What a Legendary Wall Street Insider Looks for in Search Fund Entrepreneurs, William D. Cohan

Private equity has the highest and most exorbitant fees for the general partners, which is fine if we're all making money, but if they're the ones making money and you're not, is the limited partner, that's wacky. That doesn't make sense. So search doesn't have those wacky fee structures and it can work out just as well.

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 less risk? Welcome to Surge Funded, the Entrepreneurship Through Acquisition podcast. I'm your host Nick Law, and I'm joined today by someone whose work you likely already know, whether from the shelves of the bookstore, the pages of the New York Times, Vanity Fair, or his latest venture, Puck, which is an insider noobs platform where he's the founding partner and a contributor. William Cohen is one of the most respected financial writers of our time. Before he became a best selling author, Bill spent 17 years as an M and a baker at Lazard, Merrill Lynch, JP Morgan Chase, GE Capital. He has since written definitive, deeply researched narratives on Goldman Sachs, Bear Stearns, Lazard, General Electric, and most recently a book titled Four Friends, which is about some of his classmates lives at and post Andover. It's one that I've been really enjoying myself for the past few weeks. It's a very humanizing book that makes you think about life. But beyond all that, what you may not know though, is that Bill is also a search fund investor. And I think that's something that he probably hasn't talked about as much as publicly as some of his other projects. So I'm really glad that he is joining us on this podcast to discuss it with me and all of you who are listening as well. It's obviously great to have someone that's an icon like Bill on the podcast. But what's even more interesting to me, I guess, is that this is a person who has studied leadership at the highest levels. The successes, the pitfalls of the biggest names in business, people like Jack Welch or Felix Ron. And so when he goes and invests in the small businesses that search fund entrepreneurs acquire, I would guess that he's to some degree taking that same knowledge and analysis that he's done on those types of people and using tools, evaluate search fund businesses and search fund entrepreneurs. And so I'm sure that we'll get a lot of really interesting insights from Bill today. But before we get into those I'd love to learn just how you first came across search fund investing and once you did, what it was that drew you to it.

Well, Nick, first of all, thank you for having me in that kind introduction. So got my MBA from Columbia Business School back in the Dark Ages, 1987. And one of my good friends there, like I did, started out sort of as a banker on Wall street and then he moved to Seattle and then eventually decided he wanted to buy a company using the search fund model. And this was before people even talked about a search fund model. And since he was my good friend, of course I backed him with what I could financially at that time. It was the same, same idea of sort of staking him to a salary for two years so that he could find a company to buy. And then we would convert that original investment at a stepped up basis into the equity of the company, plus more equity because of course he would need more and then raising the debt financing too. So he spent a couple years, found a company, a tortilla company in Boise, Idaho, and moved to Boise, Idaho with his family and became the CEO of the company, just like it's supposed to work on a textbook basis. And basically we owned it together with others, of course, for close to 20 years. Recapped it once and then just a few months ago sold the company to affiliates of the Pritzker family. And he did great. We all did great. And probably should have invested more and probably should have not taken money out at the recap. But you never know. There was a bit of a roller coaster at times, especially during COVID So this was a great outcome and a real accomplishment for my friend who ran this company for close to 20 years. And as a result of having done that and that working out pretty well, we formed a partnership with a third fellow and decided to invest in other search fund entrepreneurs around the globe. I would say the ones we did in Europe didn't really work out particularly well. We've got one going in Colombia, South America that I think is working out okay. We've had others, some of which have worked out well. Great. Some of which have it, you know, it's a real interesting sort of hit or miss investment opportunity. But I like that it's sort of, you know, I've invested in private equity firms and between their 2 and 20, I've noticed that the general partners get filthy rich and the limited partners often don't get much of anything. Sometimes they do, and that's great. But I noticed the general partners do very well. And so this doesn't have any of that, so that's nice. It feels like more like direct investing and it's sort of lower stakes and more mundane, salt of the earth type businesses. And so I'm glad I've done it. I say by and large it's worked out well. I've never gone through and done the analysis of all of my investments and how they've worked out. My friends tell me that it's worked out very well, and I don't think they've done the analysis either, but they seem still quite high on the sector. I've been to search fund conferences at Stanford and met the heroes of the search fund industry, the titans, and listened to them speak. So I don't know, it's just sort of an interesting asset class. I like the entrepreneurial nature of it. And when it works out, it's great. And when it doesn't, the stakes are relatively small.

