WayFinder Searcher Growth Fund I.L.P.

Our Ethos:

• Talent First. Acquisition targets will come and go. What we know is that backing the right talent into an acquisition will create value.
• Skills & Aspiration. Work with high-energy entrepreneurs who can lead, sell and relate; have empathy, listen, and are open to learning.
• Value is built over time. Patient capital is needed for long-term, sustainable value creation.
• Be active in the global Search Fund community.

Introduced to one another by a mutual colleague in 2008, Lui and Ak began ‘trading notes’ on their combined experiences of helping clients with growth, mergers, acquisitions, MBOs and other forms of business transitions.

This led them to discover – and get passionate about – the Search Fund concept and investment asset class.  In 2018 they established Second Squared to officially introduce Search to the Australian market and accelerate the opportunity for growing a thriving Search community here.

The unexpected speed with which the community has grown has led them to establish WayFinder Capital in 2021 with Nima Sedaghat, Australia’s leading practising corporate lawyer and expert on Search Funds.

Lui is a Managing Director and Co-Founder of WayFinder.

Lui has had significant involvement in corporate development activity (mergers, acquisitions and divestments) in a range of industries covering transport and logistics, retail, chemical manufacturing, professional services, marine and civil engineering, laboratory services, subscription-based technology services, and for-purpose organisations.

As Principal of Loop Advisory, he has spent more than 15 years working with business owners and executives to grow the sustainability and value of both themselves, and their businesses (including through mergers, acquisitions and divestments). Lui will continue to operate Loop Advisory on a part-time basis as he has done for the last three years.

He is an experienced executive and business coach, Non Executive Director and a member of the Institute of Chartered Accountant and a graduate of the Australian Institute of Company Directors.

Lui co-founded Second Squared five years ago to develop the ecosystem and accelerate the development of the Searcher Community in Australia. He has mentored and provided advice to many of the existing Searchers throughout their searches and acquisitions.

Ak is a Managing Director and Co-Founder of WayFinder.

Ak has worked extensively with entrepreneurs and business owners in the MME sector across Australia for over 20 years.

As Principal and Director of Beckon Business, his work has primarily focussed on sustainable business growth, alignment of commercial strategy with partnership/shareholder aspirations, structuring for growth (including setting up of boards and governance processes), acquisitions, and succession (MBO, outright sale, etc).

Whilst his career began in the corporate world in organisations like IBM, EY, PMP Ltd etc, and part of his coaching and consulting practice services this market, his real passion lies in the MME sector where he has worked across a broad sphere of industries including Federal and State Governments, forpurpose organisations, banking, financial planning, accounting, town planning, property, legal, bio-technology, engineering and construction, mining & mining services, advertising, hospitality, IT, and manufacturing. Ak will continue to operate BeckonSecond Supplementary Information Memorandum - Business on a part-time basis as he has done for the last three years.

His understanding of the challenges of the MME environment led him to start up (and subsequently sell) MyHRadvisor – a boutique HR consulting practice to the MME sector. Pre GFC, he also started up MyGM which provided outsourced ‘growth focussed’ general manager solutions to MMEs struggling to find the right talent at that level to support their growth.

Ak is an experienced executive and business coach, certified internationally as a Master Practitioner (European Mentoring & Coaching Council Accredited), a Non-Executive Director and Chair on advisory and formal boards, and a graduate of the Australian Institute of Company Directors.

Ak co-founded Second Squared in 2018 to develop the ecosystem and accelerate the development of the Searcher Community in Australia. He mentors and advises many of the existing Searchers throughout their searches and acquisitions.

Nima is a Managing Director and Co-Founder of WayFinder.

He has spent over 15 years advising business owners, executives, Australian and foreign investors on business restructures, mergers, acquisitions, and investment transactions.

As both a lawyer and chartered accountant, Nima has been appointed to senior roles in professional service organisations such PwC and Deloitte, and law firms Minter Ellison and HWL Ebsworth.

Nima has been active in the Australian Search Fund ecosystem since 2017, having advised on structuring the first traditional funded Search Fund in Australia. In this context, Nima is well known in the Australian search ecosystem and recognised as being a leading adviser on search funds in Australia.

Nima will be actively involved in the Fund Manager’s evaluation of Searchers and the structuring of potential acquisitions by WayFinder investees, as well as ongoing portfolio management.

1. The Fund aims for 20% return to LPs. Was that compound return?

Yes, this is a 20% IRR to investors based on pure money going in and money going out. Broadly speaking, investor calls will be made over the next two to four years and then returned over the following five to seven years.

