learn the people, time to meet the customers, time to figure out where the gaps are in the business without having to rush around and try and find revenue to fill the hopper. So that time is what this stability of revenue buys. The moat protects your margins, so you haven't got this margin compression occurring. So what we typically look for, the proxy, the read across into the financials would be high gross margin, a high gross margin business typically is a price setter in the industry or in its market, a low gross margin, think FM cleaning business, 20, 25% gross margin, you're a price taker who cleans my office. Well I'll just negotiate the contract down in tough times and I'll swap it with somebody else who's willing to give me a 10% discount. That moat protects you through an economic cycle. And what I noticed when I spent the first 10 years investing, I looked back on the businesses we'd invested, the ones with high gross margins just tended to ride knocks way better than the ones with low gross margins. And then the final is this cash, are you generating enough cash to reinvest, and so we're typically looking for businesses with relatively low cap ex, high sort of cash to, sorry, EBITDA to cash conversion. So where you're looking at EBITDA, it's a good proxy for what cash is in the business. So avoiding things with very long payment cycles where you're paying staff to, in construction for example, you're paying staff today and you're getting paid for six months later for the work that you've already done. And back to the stability of revenue piece, we're trying to avoid sectors with high cyclicality. So exposure to construction or exposure to, so recruitment, certain types of recruitment can be very significantly exposed. We're trying to avoid those situations. So searcher, when they're looking for a business, we're trying to guide them towards those sorts of metrics or those sorts of criteria, which ends up leading you towards test, you know, regulatory driven businesses, testing and inspection, fire safety, HVAC, deliciously boring businesses. It's so boring, but as somebody described it once, if you don't do it, you go to jail. So when you're in an economic downturn, do you not test your fire sprinkler system every year? No, you still test it. So those are the sorts of businesses that we're interested in. They are very boring and our service lads, I'd like to bring to life how, how much time you put into the search, because your effects will be backing an individual to spend a year and a half to two years searching for these businesses. I think some stats I picked up for you guys in the past is, on average, they do 7,000 letters or outreach to small businesses, of which they'll meet quite a high percentage. So you guys really do invest time in finding those criteria and de-risking it for your investors. Is there anything you'd like to add to that in terms of, like, the fine detail you expect of your chosen searches? No, I'd probably only just correct, I mean, we probably don't deserve any of the credit for that. Good on you. One of the reasons, in my opinion, this is such a compelling model, and this is true as an investor, and it's also true if someone's looking to do it, is you have the luxury of being able to dedicate almost all of your time to direct origination. So you mentioned we've backed a little over 60 when you say direct origination, sorry, for laypeople that's like finding as well. Yeah, what you were just describing, basically not necessarily always unsolicited, but predominantly unsolicited, direct outreach to a potential business that you would look to acquire, rather than finding a business that's already in a sale process with an advisor that's kind of running a slightly more competitive situation. At the small round of the market, even the processes are usually quasi-competitive. So it's not that there can't be some interesting value opportunities there, but typically people are spending a time directly reaching out as you were just writing letters or direct mail or email outreach. And so we've backed a little over 60, I think we have a little over 40 currently across, we invest all across Europe, looking for the one business that they want to acquire and run for the next five to seven years, maybe longer. And typically each of those individuals or teams that we back will hire two or three interns or analysts, associate type levels to help them find that business. And so our 40 have hired another 80 to 100 people. So right now there's 140 people all across Europe spending essentially 100% of their time doing direct origination. So it's not credit to me or Pascal or any of the rest of our team that they're finding these fantastic opportunities, it's that you've sort of unleashed an army of people that if we were trying to do that, if we were trying to replicate that inside our own organization, it would be impossible. You know, the operating cost of hiring 140 people to go and spend all their time looking for business to acquire is very difficult. And then they are in turn leveraging technology and AI, which has made this actually a much more efficient exercise. But yeah, it would be unfair to say we get the credit for the kind of quality of businesses that they manage to uncover off the beaten track that others haven't been able to. You've actually reminded me, mate, because I think that's another thing of why it's so attractive to potential CEOs is you guys take a minority position. And so for listeners or watches, you might expect someone like the Orca team or another fund of search funds to be one of maybe seven to nine investors on in the company and take maximum 15%, which means it's not like you have a boss or private equity company on your shoulders telling you what to do. And I think with some of the CEOs, the fact you do quarterly board meetings, I think says a lot as well. You really do get that freedom and you're there in a very supporting role. You also mentioned tech and AI. And I see a lot of people thinking, I got her some thesis, how do I resist AI? And they forget that in successful businesses now, some don't even have a CRM system and they've been around for 20 years. So I think it's going