Sure. It's a common story for people who have been involved in the community from the early days that it was usually just through a friend. That wasn't such a formalized structure back then of going to the conferences and raising more officially. And obviously it takes a really good friend to front your friend's salary for two years and then also invest in the business. But also very interesting that you've done international investments because I know a lot of the search fund investors in the US are a little bit hesitant to do that. So pretty interesting that you've done that as an individual investor. I was wondering maybe if you could just at a high level, talk about the investments that have gone well, the ones that haven't. Have you seen any commonalities between a search for investment that does return well, or has it just been kind of random?

Of course, when you go into it, you just like, okay, here's this young guy or whatever. Mostly guys who are gonna take this entrepreneurial flyer and they're all hyped up and excited and they've got the pitch deck and blah, blah, blah. You don't know them from Adam. You talk to them for a while, they're all excited. But it's hard to find a company to buy. And you know, you send out a lot of flyers and then you gotta get somebody to agree to sell. And who are you anyway and where are you gonna get your money from? And the whole thing seems kind of nutty if you're the seller. So to actually find somebody to sell and to get the money together, I mean, it's really kind of like the old bootstraps lbos of the early eight has that kind of feel to it. So, you know, who knows if it's gonna work out. It really, at that point becomes the whole thing's kind of like a crapshoot, to be honest, but, you know, sort of a dignified and respectful one. You gotta believe in the people even though you don't know them. I mean, I knew my friend obviously quite well, so I knew that was, you know, fine. But beyond that, it's just, you know, who are these people? Where'd they come from? And so sometimes it works out and sometimes it doesn't. So it' like any portfolio theory. And again, I'd say relatively speaking, the stakes are are low and the returns are modest but nice and it works out. And if it doesn't, as I said, you can absorb the loss. And, you know, most people aren't too greedy with the salaries they want for the two years of work, and it's a lot of work. So I get that there's one situation now where we're thinking of investing, and I noticed that there's two guys who want to run this. So that's two salaries and they're actually asking a lot and they want to know that they're going to get a lot of the equity. And so I don't know whether it's because suddenly there's all these many, many, many billionaires and Elon Musk and Larry Ellison are in the news all the time and their fortunes. And maybe search fund entrepreneurs are getting a little greedy too, potentially. We'll see how it plays out.

Yeah, I think that maybe it's losing a little bit of the scrappy entrepreneurial origins that might have had as more people move into it. You mentioned that you really just get a couple calls or so to really evaluate these people as entrepreneurs or leaders. I know that obviously you've spent a lot of time studying leaders. I was curious if there are any things that you do look for in the surges to be able to, at least at a high level, suss out their character or the motivations or how they're going to perform as searchers when you do talk to them.

Well, again, it's hard to discern what people are really like from a couple of zoom calls. But you want to make sure that they're highly motivated and seem smart and disciplined and organized and can speak in an articulate, thoughtful way, properly well educated. And then you sort of go with your gut probably in a way, it's kind of like investing in SPACs where it all looks good on paper and in the SEC filings and it all sounds so great. But then, you know, most of the time with SPACs, it doesn't work out and yet they're back again. I mean, there's sort of an element of that without any of the SEC filings or with even less information. So I think you just sort of get a feel for whether somebody has got what it takes to do this. And since we've done enough of these and I know what it takes to do it, you can see whether somebody's got the gumption and the drive to spend two years trying to find a company and then if you're lucky enough to find a company, to have the seller sell it to you and then to become the CEO of the company and run the company, all of that was sort of a gut feel. Right. And of course you do have a second bite of the apple. I mean, if they find something that you don't want to invest more in, then you don't have to do it. We've had a couple of examples of that.