2. The searchers get 8.3% for originating the deal with the balance up to 25% on meeting hurdles?

Yes, in practice they are allocated all 25% but only get ownership in tranches (vesting conditions).

The first 8.33% (of the 25%) of the ordinary shares vests on the day that the business is acquired.

The next 8.33% vests monthly over four years.

The balance vests based on the return that they give to the investors in that search and business (which includes us). They start to earn it at 20% and completely get it at 35% IRR.

One exception to the above – the 25% relates to a single searcher and it increases to 30% in the case of a partnered search (i.e. two people going into it together). We can do this because the success rate of partnerships is somewhat better than single searchers. The other exception to the above is where we participate in a Self-Funded Acquisition, where terms will be negotiated and agreed on a deal by deal basis.

3. No above hurdle performance is paid until there is a sale.

Yes, for the searcher – their ordinary shares are worthless until the investors have received all of their capital back and then an 8% return.

Yes, for investors in our fund – we (as the General Partner) also do not receive performance fees until we have returned all investor money and an 8% compound return.

4. Management fee is only paid once 8% return is achieved.

No, our management fee starts from Day 1 and is paid quarterly in advance.

The management fee to the fund manager enables the fund manager (i.e. the General Partner) to do the work required to source 25 searchers over the five years and make ~20 acquisitions.

5. How is 8% calculated prior to a sale. i.e as we go along is there any calculation of the value of the business or is this yield only?

5. How is 8% calculated prior to a sale. i.e as we go along is there any calculation of the value of the business or is this yield only?

There are two aspects to the question:

(a) How do we calculate the 8% hurdle value?

The 8% hurdle is converted to a daily hurdle rate of 0.021087%.

Whilst we (the Fund Manager) will maintain these calculations for the fund, they will also be prepared by an external fund administrator and audited by a third-party accounting firm.

(b) Cash flow yielding business or Value uplift on a specific investment?

The hurdle capital is only impacted by cash in or out. So, if the business pays a dividend or does some other form of distribution (e.g. buyback of the redeemable preference share) it will reduce the capital (i.e. some cash has come out).

The hurdle capital continues to increase regardless of business performance as that is the base rate to be achieved.

Some of the businesses will produce a yield, but not all. It will depend on how each business acquisition is structured (quantity of debt, repayment scheduled) and business performance. Should businesses that we invest in pay a dividend it is likely we would use that first to pay management fees, rather than making another cash call from investors.

(c) A side note:

As part of our reporting to our investors in the fund (i.e. the Limited Partners) we will periodically value the portfolio. At each valuation point we show aggregate value of the fund, the investors portion of the fund, and their original cost and the hurdle that must be achieved for that investor.

6. What happens if returns are above 20%?

To clarify, the 20% is the target net return to investors after all management fees and performance fees.

If the investments do better than this, then the uplift is split 80% Limited Partners (investors) and 20% General Partner (manager).

7. I see and have skimmed the US/EU reports on search funds and saw the estimated returns on Search Funds over time. I didn’t see any data on returns of Funds of Search Funds – do you have any sense of what this looks like?

There is no published data that we have found (on Prequin, S&P, Orbis), it is relatively closely guarded and only shared formally with investors in those funds.

We understand from our discussions with the Funds of Search Funds that they are all targeting similar to private equity returns.

8. You are seeking a total of $25M but can kick things off with $10M. Is the additional $15M also being applied to Searching or the late Financing stage?

All funds raised across the life of the fund will be applied to both the search and acquisition financing stages – we are aiming for a blended return across a portfolio of the estimated ~20 acquisitions.

During search phase

9. What control do Search Fund investors have over activities of the search fund and how funds are used?

Each Searcher (or Search Partnership) raising a fund has a Private Placement Memorandum which goes into some detail on their proposed search – where (thematic or opportunistic), what (size), how (use of external resources including interns). It is a good starting point for them to begin with but also naturally evolves as they learn from and during the process.

Each Searcher is also required to provide a report on their activities (essentially pipeline and negotiations) – some do this quarterly, some monthly.

10. What controls/vetoes do investors have?

The investors in the Search Fund have the ultimate veto of not participating in the acquisition. There are discussions that also take place amongst the investors. The reality is that it never gets to a veto – we have one-on-one calls with the searchers that we are closely tied to (and expect to invest in) and are seeing the opportunities that they are looking at before they get too far in.