to be a while. But would you describe yourself as almost anti AI, because again, you're buying really boring businesses and your your value rate is not in huge distribution transformation, maybe some, but how do you react to that like what are you doing with AI or that kind of question? It hasn't been deliberate. Sorry, I'm not not intending to be self deprecating. As Pascal said, the kind of the main guide to our portfolio construction is very much bottom up. So we're talent led. So we want to back the best people, and then we're going to quality of the business opportunity that they find the quality of the business led. And we're going to maximize for when those two things are really compelling. And then the sort of top down overlays we're investing all across Europe. And we're looking for those characteristics that Pascal outlined. Now those characteristics tend to manifest more in some sectors rather than others. And actually historically, vertical market software or IT services cybersecurity services would have been some of the sectors where you would see the characteristics that we would look for. However, we have to date in typically priced out of those of those types of opportunities. You know, you find a great vertical market software business that's growing quickly. It tends to get the attention of slightly bigger investors at a smaller stage. And we maybe get priced out because back to what we were talking about earlier, for the CEO or the team that we're backing, this is their, you know, the one business they're going to acquire. They want to stack the deck in favor of being able to reach the maximum 35% IRR. And if you pay 12, 14 times on the way in, that just becomes a little bit harder. So we've been, typically we have a few technology and software investments in our portfolio. But we've typically been priced out. So what we've ended up with now, we have a skew towards, you know, technical BTB services. Pascal was mentioning fire safety, HVAC testing inspection. We have a skew towards the light niche manufacturing. So, you know, think essential business critical products that are typically a very small part of the, an overall cost. And as part of your value proposition, so if you're looking at that three to five year journey of the CU coming in, you said they've got time. So they got like a year to like take time because you're protected by that recurrent, that not recurrent revenue, the more safe revenue. But you're not trying to bring in some AI into the business to completely transform it or remove cost. Actually, you're aiming to achieve these returns with the simple stuff. Is that fair to say, or how do you think about bringing AI and the whole buzz about vibe coding into the businesses? I'd start by saying Sunny and I are probably the least qualified of the audience to talk about AI immediately or the most honest. So I couldn't possibly hope to comment intelligently on how we bring AI into businesses to make them transformative. We're working at a much more basic level. Most business owners have some core traits, which is what has enabled them to build the business. They're micro managers, they are fisterious on detail and on quality. And they are very tight with money. And so what that typically lends itself to is a business that grows well, but underinvests in all the infrastructure that sits behind the business. So the point when they come to a sale and one of the main reasons why there is this wave of retiring shareholders who need to find succession is because the skills that got them to where they are today do not lend themselves well to doing succession. If I'm very tight with money, I'm not hiring expensive people into my business and I'm not giving them equity. I can't attract the talent. If I'm underinvesting in the business, I've tended to run it really hot. So you've got a workforce that are being sweated to create the value. And so when when an incoming CEO comes in, one of the first things they're looking to do is assess the people base at the senior level and understand whether they have both are good at the job today. They're usually good at the job today. But usually the key gap is are they still going to be as good at the job tomorrow? So can they grow with this business? And more often than not, there are some really critical gaps in the senior management team which need to be filled. So that's usually the first place an incoming CEO will look to fill out the senior team. And then once you've got good people in place, really good people, you need to then give them good data and good MI. So good people and what's their mind? Good data management information. So we're going really basic here. So this is about putting an ERP system in place. We're putting a CRM system in place to capture data. And I'm just going to translate that for people. So CRM system is something like their name's HubSpotSalesourceMundo.com. Think of it as a really pretty but intelligent Excel spreadsheet to capture all of your customers and deals. ERP system, enterprise resource planning system, then normally takes it from when you've won a deal or you've got a quote back sign from a customer through to delivery and the finance team. So those tend to be your end-to-end systems in the business and many small businesses don't have them. So it sounds like as part of your value plan, you're not doing amazing things to these companies. You're just running them well, bringing in that driven and incentivized talented leadership to really take it to the next stage with some basic transformation. Yeah, so it's quite an interesting point because we touched on how the people that we're working with and backing find really good businesses for a compelling price. And part of it is that direct origination approach that they take. Part of it is they are uncovering businesses that are actually otherwise really quite difficult to sell. Partly for the reasons Pascal was talking about, they don't have basic systems and processes. They haven't built out a kind of a well-formed senior team. They don't have good monthly management information that allows that senior team to be informed and take decisions. So when someone coming to look at the