Kingsway Corporation (CEO Interview)

DISCLAIMER & DISCLOSURE: The author holds a position in Kingsway Corporation at the date of publication but that may change. The views expressed are those of the author and may change without notice. The author has no duty or obligation to update this information. Some content is sourced from third parties believed to be reliable, but accuracy is not guaranteed. Forward-looking statements involve assumptions, risks, and uncertainties, meaning actual outcomes may differ from those envisaged in this analysis. Past performance is not indicative of future results. All investments carry risk, including financial loss. This analysis is for educational purposes only and does not constitute investment advice or recommendations of any kind. Conduct your own research and seek professional advice before investing.This podcast/video interview focuses on a company that almost nobody understands correctly, which is exactly why it’s so interesting.This is not a stock that currently screens well. It’s misunderstood and financial metrics are misleading. So don’t get lost in the numbers. This is a qualitative investment thesis.The business piqued my interest because I am particulalry focused on companies with an opportunity to reinvest capital at high accretive rates of return over the long-term, and which have first class management teams. This one ticked both of those boxes.Here’s what you really need to understand:* ‘Search Funds’ are a niche “entrepreneurship through acquisition” (ETA) model.* Stanford professor Irv Grousbeck (not merely an academic, but successful entrepreneur with a net worth of a couple of billion dollars, and co-owner of NBA Boston Celtics) and Will Thorndike (author of ‘The Outsiders’ book and seasoned investor himself) helped popularise the ETA model.* ETA involves backing talented early-career CEOs (often MBAs) to find, acquire and manage an acquired business.* Acquisitions are private mom-and-pop type lifestyle businesses which are capital light, enjoy recurring revenues and have no customer concentration risk, but which have been operated as lifestyle businesses and starved of growth capital. Without succession plans in place, founders ultimately look to cash out. This generally means that they are available to buy at low single digit multiples.* Investments are typically too small for traditional PE firms, but too complex for individual investors.* In 1994, Thorndike founded Housatonic Partners, a fund focused on the ETA model and he enjoyed enormous success. He has quietly been one of the most significant investors in this model for decades.* Thorndike is on the Advisory Board for the International Search Fund Center at IESE Business School and frequently lectures at Stanford and Harvard.* The Center for Entrepreneurial Studies at Stanford Graduate School of Business conducts biennial studies of all core search funds. Its findings reveal that, since 1984, the ETA model has generated steady IRRs ~35% through various economic cycles.Now that I have your attention, please be aware that until now there have been a few issues with search funds:* The ETA model has, until now, been the preserve of wealthy private investors. Retail and other public market investors had no way to access search funds.* Each search fund focused on the acquisition of one company and so there was a high level of concentration risk.* Without the liquidity of a public market, private investments in search funds require an expiry date so that investors know when to expect a return on their money. This forces short-term thinking and exit decisions at inopportune moments.* Thorndike has conducted his own analysis that many of these search fund businesses have been sold too early and go on to achieve outsized returns over the medium to longer term, meaning too much vaue has been given away historically.The answer to all of these challenges is to create a publicly listed permanent capital vehicle focused on deploying the search fund model, building a diverse portfolio of search fund businesses, owning them for extended periods (maybe even forever) and enabling public market investors access to this asset class for the first time.Kingsway Corporation is the only such business.It is run by CEO JT Fitzgerald, himself a search fund veteran. Will Thorndike is both an investor and a member of the advisory board. And if that hasn’t captured your imagination, so too is Tom Joyce, previously CEO at Danaher and the architect of the acclaimed Danaher Business System (DBS), a version of which Kingsway is deploying itself.In this interview with JT Fizgerald (CEO of Kingsway), we breaking down how Kingsway is using that playbook to build a programmatic acquisition e