Yeah, I've heard investors say that the search period is also kind of an interview process where you see the character of the person over the time that they're searching for the business. And I guess it is really hard to assess from the beginning because it's two different skills. It's. One is being able to search and buy a business and then lead a business is a totally different skill set. So I think you kind of learn how the person will lead the company, hopefully to some degree just by the way they lead their search. But yeah, I'd love to learn the cases where you didn't invest in the acquisition. Wasn't the search or was it the type of business what made you hesitate?

I'd say the best search fund investments or modest old line manufacturing companies that are manufacturing things that everybody needs or wants or is going to want, like tortillas or something. When you're presented with like a management consulting company in Matamoros, Mexico, which has happened, or something like that, I mean, you say, okay, I'm not sure I get this. And how are you going to finance it? Well, there's no money for this in Mexico, So it's like 90% equity. I mean, it's like, okay, no, we're way off the script here. And then you've got to extract yourself. And so I can understand, you've been at it for two years and you want to do a deal and it's this management consulting firm and it's like, okay, but no, no shell.

Yeah, yeah, I think that is one issue is that since there is a time limit, sometimes towards the end of that time frame, the searcher starts looking at deals that they may not have accepted if they didn't have that time limitation.

Like spacs where there's a two year time limit on spacs and then they do some nutty deal and then it's hyped in the market and the stock trades way up and then it loses 99% of its value for short order. Or the better outcome with lease spacs is they return the money that was raised, which you don't get with search because they've obviously spent the money to live on. So you know, there are pluses and minuses. But again, it's relatively small stakes to collectively pay someone's salary for a couple years and living expenses so they can search for a company to buy.

Yeah, definitely is still a relatively favorable model to the investor. I guess maybe switching more to the macro view of how search funds fit into the broader landscape of American capitalism. I know that this is something you've also written quite a bit about is the system that we're in right now and the incentives. And I was curious if that's something that motivates you at all in terms of how search funds fit into the macro picture and where you could see search funds playing a bigger role in what NBAs end up doing or affect the challenges that we face as a country right now.

Well, there's obviously people have a wide, wide, wide range of investment opportunities in this country. And so private equity was outperforming for a long time and people made a shitload of money and so that attracted more capital even with the 2 and 20 fee structure. But again, as I mentioned before, I've noticed that not always, but a lot of the times the general partners using the 2 and 20 fee structure made just like an unbelievable amount of money. And people I used to work with, when it's private equity, I was like, okay, now you have this home in Palm beach and I'm looking at my returns as a limited partner and it like what happened to my money? I see what happened to your money, but what happened to my money? And I think search, you know, there, there aren't those kinds of fees, especially in earlier days before greed started to creep into search. So it's sort of like a no load fund or a vanguard investment fund opportunity, but in the private equity space and the opportunity to own an actual company that makes something. So I Think from an investment point of, you know, it's important to kind of have a diversified portfolio of investments and ones without exorbitant fees related to it. And obviously private equity has the highest and most exorbitant fees for the general partners. And again, they do a lot of work and they add a lot of value, which is fine if we're all making money, but if they're the ones making money and you're not as a limited partner, that's wacky. That doesn't make sense. So I think search doesn't have those wacky fee structures, and it can work out just as well to some extent.

Yeah, totally. I mean, it's especially disappointing to see that when a lot of the investors in these PE firms may be institutions or, you know, pension funds, things like that, that are basically taking money from the parts of the country that are contributing. And you've talked a lot about how America often lionizes narcissistic leaders. And you mentioned some of the top CEOs, like Elon Musk before. I was wondering if culturally you see that affecting search fund entrepreneurs at all the greed you mentioned. I mean, I don't want to harp on this too much because we've already talked about evaluating the searchers, but maybe when it comes more to the incentive structures, do you think that there's anything that should be in place to make sure that that doesn't happen? Search funds. Anything that should be changed about search funds based on how they are structured now?

