Episode 9 - Andrew Locke, co-founder of Ambit Partners

Distinguishing feature of emerging markets is that typically in many industries they're lagging established markets, which provides a great roadmap on how different industries may grow.

So the big question is this. How are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing it? How do acquisition entrepreneurs find businesses, buy them, and then create generational wealth while taking on less risk? Welcome to Search Funded the Entrepreneurship Through Acquisition Podcast so this episode is one that actually aired on the Insead Emerging Markets podcast over a year ago, but I decided to repurpose it here just because it's extremely relevant to this podcast given the guests that I interviewed. In this episode I spoke with Andrew Locke, who is the co founder of Ambit Partners. Ambit Partners is a search fund investment group based out of South Africa that invests in search funds across the world fund focused on emerging and frontier market countries like Paraguay and the Ivory Coast. Oftentimes they're helping searches launch the first ever search funds in their countries. I really enjoyed speaking with Andrew and I'm really happy to share it here on this podcast as well. This episode I started out by asking what a search fund is just because the emerging market listeners may not have been as familiar with the concept as the listeners on this podcast are. But I'm going to leave that in there just because I think it's a great place for us to start and it segues really well into the rest of the episode. So I'll leave it there. Hope you enjoy.

Yeah, happy to define a search fund to start us off. So a search fund is kind of an alternative path of entrepreneurship that's typically undertaken by an individual or pair who will form an investment vehicle that's capitalized 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 five to 10 years. Those initial investors in the search fund, many of whom will participate in the actual acquisition of a target company when that time comes. That's kind of what a search fund is. They were started in 1984 in the States out of Stanford and Harvard and became popular in the US before jumping over first to the UK and then to mainland Europe and have kind of been proliferating across the globe since there's been, I think, 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.

Yeah, definitely. It's a very exciting area for MBAs. It's something I thought about doing directly after the MBA myself and it's something that I hopefully we'll do in the next few years. So that's how we originally got in touch and then I, when 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.

Yeah. So I'm American by birth and I've been working internationally for most of my career. The first half I spent in development economics. 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 in microfinance, some time in India working in behavioral economics before making a transition in the more private sector work. So the kind of problems I'm interested in solving have persisted but I think that 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 my work. So I came back to Africa, this time to the east, based on Nairobi, for a few years in management consulting, supporting small businesses to kind of build a strategy to raise some money to build teams. So in a particular focus on developing talent which is a huge factor and differentiator and success for I think small companies everywhere, but particularly in the social enterprise space in Africa. Was there for a few years, spent significant time in Kenya and Rwanda and Uganda as well before going to insead for my MBA in 2020 18. So it was an 18 in the NCI parlance, the 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 up before school. This is a social enterprise private equity fund based in Johannesburg. So we operate four portfolios comprising a total around 26 small businesses. So of approximately search fund size that this initial work was not called search funds. It was more traditional kind of small cap private equity, but had a lot of the characteristics of search which kind of speaks to where we are now. So we went and acquired as a firm these 26 businesses in South Africa, all in 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 attempted to rectify many of the wrongs of apartheid and to encourage the transition of business ownership from traditionally white hands to younger black hands. So the principles that we brought to these companies were all black South Africans who were super high talent, but generally didn't come from the intergenerational wealth that is often needed to take the entrepreneurial risk and, you know, start a business in your garage, for example, is not possible for many people in South Africa and other places as well. So it was within that context that we operated in this fund. Myself, my business partner, were there for a few years and helped actually sell those funds to a secondary PE fund in South Africa and then together with a third partner. So there's three of us. We founded the current firm that we work at called Ambed 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 fundraise of our first fund. And we've invested so far in 24 search funds in 16 countries around the world. So that touches South America, North America, Europe, Africa. We're probably some of the first to go into Asia, some of 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 and help them raise capital and give them the resources they need to be successful.

A lot of interesting stuff. There may be best to start off addressing what you just ended with. I'd be curious to know 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 on just their home country or their home region. And they don't really stray from whether it's the US or Western Europe. They typically will stay within a particular region. So why did you decide to start investing in places like South America or Asia? And what learnings have you gotten either from your work prior to Ambit or during Ambit that has led you to believe that those are good places to invest in search funds?