business, looks at all that, they think, "Well, it's not really in a state ready for me to invest." So a large part of what we're doing and the people we're back here doing is they are, hopefully they're finding a business that has an opportunity to grow and have some decent tailwinds and so can grow profitability and cash generation, but they're also professionalizing it on that journey. They are building out the team. They are introducing basic governance and systems and processes and reporting so that when they come to sell it, hopefully it's a bit bigger, but also it looks and it feels like a more sophisticated professional business that unleashes a whole segment of potential buyers, typically financial buyers, typically it's the next-day jar of private equity. And so you're really building up assets that are fit for purpose for private equity to come in and buy. And that's as Pascal was looking to, when we had our little AB test of trying to do small private equity buyouts and backing these entrepreneurs to acquire businesses, we saw we were having to pay sort of two times more on this side. Hopefully that means when we, and the people that we're supporting to do this, buy a business for four or five, six times, when they come to sell it into private equity, they can realize a little bit of multiple arbitrage. And back to your question about returns, if you can deliver some growth and a bit of multiple arbitrage, you don't, you don't have to do anything too heroic to actually deliver some really quite compelling returns. And so you get to this place, which is one of the reasons when we started investing in this space we were just like, hold on, we're taking, we're basically taking buyout risk and you can get venture like returns and it's so, it shouldn't work. I mean, there should be, there should be a slightly higher return. There is a bit more risk around so alongside management transition. But I think it's it's mispriced. So I'd love to do two things with your permission. That's a people listening to this can have a think about whether the right fit. And the other one is maybe one or two stories. So on the first part, what I love about you guys and girls is you don't always, and please challenge me if I got this wrong, you don't always go for the classic XMBA X maybe, um, merges in acquisition banking or investment banking experience or an X consultant from say Bayon and McKinsey, you also value someone with a bit more experience running a P&L, so being a manager in a small or a bigger business, and a bit more life experience to come in. What do you look for? Are you excited by it? But I'd love to do it from the sense of our listeners of who should appear in your inbox. So be like, hey, this is a thing I've always wanted to do. When we launched the strategy, we spent a lot of time thinking about this. And so one of the first things we did is we tried to go and find people, and that was typically meant we were talking to some investors in North America that had done this for a lot longer. So they had more reps, and they had some data. And so we were hoping they could tell us, okay, well, what should we be looking for? What kind of profiles? What kind of behavior is what kind of previous experiences? And unfortunately, the consistent message that came back was, we've gathered data, and this was mostly investors, but there's some academic research as well. We've gathered some data. There's nothing really instructive. There's no sort of ex-anti-indications that suggests this is going to lead to success. So we're like, okay, well, that's not particularly helpful, but we didn't also want to just throw darts at a darkboard randomly. So we tried to come up with what we think are the types of experiences and attributes, and probably most importantly, behaviors that sort of stack the deck in favor of someone being successful. And so over the last four or three years, since we've been backing CEOs and teams, we're largely testing this. And so it's things like, there's a hygiene factor of sort of cognitive, academic, professional performance that, to be honest, that the point someone comes into doing something like this, almost everybody's. If I can make that tangible for people, as in, they've been to uni. Yeah, they've been to uni. We tend to look for people that actually have been sort of bumping their heads up against whatever the ceiling is at whatever stage they've been at in their respective careers consistently. So that can look like many different things. But if you observe someone that from an earlier kind of academic stage and through their professional career has consistently sort of done things a bit quicker, then that would be the norm. You know, I'd be moving from analysts to associate in two years rather than three. And that's everything. You can get a sort of a feel for a consistency of past performance that's a good proxy for someone that's just highly competent and quite intelligent. And most people kind of clear that. And so then we are looking for things like, you know, leadership capability, have they demonstrated that they might not be in a CEO, almost no one would back that somehow, but almost no one's been a CEO, but leadership capability, negotiating experience, because there's a lot of different skills that are called upon through this journey. But one of the most important is you do need to be able to sit in front of someone when they're trust, and then actually consummate a deal with them. So we look for people have some experience there. And then operating, you alluded to it with as well. One of the main differences that is probably a slight misconception from the outside in and maybe a difference between Europe and North America is we're tending to back slightly more experienced people on the whole in Europe. So it's pretty rare, probably even now, old-school North American model of fresh out of an MBA, late 20s, early 30s, you know, backing someone really quite green. That's really rare. We tend to be backing people actually sort of at the inflection point when they're probably about to become a CEO anyway. So I think our cohort is typically sort of late 30s to early 50s. And so they're at a point where they'd