Well, I think the market regulates that pretty effectively. If you got two guys who want kind of a boatload salary for two years plus an outsized chunk of the equity, it just doesn't feel right. It feels more like 2 and 20, which I think people are sort of starting to shy away from that structure. Private equity is still very, very important, lucrative business. But I think there's starting to be some pushback on how that fee structure slow. And it probably isn't going to happen in my lifetime, but it's happening. But I think some of that is, as I've said, seeping into the search fund category. I think the best, better way to go is to be much more modest. And in your upfront requests, I mean, you've got no track record or even if you do, who cares? You're coming. And you know, this is the time to be modest in your demands. And if you perform, then you can step up and ask for something you think you're entitled to and talk it over with your board at that time. So, I mean, as you know, we do lionize our wealthiest people and that's, I guess, part of the American ethos. Build a mitter mousetrap and the world would be the path to your door. Oh, and you should get rewarded for that in an unlimited capacity. But I think, you know, Elon, asking for and getting a trillion dollar pay package is beyond absurd and disgusting, to be honest. And is that seeping in a tiny way into the search fund entrepreneur world? It could be. As I said, I don't want to make too much of this. I mean, I've seen it in a couple of cases, but I don't know if it's a trend yet.

Maybe just a quick follow up to that is that I know that at Puck you give ownership stakes to the journalist. I was wondering if you've seen anything like this in the search fund world. Do you think it could work to give employee ownership to businesses in the search fund world?

Well, I mean, employee ownership is a long established idea and an important idea. And it's the reason I helped to start Puck and to join Puck. You know, I was at Vanity Fair. I didn't need to leave, but I long believed that I should have equity creating the content that I create. And you know, when I was a, a journalist at the daily paper in Raleigh, North Carolina, in the early 80s, I got paid like a peasant and didn't have any equity at all, of course. And even though I was creating the content that people were buying the paper for and the advertisers were advertising for, the owners of the paper were nice people, great people, you know, sold the paper, got very wealthy, and, you know, I had my pauper's salary. And, you know, that's sort of the way it is in, in journalism with books. I share equity in my books with my publisher, so I have equity in my books. As a banker on Wall Street, I got a salary and bonus, but I also got some of that bonus in equity. So again, I got to share in the equity of the company. Of course, you have to be there to get the equity because it vests over time, as it does at puc. It vests over time, which makes sense. But, you know, Puck is really the only place I can think of where the journalists get equity ownership in the company, as they should. And I think it recognizes that. And that's very, very important, certainly.

And I think there are business reasons for it too. I mean, it aligns incentives for everyone, so should hopefully make everyone do better, I guess, maybe switching over to you and your career path and Maybe. What? A lot of the listeners of this podcast are current MBA students. You ultimately returned to journalism after years in investment banking. Maybe you could talk a little bit about that and why you made that decision, what students should be thinking about now, because, you know, we are in a time of AI. There's a lot of uncertainty. What advice would you give based on your career path, what you decided to do with your life? What should people think about?

