The growth equity firm HalBar Partners is helping family-owned businesses with succession planning through its search-fund operating partnership with Novastone Capital Advisors, a Switzerland-based company founded by a consortium of single-family offices.
Search funds date their origin from the 1980s. Under the concept, young entrepreneurs partner with institutional investors to identify companies they could buy or invest in and place these business school graduates as the new CEO of the business.
Novastone Capital provides HalBar access to a pool of vetted entrepreneurs who have expertise in manufacturing and logistics operations, which are the fields HalBar targets with its search fund.
“In normal private equity, they buy the company and then place the operator. The operator is a hired gun; there’s no passion there for the business," HalBar Partners co-founder Nate Wasson told Crain Currency.
"We do the opposite. We say let’s find the person who is really passionate, has domain expertise in this space, and then we’ll let them find a company that’s most appealing to them. We’ll underwrite that company, and then they’ll turn into the operator for that business.”
Wasson, who also co-founded the family office co-investment group Alvearia, pointed to the exodus of baby boomers leaving their businesses for retirement and the subsequent generational transfer of wealth as the top reasons that now is an opportune time for investing in search funds.
“It’s the ‘silver tsunami’ — this macroeconomic tailwind of all these baby boomers leaving lower middle-market businesses,” Wasson said. “The model is a smaller, family-run business without a succession plan — that is generally the business you buy. This program takes local businesses and helps us invest in those communities and give succession plans to the current business owner, other than just a large company acquiring all the assets and shutting down the factory.”
HalBar Partners looks to invest in companies with earnings before interest, taxes, depreciation and amortization (EBITDA) of $1 million to $1.5 million and enterprise values typically from $15 million to $65 million. A 2022 study from Stanford University found that search funds bring an average internal rate of investment return of over 30%. The study analyzed 526 search funds from the U.S. and Canada and found search-fund entrepreneurs to have a median age of 32.
Nate Reichard was one of the first limited partners to invest in HalBar, which Reichard said has thus far invested in roughly 14 businesses with investment stakes ranging between 15% and 30%. Reichard is a fourth-generation leader of his family’s A&R Mechanical Contractors construction company, based in Illinois, and runs his single-family office called Apimaye as well as Reichard Capital, a real estate investment and asset management company.
“The strategic advantage HalBar has is the exclusive relationship to Novastone Advisors as the largest incubator of executives that have real experience in this domain of companies they’re searching for,” Reichard told Crain Currency. “That’s why I got excited about investing in a search-fund-type structure with an incubator of the cream of the crop in terms of subject matter expert, experienced CEOs.”
HalBar plans for its funded CEOs to run companies for roughly five to as long as 10 years before selling its stake, Reichard said. “We’re underwriting at least 30% rates of return, we need to see at least that level of value,” he said.
Said Wasson: “Instead of just doing one or two at a time, you now can invest in 20 to 30 entrepreneurs through a single vehicle. That’s how we built HalBar to help family offices really approach this as an asset class rather than to find one or two searchers at a time.”