Your first question. I think an important feature of search funds is the size and diversity of the cap table that that searchers will raise. So 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 experience managing small companies and experience in emerging markets that is I think an important component of a complete cap table but not sufficient. So we invest alongside other search fund investors that do take that geographic approach. So if we were to invest in Brazil, for example, we would require part of our investment process to see that there are Brazil specific investors on that cap table to help us be comfortable with the geography that's true all over the world. So for in South Korea we want to see investors that are specific to that geography. So I think the role that we play is and 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 and can provide some kind of assured of that. So we've seen that a few times that we're able to bring in investors that typically only go into Spain or go into 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 look to play in the industry as far as what we've kind of learned. Yeah, I mean so much maybe difficult to summarize. I think the team brings a diverse set of perspectives. So we've worked in many countries around the world among the three of us from different angles. So one of our partners has spent quite a bit of time in organizational private equity in Canada and consulting around the world. We've done a lot of deals together, particularly my two partners. They were transactors before coming to ambitious myself I've worked across Africa and India and the Middle east and I think it's difficult to identify exactly the lessons but they certainly build an intuition around what can work and especially the things you don't know, the things that are probably different and build habits of how to find the answers to the questions you don't know. I think there's this huge opportunity here in these different markets you can navigate them properly. Other important pieces we back really great searchers. So that's our first lens is talented is finding guys that are experts in the region they're going to search in with a lot of experience in the relevant skill sets that are going to be needed and who bring really strong values. So they lead this process, they direct it. We support in the background when we can. But the real trailblazers are the other searchers going to these markets and then they solve many Many, many of the problems and that'll come up and pull us in when it's relevant to help out.

What are some of the attributes of these successful searchers? 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.

Yeah. So there's resume skills that we look for. There's one vertical and that's typically salting or private equity or venture capital, sometimes operations at a high level, working for reputable global firms and finding a lot of success in those early years of their career. It usually means kind of top pedigree schools. So business school and undergraduate programs that just give a lot of credence to the idea that they can solve problems and work hard and do the kind of nitty gritty hard work that's required to be successful. It's not always the case, it's not always indicative. We have invested in searches that are what we call less traditional and non traditional, that come different backgrounds. But that's a typical profile, is one of the top business schools and top pedigree consulting or private equity firms. A second vertical for us is value alignment. So we spend a lot of time just kind of talking to the guys that we invest in, understand what motivates them, why they're doing this, who their families are, the kids to bring on with them, 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 just indicated that we're gonna be able to work successfully together over five or ten years. And then the final vertical is knowledge of the geography that they're going 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 banking or consulting or some of these group house decides they want to run a business, they want to go home, they want to invest in their communities and move back. But there aren't many options for them that are exciting in the ways that they care about. But we want credible narrative around being able to navigate the geography that they're searching in. So connections to the financial markets, connections to the small business ecosystem, connections to top talent sources in those countries, these are things that we won't be able to bring, but we. So they look for in searchers. So these are some of the questions we have. So I think across those three kind of resume value or values and real connection to the place that they're going to search in is what we look for.

Sure, yeah, those are. Those all 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.

Yeah, so we do. We have a constitution that was actually the first thing we wrote as a team, kind of lays out how we work, what we care about. It's not the same for everybody. That would be perfectly aligned. I think there's still themes. One is things like integrity, which I think are on many value statements, but desire to be an owner, desire to take responsibility, a sense of community, the sense of fun, a good sense of humor, I think is quite important for this process. And so it's always one of the questions, would we share that constitution with researchers that we invest in them very soon in our process and have a conversation about which pieces resonate, which ones they disagree with? I think it's quite personal. I think it's hard to sort of distill. But understanding if these are questions people think about and care about is really important to us to build a successful working relationship.

Sure. I'm sure it's a very personal journey. So who the person is matters quite a bit, I guess, 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 an ecosystem and search for businesses themselves may be different in Africa versus US or eu.

Yeah. So yes, I think business in Africa has changing very quickly and developing quite fast. So there's robust and growing venture capital scene across the continent. There's kind of hubs of tech sprouting up in Nairobi and Lagos and Cape Town. There's more money and more opportunity being seen by large global investors on the continent, which is great to see. There's also small business transacting exists everywhere and has for a long time and there's been a lot of that. The search fund industry specifically is quite nascent on the African continent, so there's only been a few launched ever. There's one in Kenya, Morocco. Those searches did not lead to a traditional acquisition. We've backed a searcher in Arctic coast right now who's very close and we hope will be the first acquisition on the continent. We'll see if that is able to conclude. 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 very, very new and you can count them on one hand. But I think it's a product of more of awareness of search funds as a possible career path. The economies here are many countries are really primed for this as an option, but search funds themselves are very new and they're particularly new these more emerging spaces. So I expect we'll see more and more of these coming online in the next couple of years. And it's actually we teach a course on search at the main business school in Johannesburg as well as a seminar at the University of Cape Town. These are, we think, kind of seeds that we're planting for the next decade or more. But spreading awareness that this is a viable option, what it means, how to raise a search fund, what the lifestyle is like. 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 at, you know, we, we talk at nci, we talk at Harvard, we talk at MIT and other schools since many of those physical populations are quite diverse with many Africans as well studying there. So we're trying to spread the word as we can, but it's really a personal choice. So we're also not trying to twist anybody's arm, but rather just show what's possible for those that are interested in it, trying to help facilitate.