be credible and can most objective people's eyes to become a CEO. But then the main thing we test for is actually the behavioral characteristics. And we're mostly looking for grit and resilience, because this is hard. How do you test that? Because if you're awesome with interview, are you resilient? To be like, yes. Yeah. Take that on a Bob Graham. For those you don't know, the Bob Graham is an awesome event in the district, but it's hard. And quite honestly, you know, you're doing this over the course of multiple interviews. It's imperfect. The good thing is you have a two stage decision when we as an investor, a two stage decision, when we initially back someone to support them through the search. And then a second decision, when they ultimately find a business, do we want to invest in them to acquire and then run that business. So by the time you get to the second decision, you have two year, maybe 18 months of observing, are they actually kind of gritty and resilient? Have they had some obstacles that they will overcome? But in the interview, it is actually trying to find out how they had some real meaningful setbacks and how did they handle those? Did they get knocked down metaphorically and were they able to pick themselves up? And what did they do and how did they do that? So we try and tease out, have they got some demonstrable grit and resilience? And then the next important things that we're looking for are empathy, sort of EQ, because you're buying a business from someone who's probably been their life for most of their life. And it's like giving a wage out. And you need to be able to build trust and confidence and a proper empathetic relationship quite quickly to enable, to give you an opportunity to consummate a deal with someone like that in that context. I think empathy, EQ is really important and then self-awareness. Because everybody going down this track is going to encounter something that they don't know or they haven't done before. We would different for different people. But it's really important that we try and find people who know what they don't know and know when to say I don't know and I actually would benefit from someone alongside me that does know this so I can learn. And it takes a lot of humility. So grit, resilience, empathy and kind of humility and self-awareness, those are probably the big behavioral characteristics that we're testing for. You're not quite relieved. I know Pascal is a massive fan of high rocks. And I was worrying you might say for a resident's rival. 100 burpees in the corner. We've tried so hard to not let make high rocks a thing. Sadly, I failed. So I love to bring to life a couple of stories. I think listeners will understand the kind of people you're looking for. They probably understand what you're trying to do, the businesses you're going after a bit of the process. And one thing I'd love to do is just bring it to life of the couple of stories. I know some of them, but I don't want to trap you. Is there one or two companies or searches you've backed, which you'd like to bring to life and talk through? You're thinking of Walter Direct here. I am thinking of Walter Direct, yeah. Where do you want to start at the beginning? So at the beginning, Adam. How did he meet him? Who was he? So he was at London Business School. Yeah. He previously had a life in the US working in a VC-backed business, Telco business, came to London Business School, came out of Business School. I want to go and do a search fund. We didn't back a search fund because we didn't know what search funds were at the time that he came out of LBS. He found a business, an Essex farmer runs around in Boots, Swelly Boots, never buying a desk, owned eight different businesses, all related to farming, energy. And this one was an alternative emergency water services business. So he approached them initially for one of the businesses, the CFO who worked across the group said, "No, no, no, we're not selling that one, but would you be interested in this one?" So Adam went down to Essex, a Texan going to Essex, a business to buy it off an Essex farm in Wally Boots. He was questioning his life decisions. This was midwinter, so it was pretty miserable as well. And he found this really, really interesting business. Because basically they're watering trucks and if there's an issue with say pipes breaking, the trucks take the water for domestic or commercial use and the water company is therefore contract with them. Spot on, you've summarized it very well. Probably one of the most interesting and unique bits about the UK market versus probably any other market in the world is during the Fatcher years and the 80s. So Fatcher being the prime minister, they privatized huge swathes of public services, one of which was utilities across England, which were all privatized, a number of them bought by private equity in the 1980s. And the private equity industry hasn't done a good job. They ran the businesses for profit. And to do that, you don't invest in the underlying infrastructure. That's tomorrow's problem. And if you save on investing in the underlying infrastructure, you generate more cash, you can pay more dividends. So for 30 years, 40 years now, the water industry has been under invested. So it's got Victorian water mains. And as a result, the whole infrastructure, as soon as there's a, there's a weather incident, cracks and breaks, whether it's hot, run out of water, reservoirs, run out of water, whether it's windy, trees fall down, break water mains, or whether it's freezing. In which case you get, you get the frost and the water and the water mains break at the same time. So in any, almost in any extreme water scenario, the infrastructure creeks and breaks. So what you're really doing is you're taking a bat on, can the water industry owned by private equity catch up on the underlying 40 years of under investment and as climate change getting worse? And if you take those two beds, you think, well, this is probably going to be an okay industry to invest in over the next. 10, 20, 30 years of water, an alternate and emergency water services provider. Now in the UK again, because it's not government owned, there's a government