Well, I've noticed that there's always uncertainty. No matter what time we're in, there's uncertainty. I started on Wall street In September of 1987, and in October of 1987, the stock market crashed. 22.6%, still the largest single fall in the stock market in one day. And I'd say three quarters of the people that were in my class at Columbia Business School and then had gone to Wall street got LIFO right out of there after that stock market crash. Last in, first out. And because I was at G Capital, that did not happen to me, ironically, because I had been a journalist and had never worked on Wall street ever, basically didn't know what it was. Before I went to Columbia Business School, you know, I didn't get a job at Goldman or First Boston or Solomon or whatever. I got a job at GE Capital financing leveraged buyouts. So this alchemy of the mba, I went from covering public education in Wake County, North Carolina, to getting my MBA to coming out and being hired at GE Capital to finance leverage buyouts. And after the market crashed, GE Capital got stronger in that business because, you know, capital started drying up at the traditional Wall street banks, and we got stronger. And the people who went to those firms from my class lost their jobs. So somehow I continued and went from there to Lazard and to Merrill and JPMorgan Chase, where I was head of Media and Telecom, M and A. And then an exogenous event happened, 9, 11. And there was a meltdown on Wall street following that. And JPMorgan Chase freaked out and decided they had to fire lots and lots of bankers. And eventually they fired me. I was not in the room when they were making those decisions. So of course I was one of the ones that got fired. And I had wife, two young kids. I had to figure out what to do. And I decided that I needed to get control of my life and not be dependent on the whims of my bosses who could be petty and capricious. And what could I do to take control of my life? Well, I was a journalist. I knew how to write. I Knew how to report, hadn't done that in 20 years. I hadn't, you know, written anything except for a stupid banking PowerPoint presentation in 20 years. But I decided I can do this. If I write a book, I can have control of my life. I don't have to have a boss, I can have equity in my books and I can be my own guy. And if the books do well, that's great for me. And if they don't do well, then I'm going to be the one who suffers the repercussions of that. And it's all on me. And that's where I want it to be. I did not want it to be anymore at the whims of ridiculous petty investment banking bosses. So I wrote my first book about Lazard, where I had worked 10 years earlier at that point, never thinking I would ever write a book, any book at all, let alone one about Lazard. But I decided it was a great topic because there had only been one other book about it and it was like 25 years earlier and so much had happened in the meantime and I had worked there and I knew all the people. And so I decided to write this book, interviewed all the firm's leaders and wrote the history of the firm and it became a New York Times bestseller. It was named the FT Goldman Sachs Business Book of the Year in 2007. So incredible. Beginner's luck. And from there I was sort of off to the races. So, you know, it was a unexpected blessing to have been fired from JPMorgan Chase for no reason, by the way, I might add, other than petty decision making by bosses who didn't want to lose their own jobs, so they had to get rid of other people. But that forced me to make tough decisions about what I was going to do in my life. And basically I decided I will do this and I will take control of my life, I will take control of my time, and I will do what I want, which is very intellectually satisfying. And while not as lucrative as banking, it's not the same roller coaster ride. And I have a much better life.

Yeah, absolutely. I mean, it's really inspirational to hear that from you. Obviously, you've proven very well. The world will probably respect what you've done a lot more than you would have if you'd stayed in banking. And I think that in a time like this where people are feeling uneasy and, you know, there's so many layoffs happening, it is really good advice if you take control of your own life, if you make a name for yourself in the world where people see who you are and what you're really about, I think that that will serve you much better over the long term, and it is a way to survive in the times that we are in right now.

That would just add one other thing, though, that obviously I think what differentiates me in a very competitive, crowded field is that I did work on Wall street as an M and a banker for nearly 20 years. And I do understand that world and the language of that world and the people in that world. And I have many friends still in that world. And so, you know, when things come up, I think I have my insights into what's going on are as good or better than anyone's. And so I think that gives me a competitive advantage, which obviously I wouldn't have had had I not gotten my MBA at Columbia and then went to Wall Street. So I'm both grateful to have had that experience. And in a way, I've joked that I'm going to dedicate my books to the troika of people who arranged for me to be fired and thank them for what they did for me, even though they weren't doing it to help me. And it was very painful for a while.

Yeah, certainly these moments can definitely be blessings in disguise. And I'm sure that you are grateful that that did happen at this point. Probably totally. Maybe. One last question. Aside from search funds and what we discussed, is there anything else that you're excited about in life or your work right now that you'd like to talk about?

Well, I'm going to be a grandfather next year in May, so that's exciting. And I have two great sons, a great wife. I'm very blessed to be able to do what I want even as I'm getting older. And so I'm very excited about all of that. I despair, like many people, for the way our country is being run and it's deteriorating sort of in front of our eyes. But hopefully we'll get through this phase and go on to greater things. So I'm basically an optimist, but I'm very much despair about sort of where we are as a country right now and hope that the majority of the people will come to their senses next time around and we can move beyond this era.

Yeah, definitely. Interesting times that we are living in, and it helps to be an optimist, I suppose. But anyway, thank you so much for joining us. This was really fascinating and I really appreciate you taking the time to join the podcast.

Thank you, Nicholas. Thank you for your time and your interest. Appreciate it.

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