Sure. One thing you said there just piqued my interest when you said that a lot of these economies are really primed for search fund entrepreneurship. I was wondering if you could expand on that a bit more and why you think that's the case.

Yeah, so what we look for, it's kind of in a country or in a potential search economy. One is economic growth, kind of good economic tailwinds. And Africa scores very high here. Of the top 10 fastest growing economies, I think six or seven are African at the moment. And so there's really impressive growth in East Africa and West Africa and Egypt as well. And just in pure macroeconomic tailwinds as these countries grow. And along with that, the emerging middle class is really important. So kind of a consumer class or a broad based economic opportunity. Great. We look for capital and financial market sophistication that's both practical things like the availability of debt, but also just the general business environment. To grow a business and then potentially to sell it in five or 10 years to strategic buyer or private equity. So we look for, for kind of developed capital market. And the final pieces we look for is political stability which can really, if you look at what's happening. Ethiopia right now, that's a really high growth economy that's being rattled by political instability and war. So seeing these different categories, not every country on the continent falls into it, but many do. So we see kind of Uganda, Rwanda as very promising places as well as many countries in the west in both Francophone and Anglophone Africa.

Sure, yeah, I know there's a lot of exciting stuff going on. I know even West Africa, they have a common currency. Now if I'm not wrong, among a lot of those countries.

Yeah, they have the Central African Franc and the West African franc which is both a common currency which allows for trade among countries. It's also pegged to the Euro and backed by the French or it's in Paris, but it's backed by the Eurozone, which is great in some ways. It's difficult in some ways too. But it does help with some currency risk. There has been some talk of relaxing that pegging, but I don't think that'll happen soon. At least it does help for international investment to reduce some of that foreign currency exchange risk.

Sure. I was wondering if you could give maybe whether it's a specific business or 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 in Africa.

Yeah, so yeah, so as I 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 Evorian company, but to date we've not. So the company we're looking to acquire is in many ways a typical search fund acquisition. We look for companies that are between half a million and 5 million in operating profit or EBITDA. 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 for startups or turnarounds. So take it all together. We look for business that are fairly simple to run on 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 has not run business before and spend in the first hundred days or a year just observing, learning the ropes, getting comfortable in the business or making meaningful changes 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 too big a players and that are growing so that have a strong tailwind to them. So those are the broad categories that we look at. If you look at the difference between you asked the difference between America or Europe or North America and Europe and emerging markets, I think the style of business we try to keep as conserved as possible. There are some important ways that searching in emerging markets differs from searching in 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, in traditional search markets there are many ways to pursue search. There's the traditional funded search that we do. There are many guys who do self funded searches. There are accelerators that specialize in search funds and in finding acquisitions of the style that exist in Europe. In the States, there's one starting in Australia as well. Or different hybrid models. So there's many different flavors. If you want to buy a small business and step in as CEO, that's not the case in emerging markets. So it's far more limited in the ways you can pursue this and the funded, you know, you can always do a self funded search, but outside of that it's really these, the traditionally funded searches that we do. In addition, we see mostly solo searchers in emerging markets. That's primarily due to there's just a smaller pool of people interested and takes a little more specific profile to partner up. That's not always the case, but it's primarily solo searchers in new markets. And more often than not we see pairs searching in established markets. On the talent side, there's a larger talent base in many established markets. So that's kind of a two edged sword. And 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 an emerging market, less so, a little less competitive, but you're usually the pioneer in that space. So 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 lose them. On the SME side, in traditional markets there's a lot of databases to search for companies. There's far more robust marketplaces and brokers and such that bring on to help you Find businesses. Whereas again, not the case in emerging markets. It's far heavier on your own networks, people you know, and just feeding the ground, looking for businesses. And the final piece I mentioned was capital availability. So debt is, if you kind of run the numbers, debt's a really important piece of the search fund model. Tilt finance, the acquisitions. Usually about a third of the acquisition price is debt financed, a third is equity, and then a third is a seller. Note that's not always the case, but that's the standard formula in the U.S. debt's very cheap, it's very available. There are public and private sources. The emerging markets is very difficult, but without debt, it's a difficult model to get to work. So knowing the financial institutions is really important. In addition to looking for businesses that are more better able to secure debt, that's often more consistent cash flows, predictable cash flows, contracts with larger companies that are more secure, or actually having assets to back the debt as well. So different strategies, different places. But I think the overarching theme is that if you go to a new market, you're doing a lot of this yourself. So you got to be able to figure out each of those categories really as the first guy through the gate. So you have a lot of obstacles to overcome, but the opportunity is there if you can do it.