agency called OffWatt that regulates and penalizes the water companies if they don't deliver water to consumers. And what this company grew up doing was as soon as there was a break, they'd get a phone call, they'd go downstream from the break, plug in the truck, and the truck pumps water to the homes. Saves the utility company, a thumb and grey big bell. Now what was peculiar about this water company was two things. One, there are two ways of delivering water, one through bottles, which is the easy way to deliver it if there's a small break for a short period of time, you deliver bottles. They kept like a gold reserve of bottles across 28 locations in England and they supplied all the water utility companies across England. And so what they said to the utility companies was you need to hold legally one X of water. We will hold one X of water in our reserves for you. And if you give us your water, your one X of water, we'll look after it and we'll distribute it. So consequently they had a monopoly across England, an almost unpenetrable monopoly across England. And then they coupled out with the tankering service and the reason the tankering service is quite difficult to replicate is because they are 70% of the time idle. You've got a driver who you're paying for, you've got a truck, which you've paid for, sitting idle. Really high fixed costs. Yeah. Very high fixed costs. And so you need coverage across England in order to get enough demand of breaks across the country. And so as soon as there's a break, they send the truck out, plug it in downstream from the break, all they deliver the water. margins on this business are watering. So they 35, 30, 35 percent EBITDA margin. Return on capital. So when they buy a truck, it pays itself off in months, not years. And the really peculiar a bit, they had no CEO in the business. So when Adam came along, there was no CEO, there was an ops director, there was a floating CEO for the eight businesses. He came a day every two weeks and would come and sit on the business. So when Adam stepped in, he was inheriting, they had no finance function. He was inheriting a business that operated well, that was in a monopoly that was completely unloved. And he did a fantastic job of hiring a top team around him, starting to put in some systems, so he could track the trucks as they were going out. And can I just touch on that? Because some people are probably building things up in their heads of, oh, I could never do that. But if you look at what actually happened from memory, Adam took about a year to your point earlier of seeing where the gaps are and where the opportunities were. He didn't come in and immediately build these systems, like the first 12 months was really waiting and seeing. And also the team, I mean, I think the son of the original founder had been there for some like 23 years. And so to Sandy's point, you had someone coming in, you had to show humility to the level of like expertise and understanding, but also wasn't on Adam to learn the entire sector. He's there to solve problems and drive change, which is your model. But in terms of some of the decisions he made early to bring that to life, I think could you talk through some of the highs he made or changes, whether it's commercially or finance-wise, if you're happy to go into that? So Sandy's first point about high EQ, really humble. Adam was both of those over indexed on both of those. So he went into a largely blue collar work force having worked in a VC backed business in the US. Please tell me you turn up on the first day with really tight jeans. So he had both those qualities and both those qualities. I believe, or what differentiates him versus other CEOs. His first hire was a CFO. We do CFO hire, so we helped him with the CFO hire. He was very, very strong candidate, very impressed with him. He stepped in immediately and built the finance function. The business, we talked about stable revenue, high recurring, high repeat income. This one doesn't have it. There is no, had one large customer, 30%, which was a good reason why many investors didn't choose to invest, but it had no revenue visibility. Why? Because it's depending on the weather. That's difficult to manage, and that's why you needed a good finance head in there to manage cash because it's a levered environment. So by levered, I mean, we introduced bank debt into this business for the very first time in its existence. And Adam needed a good CFO in order to start to pull those numbers together to work out the profitability, not three, four months after the month has happened, but as quickly as they could after the month has happened, and indeed starting to track it on a daily and a weekly basis. Again, just like basics, although working at pace get these things done, given you guys have a length of time, you want to have your businesses for. And what about existing team, were the big changes, or actually, like the company who had been working well to that date, did he not have to make too many changes? He did make a number of changes, but they were predominantly hires. So Ollie was the COO. He was the son of the founder. He was a critical individual to keep another. He kept, he was the glue that kept the whole organization operating. Very cool. It was fundamental. He got some equity. It was fundamental we kept him or Adam kept him. If I may digress very quickly, yeah, I spent the first 10 years investing in private equity, management buyouts. And after 10 years, I thought I'd spend a bit of time having a look at what our track record was, of predicting what a business would do at the time of investment versus what actually happened. And see if we could learn anything off that, because we were we were getting it right sometimes, and we were getting it wrong sometimes. And one of the things that came to light very clearly was our due diligence was missing some key areas, some really key areas. And so we got all the chairman of the businesses we backed, plus the investment team, plus some CEOs, interviewed them, got them into a room to try and distill what it was we were missing. And it was, we ended up summarizing it in a pyramid. Maslow's hierarchy of needs, he'd turn over in