11. What happens to unused funds?

 Any unused funds are returned to the investors.

Once an acquisition target has been found

12. How do the ‘right of first refusal to invest’ rules work? Proportionate to search fund investment?

Yes, proportionate to the investment in the search, and then also pro-rata for any shortfall (if for example one of the investors is unable or unwilling to contribute to the acquisition)

13. “If we choose not to invest, our contribution to the search fund converts to equity…” is this always at the 1.5x multiplier?

Yes, the 1.5x multiplier is locked in. If for some reason we didn’t want that there would be a shortfall and we would seek to offload our shares to one of the other investors, but we think it is unlikely that this will occur.

14. How does the 25-30% equity for Searchers work? Are they expected to invest a little? How does this rank?

The searcher’s equity is their incentive. They are not expected to contribute cash, they have already contributed sweat as all of them could earn more than the Searcher salary during the search by working as an employee in an organisation. The standard amounts in a funded search for a sole searcher is 25%, in a partnership it is 30%. This vests in three tranches:

• 1/3 of the total amount upon acquisition of the entity
• 1/3 of the total amount monthly over the first four years post acquisition; and
• 1/3 based on the IRR achieved by the equity investors. The hurdle is 20% (at which point it starts being earned) and is fully earned (or vested) once the investors have achieved an IRR of 35%:

15. How do exits normally work?

A sale can be instigated by shareholders who collectively own 50% of both preference and ordinary shares and force it through the drag/tag alone.

The reality is that the Searcher is incentivised through the last vesting component to exit at a time that crystallises more of the upside for them. This gets relatively harder through the impact of compounding. The overseas experience on timing is 4-6 years is common. Exceptional businesses are held longer (or recapitalised allowing the Searcher to crystallise some upside and investors to take money off the table).

A range of options present themselves in terms of a liquidity event including:

• Trade sale within a particular industry/sector (a few SaaS businesses have scaled up and sold to the bigger sector consolidators).
• Sale to PE as the asset will be big enough and on the radar to be attractive (one of the med-tech businesses acquired by a searcher last year may probably go this way in 4-5 years from now).
• IPO if the searcher has “pushed it” in terms of scale.

16. What is the typical CEO compensation at this point?

There is no one size that fits all - it will be the market rate for the business that the searchers are in (sector and geography).

17. Are the principals full time? Who else is the team? Are they full or part time?

The principals are presently all part-time as that is all that is required during the ramp up phase.

We are supported by an office administrator and an associate (also part-time).

18. How many SF’s have the principals been involved in?

As at the date of this document, we have invested in ten.

We have been involved as mentors or advisors (in small parts) on almost all completed searches to date in Australia.

19. How do you plan to manage the investments?

We anticipate being one of the largest single shareholders in most Search Funds. We also expect to hold board roles either ourselves or through nominees. We will match our skills to the requirement of the searcher and business acquired.

20. Do investors in WayFinder have the opportunity to co-invest and be exposed directly to investments?

Yes.

21. Target returns? What are the key assumptions and evidence for this?

WayFinder is targeting returns of ~20% IRR for the LPs. The underlying assumptions (based on both overseas SF stats and our own experiences here) are:

• Search Investments (average $120k) – 3 out of 4 successfully acquire. 1 out of 4 terminated at full loss
• Average investment value expected at acquisition:

• • Self-Funded Search - $1.1m
  • Funded Search (where we have invested in the search fund) - $1.1
• Average IRR on WayFinder investments and hold period of 29% over 5 years
• Note that the 29% is only on acquisitions, not on incomplete searches.
• Rationale

• • The 29% is below both the aggregate returns experience overseas including failed searchers and businesses
  • Searchers are targeting 35% in order to maximise their own outcomes
  • The portfolio of 25 allows sufficient diversification to not be overly exposed to a poor performing investments
  • We are being slightly conservative in using a lower return as this is still a first of its kind fund in Australia.

The only other major assumption is that the fund incurs administration and overheads of $4k per month in addition to the management fee paid to the fund manager.

22. Can you show the return arrangement and the 2 and 20% fee in an annual cash flow?

The table below sets out the forecast annual payments to the Fund Manager in our base case (20 Searches -> 15 acquisitions, 5 self-funded acquisitions). Also included are the forecast cash flows to/from the Limited Partners (i.e. investors which also includes ourselves) as it lacks context without it.

The GP payout of the 20% carry is all contingent on the investors getting an 8% compound return first.