Sure, yeah. I'd be interested in learning a little bit more about the surge process itself. In a more developed market, there's usually a database for people to look into. You mentioned that people may use their personal connections and so on, but my guess is that would only be able to take you so far. So after that point, what have your searches had to do in terms of finding businesses that they find are interesting and finding the information that they need on those businesses?

Yeah, so there's a lot of different strategies and people have had a lot of success 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 send handwritten letters to business owners by the hundreds. But even having a database again is very helpful. But it's also generally public. So you're still competing with everybody else who has access to the database. And you're looking for good deals. So it's not always, it can help, but it's not always a golden bullet to sell things. So there are searchers that take a far more personal approach. They 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 other is much more automated approach where you buy sort of CRM systems that will send emails and categorize responses and you can go through thousands and thousands of businesses that way. So it depends, and we've seen both work, it really depends on the market. To use the example of our Ivorian searcher in Ivory coast, he has great connections to the local market and business scene. So his funnel was very, very small, probably on the order of dozens of businesses, not hundreds. But he had a really distinct thesis on what he wanted to look for and knew many of the main players already. So his hit rate was much, much higher than you typically have in the States, for example, which is usually more of a numbers game.

Yeah, that makes sense and it's pretty interesting. One other question I'd have is, are there any industries or sectors that either you're most interested in or you see that they're growing so you push your searchers towards them or is it pretty industry agnostic and you just try to fit the business into the other attributes that you mentioned previously?

Yeah, so more of the latter. We're industry agnostic, we're business model pedantic. So we make sure that whatever industry a business is in, it's never perfect, never checks every box exactly as you want it, but doesn't have any major red flags and hits most things that we care about. So the actual industry is dependent on the interest and expertise and backgrounds of the searchers primarily and the fit in the market and a credible growth story. So we'll interrogate the thesis for growth quite closely. You can have, you can imagine, I mean, there's many, many industries that can be compelling in different markets. So we wouldn't necessarily push guys one direction or another. Our interests are very closely aligned here. There's been an increasing emphasis on SaaS and software businesses in search. That's traditionally or historically not been the style of business because it's a little more difficult, a little more malleable. But there's been great success in SaaS. So I think pushing a little more willingness in the industry to fund acquisitions of software companies in the last five years or so, and we're seeing that also in emerging markets as well. So I think another distinguishing feature of emerging markets is that typically in many industries they're lagging established markets like the US and Europe, which provides a great roadmap on how different industries may grow. So you can have a security company in Ivory coast. You can look to see how did security companies look like 20 years ago in Canada and how they've 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 than you might if you were at that cutting edge already.

Sort of the rocket Internet model to search funds in a way. But yeah, I guess one final question would be just personally, what do you enjoy most about living in emerging market countries and doing business in them?

Yeah, I mean it's. I think you asked that question. Well, I think it's both for me a personal interest. I enjoy the dynamic lifestyle. I like being in new cultures and new places and traveling and being challenged by the place I live and kind of coming more in contact with the more difficult aspects of development that I've worked in for most of my career. So I enjoy the diversity of the lifestyle from a personal point of view and then from a professional point of view. I think there's great opportunity here. I think there's great possibility for impact if you can bring good ideas and good people into these communities and markets and empower them and invest in them to do great work. I think that in development 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 well paying jobs. So I think it certainly fits kind of my values. I think what could be really valuable to the world and then just from a purely commercial standpoint, there's some really compelling. It's fast changing and there's a lot of really interesting trends that you can get behind in these parts of the world that you don't necessarily see. It's a little bit faster moving than you would get in, in the US or in Europe, which can be a lot of fun. It's also bigger risk, you know, it's a riskier place to work as well, but it can be quite fun.