his grave if he saw what we'd done to his pyramid. But the bottom layer was people. And it sounds obvious, but we would start to introduce. So one of the obvious questions I'd ask when we'd be going in, have you got all the roles filled? I get vigorous nods, yes, yes, yes, you know, soons over here. And I'd leave it at that. And we go, okay, tick in the investment memo, we've got a full team. The, the new ones that we started to identify was, have we got a team for today? So what's their current capability? And what is their future potential? So we, we just put, we took, we borrowed what already exists, a nine box model, current performance versus future potential. Put it in front of the CEOs and said, fill out where your team is on this. And when they filled out what their team was on this, we suddenly got a very different picture. We got a picture of, I have got all the roles filled, but I've got nobody who can grow with the business. And, and when that penny drops is, well, who's going to replace you in four, five years time? Why is this person in the bottom left hand corner? What, what are you doing about that? Bottom left is, I'm not performing well today and I don't have potential. So, so those, those started to yield interesting insights about, do I have the right team in place, not just for what I'm doing today, but who are going to be able to, to do the transformation I require to grow the business? Adam did that across his business. And he concluded that in a number of areas, not ops, because Ollie was, was absolutely key, but in a number of the other areas where he did have notional heads, he didn't have the caliber he needed. To take it to that next stage of the journey, yeah. And that's when he started to recruit a great CCO chief commercial officer. He then started to build onto that, some changes in sales and marketing. Can I just run a story then? I'm sort of across my wise. There's something I should I care about, which is often you get really capable people, but they're in the wrong role. Yes. And it's a mistake to, to take them. Yeah. And I didn't have, you know, with your guy's support. I really liked Adam's approach, because he had the confidence to re-roll some people, because he could see their talent. And I think there was a story about a sales leader who wasn't hitting the numbers, got moved into an individual contributor role, so just a self person and, and just smashed it. And is that, is that the same story? That is exactly right. I think that is real leadership. As opposed to like, you're not hitting the numbers. You're right. Yeah. And so much of it is about trying to keep the DNA, the culture of the organization together. Where you've got people who don't for the culture, there's obvious, I mean that's an obvious way. to change. But the tricky bit is trying to find roles for individuals that they could then go and fulfill, continue to be experts in their field, but they're not managing a team of 20 people. There's many analogies to football, where individuals, where there's just a team of 11. By the way, thank you for football analogy, not a high rocks one. And that's hard for you. I don't really follow football, so this I'm straying from my comfort zone. In order to move up a division, you need to hire people in the division above you. You can't go two or three divisions above you, because I'll never join you. You've got to go the division above. You bring that talent in, that increases the caliber of the DNA, and then when they get to a certain stage, you then have to go and hire the next division above. Football has only 11 seats, whereas a business has many, many, many more seats. And that's the trick is to find once you've got great talent, they've got great values, they understand the business well, to go and find a seat for them that fits their capability and hold on to that talent. There was another story. I don't know if it was a direct, but there was someone in the yard who was really knowledgeable of the business, everyone loved them, but they weren't doing a great job with their particular sort of execution to every focus customer facing role. And so roles just created for them to do whatever they thought needed to be fixed across the business, which sometimes is a recipe for disaster, because they just start messing around. But to your point, when you've got people who are the glue, know the business, know the customers, can see what isn't working. It's not necessarily a case of their failing because they're not performing against the KPIs in the role, they're just in the wrong role. I think that takes such confidence as leader to spot that onto the numbers bit. This is a bit like grand designs where they were at the end, Kevin's like, what was the budget? What was it worth? How long did you take to do it? Did you go over budget, which is what everyone waits for? Yeah. More direct, I think, is quite rare because you've had a liquidity event and you had a successful exit and quite a short period of time. Are you happy bringing to life that time frame the numbers and what happened? A typical hold period is four, five, six years. We're typically looking to generate north of three times return. So what does that mean? It means if you put in a pound, you get two pounds profit back. So you get a pound back plus two pounds profit. That would be a three x return. In private equity would be top quarterile. It's what everybody targets. But the returns end up being lower on average across the portfolio. For Adam, he bought the business when it was making around three million EBITDA. He bought it for six times EBITDA. He undertook an acquisition nine months post, post investing, which is unusual to do it so quickly. Again, a reflection of the caliber of the talent, to be able to go into a business, hire the people, learn it, meet all the customers, and then also, whilst you're still building all of that, undertake an acquisition. Very hard. But he did a very good job and he integrated the business well, which is even harder than the acquisition itself. That was about a two, two and a half million EBITDA business. So he had a five, five and a half million EBITDA business quite quickly. The market, we had