Transcript
Introduction
Patrick
In this episode, I continue to pull on one of the most interesting threads that I have uncovered in the course of producing this podcast, the world of permanent equity. My guests today are Royce Yudkoff and Rick Ruback. Two Harvard Business School professors, who have partnered to create a popular class that teaches students how to search for, acquire, and run a small business directly after graduation. The course is aimed at students who want hands-on management experience as soon as possible. After purchase, there's no timetable for selling the business. Indeed, if done well, there's never any reason to sell because the free cash flow yields to owners are higher than most alternatives. I approached this conversation from an investor standpoint. LP Investors usually partner with the searchers to form what is called a search fund. A search fund allows recent MBA grads to spend time looking for a business and ultimately acquire it. The result is small in scale but it's often a high return proposition for investors. I loved our discussion on what to look for in a business and what to avoid. The principles we list are useful for investors of any kind and will be particularly appealing to those from the buy and hold, value investing, or quality investing camps. One point of note which wasn't captured during the recording.
One of the reasons this style of investing isn't more well known is that it's extremely expensive upfront. It can take years to find a company and once found the transaction costs can be 20% of the total purchase price. As you'll see Rick calls this category REALLY private equity. If you enjoy this conversation, be sure to check out Royce and Rick's book The HBR Guide to Buying a Small Business. Which goes into many of the topics we cover in even greater detail. For show notes on this episode, visit investorfieldguide.com/hbs. Now, please enjoy this conversation with Royce Yudkoff and Rick Ruback. Royce and Rick, thank you very much for taking the time with me today to discuss a topic that is still relatively new to me, probably discovered it just three, four months ago. But I think from an investor standpoint and also from an operator standpoint is a really ripe and interesting niche in the world of investing, which is that of search funds. Maybe we could begin by you describing, pretending that I'm an LP looking for interesting things to do with my capital. Sort of explains at a high-level the idea behind a search fund and why both recent MBA grads but also LP investors might be interested in this concept.