a couple of weather sharks and the business went off like a rocket. If it has a good month, so you have a deep freeze or a very hot summer, it can make one to two million profit in a month. The whole sort of 30% utilization, it's 150% utilized over a month. It's hard going, they're working through the night, they're working on shifts, but they make a lot of money. Two to three years later, so it grew really nicely and then started to, as the weather patterns would change, started to climb a bed. We saw at that point, quite quickly, that it was lost making over a couple of months. It was quite a shock to the board. It never runs smoothly. It never sort of runs up towards the right. We had a couple of months where it was lost making and that gave us real pulls for thought. Have we got the right systems in place? Have we really thought about how much fixed costs we have versus variable costs? Adam and David CEO, CFO did a great job of coming back from that, restructuring the business, changing it and it ultimately came out better off the back of it. Subsequently, grew up towards 10 million EBITDA after two years, two and a half years. Super, super outcome. Adam wanted to create a bit of liquidity for himself. He had 99.9% of his net worth tied up in a company that was growing really well, but had a multi-kitchen that needed to be replaced and had no cash to replace. And is living in Essex? Well, it wasn't doing that. Nothing more with Essex or the board master. And so that precipitated a discussion about, do we undertake a transaction? From our perspective, as an investor, we would have been happy holding for another two to three years. We could see this was an upward trajectory. The actuarial cycle, so a cycle of weather, who knows what a real cycle of weather is, because we're looking at it on such a microscopic timeframe, but we looked at it at sort of four years. And over a four year cycle, you'd have some ups and downs, but you could see it was growing up and towards the right over that period, sort of 20% compound growth rate. So we were quite comfortable holding for longer, but that liquidity event with a need for liquidity and for some of the other shareholders, we undertook an exit or an exit process. And the big risk in an exit process is there's no revenue visibility as such. And so you are at the mercy of the weather and private equity, which is where we were selling it into a very good at looking at the last quarter's trading versus planned. And saying, well, I'm thinking off, we're going to chip the price. So there was a lot of nervousness about a price chip happening, if the weather patterns didn't pan out smoothly as we hoped. Exit processes are painful. They're harder than entry processes. It's easier to buy a business than it is to sell one. But in the end, they managed to sell it in consummated transaction to Eurasio. What we feared did happen, trading dipped off substantially from about 10, 11 million EBITDA down to about 7 million EBITDA. But to be fair to Eurasio, they held their nerve. And there was a bit of fiddling at the edges, but they consummated the transaction. And literally two weeks after the transaction happened, a whole of Kent shut down as there was a deep freeze. And the business was a trailing 13 million EBITDA literally weeks to months after we sold it. So that was a three year, just under a three year time horizon generated a return to investors of over five times, which is Stella. And has acted as a reminder to the European industry that the UK still is a good market to invest in, still attractive opportunities. And we believe that there's a very active liquid market so you can sell your business when it gets to certain size. And with good talented managers, there are some really interesting niche businesses to be born. It brings to life, I think, the opportunity for people who are driven and want to run their own business. I don't have their own money in the bank account to go and buy one. Like Adam. And I think it dismisses with data the fact that you need to know this sector or you need to have been a CEO before you don't. And where I think you get it right with the whole search fund model is the incentives behind it because everyone wins and the data so far proves that across stampers research within all sites, six hundred and eighty one search funds. And I imagine for someone like Adam, not that there are any numbers public and I don't know numbers, but I imagine for him it's probably double digit millions that he walks away with for that wealth creation and good on him trading Texas weather for an excess potato farm. He deserves it. And I think such a cool story. And what I'm for you guys for backing him as well. Well, the real, the real thanks goes to Adam and the team he built around him. In my words, actually, the military bit where you get someone young in experience turning up with some sweats a bit like the sun. It was a COO for 23 years. And you have to be humble. Many people get it wrong, probably including myself, when you're there with like 30 rugged men and women, many of whom are 15 years older than you and you turn up as their commander. And you don't know anything. And so you're at their mercy of experience and knowing what to do. And I think it's how do you do it in the army then? I've probably got it wrong. So the worst person to ask, make, make it up is the army. How does the army, how does the army deal with that? Would you know what? All's told early on in my training, never admit your wrong or you don't know. And I categorically disagree with that. And I think the better leaders agree. And actually, giving people confidence, but also making them aware that you don't know the answer. And you can work it out together. But when you make a decision, you back that decision, you expect them to help you. I think that's the best way through it. I think just acknowledging you don't know opening up to inputs from the right people to the Dutch Parliament. So the more experienced peeps, and then just making a decision to make sure I'm against behind that, that's the best way of doing it. But I, it also depends on the context because there's difference between leading 30 people and then being in a team of say four, which is where you edge more draws a special forces. And then a team of four, six, eight, whatever it might be. Actually, there's no clearly defined, yeah, it's quite flat. And I think if you look at the SS, like one of the four values is humility and a rankless society. I think there's also one with the whole thing about being called Sir. And the arm is very hierarchical. And my feeling is looking back when you turn up, maybe you've left off to training school, which in the UK is called Sanhurst. And everyone has to call you Sir, even though sometimes they're 15 years older than you, and they've got 15 years more experience. I think actually acts as a protective safe rail to help you lead them. And then as years progress often that changes into down to first name terms. Whereas if you look at small teams working together in special forces, it's first name terms, or really abusive language. So I think it does change on the situation. What do you think you could take from the RMA or the special forces that you could then apply as a CEO and a business? Do you know, I think different x forces people give you different answers based on their experience. From my sense, who knows if this is right or wrong, I think one is the ability to speak to people of different backgrounds, not just in terms of their personal background, but the role in the company. Because some people are at the call face, they're in a manufacturing factory, and they're working with the tools. And very much in the military, you're taught to get in there alongside them, whether it's fitting soundbags or cleaning weapons with them, having a chat. And so you tend to be one at the call face, and I'd expect an ex-military commander to go in the factory and spend if you're as every person learning their role and empathising with them and seeing the reality. So I think that therefore helps to identify problems in the business, top down, but also you can sit down and present to a general and get the strategic picture. And so you can interface with the board or the investors, which is equally as important as maintaining the team. And so I'm less sure of my answer when it comes to corporates, but for really small businesses where an Excel spreadsheet doesn't translate to the human element of the small business where people stay for 30 to 40 years sometimes, where they don't like change or uncertainty, someone ex-military would hope would be able to have that humility, the ability to communicate with them the vision, and to put the medis and give them confidence against the uncertainty and change, like bringing in a serum system and the job is changing. And I manage that particularly for doing further acquisitions with the change required, because that is huge human toll. And I think for small businesses, a big risk is the churn factor of people leaving with the change in culture that they may fear but may not happen or the change in their working practice. So that's right point to things, but what do you think? We don't have many data points of veterans that we backed, not by choice, just we haven't come across many. And one of the observations if I were to have a generalisation of the CVs and the backgrounds of the individuals that were backing, few have led teams and big teams and teams of mixed workforce. Somebody who says I was an associate director at McKinsey and I led a team of five analysts in a great, you've got five of the smartest people in your geography working for you who are extraordinarily hungry and motivated. How does that translate to going into, as you said, your factory? Whether you're on 12 pounds 7 hour, they don't get a bonus. And so I'd say one of the observations we've seen is, and this is why we hunt for EQ and humanity. And an over index on people that will look to over index on individuals, I have that is because they need to learn that skill pretty quickly. Your SME is so different to your Amazon, called Dev Environment or to your investment banking background or to your VC backed startup. And so that ability to be able to flex your style, I think I've always thought it was, I've always admired when I've been around people who've come from military background and seen them operate just how at ease they are with standing in front of a group of 30 people, getting 30 people in the office, come and stand around me, I'm just going to have a quick chat with you all and be able to communicate really effectively, succinctly, confidently, listen to what people are saying. And then off they go and I think that's a skill set that is just not taught in bigger corporates because it's not a way of running a business. You'd like to think that's always the case, but there's a story which I love to hear, which is, on the planes of Canada, there are just over a thousand British soldiers getting ready for a big exercise with the right men vehicles and tanks because Canada is massive. I think there's literally one tree on the plane, and it's called the lone tree on the map. And there's a young commander officer, you're expected to do a brief. And so a young officer, probably in his early 30s, was asked to address all the senior officers and brief them about the ground, the map and the plan. And so he got a run sat down, they were all facing inwards and he was there with his military notebook about to present. And he's like, so is ladies gentleman, if you please, turn your rear and look across the plane and everyone turns around and they wait expecting them to start talking and pointing out the various physical references. And there's silence. And people are waiting as you may, you can use note, but ready and they're waiting. And then eventually people start turning around and looking behind them and they see this young, young officer who completely, you asked his confidence just side the best thing was just to sprint for the distance and just see him running away as fast as he can across the field. So yeah, it definitely doesn't apply to everyone, but I think there is something in that. Yeah. Pascal, Sandy, thank you very much indeed and look forward to hearing more stories as we go. Thank you well. So it's been really enjoyable. Thank you.