Kingsway Financial at Planet MicroCap: Leveraging Search Fund Model

On Wednesday, 23 April 2025, Kingsway Financial Services (NYSE:KFS) presented at the Planet MicroCap Showcase: VEGAS 2025, outlining its strategic focus on leveraging the search fund model to drive growth. The company highlighted its decentralized management approach and tax-efficient structure as key advantages, while also acknowledging the challenges of maintaining high acquisition standards.

Key Takeaways

• Kingsway Financial Services aims to acquire high-quality service companies with recurring revenue and strong margins.
• The company utilizes a decentralized management model to empower individual CEOs.
• Kingsway targets two to three acquisitions annually, with a focus on businesses with 1 to 3 million dollars in EBITDA.
• The company benefits from substantial net operating loss carryforwards to offset future taxable income.
• Kingsway’s current adjusted EBITDA run rate is approximately 19 to 20 million dollars.

Financial Results

• Kingsway’s acquisition strategy targets businesses valued at 4.5 to 6.5 times EBITDA.
• The company leverages 2.5 turns of debt to finance acquisitions.
• Kingsway’s tax structure includes 622 million dollars in net operating loss carryforwards.

Operational Updates

• Kingsway emphasizes a decentralized approach, allowing CEOs of acquired companies to operate independently.
• The company invests in talent and technology to enhance the growth of its portfolio companies.
• Kingsway’s portfolio is diversified across B2B services, healthcare services, vertical market software, and skilled trades.

Future Outlook

• Kingsway plans to continue targeting two to three acquisitions per year, with an underwriting hurdle of over 30% IRR.
• The company aims to capitalize on the "silver tsunami" of retiring business owners.
• Kingsway provides a liquid investment vehicle for public investors in the search fund space.

Q&A Highlights

• CEO JT Fitzgerald emphasized the company’s focus on recurring revenue and asset-light operations.
• Kingsway’s advisory board includes industry veterans who provide strategic guidance.
• The company is committed to maintaining disciplined investment criteria and robust support systems for its acquisitions.

For more details, please refer to the full transcript.

Full transcript - Planet MicroCap Showcase: VEGAS 2025:

JT Fitzgerald, CEO, Kingsway: right. Good morning, everyone. Thank you for being here, eight a.

In Las Vegas, lead off hitter here. Really appreciate it. I’m JT Fitzgerald. I’m the CEO of Kingsway. And today, we’re here to discuss our company and how we are building through search.

Before we dive in, let me remind everyone that some of the statements we’ll make today are forward looking and contain non GAAP measures. They reflect our expectations based on current information and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Please refer to our filings with the SEC for a full overview of the company’s risk factors and I encourage everyone to review the detailed Safe Harbor disclaimer on this slide at your leisure. So here’s our roadmap for the next thirty minutes. First, I’ll explain why the search fund model, the space in which we operate, is an attractive asset class for investors.

Next, we’ll discuss Kingsway’s unique value proposition in this arena, essentially what sets us apart. Then I’ll walk through the Kingsway growth flywheel, our strategy for scaling the business. And finally, we’ll discuss the performance of some of our recent acquisitions. There’s an appendix at the end of the presentation with additional details about the company and the non GAAP reconciliation. And by the end of the presentation, I hope you’ll have a clear understanding of our strategy, our positioning, and our performance.

So with that, let’s get started. Quickly about us at a glance. We trade on the NYSE under the ticker KFS. And to our knowledge, we’re the only publicly traded US company leveraging the search fund model to acquire and build great businesses. We own and operate a collection of high quality services companies that are growing, generate recurring revenue, strong margins, and are asset light.

And our goal is to compound long term shareholder value on a per share basis, an important emphasis on per share basis, through a decentralized management model and a talented team of operators. We also benefit from tax assets that enhance our returns. In short, Kingsway is uniquely positioned to capitalize on the search fund model at scale within the tax efficient public company framework. So why are we so focused on the search fund model? Simply put, it’s an attractive asset class for generating strong returns.

The search fund approach, often called entrepreneurship through acquisition or ETA, has a compelling track record over several decades. It involves backing talented entrepreneurs to buy and grow small businesses. We see search funds as a powerful engine for value creation and that’s the foundation of our strategy. Historical data backs up the attractiveness of of the model. Research from the Stanford GSB shows that search funds have delivered median annual returns in the mid 30% range over decades.

This result tracked across hundreds of search funds since 1984 underscores the model’s performance. The idea is that a small acquired business led by a driven entrepreneur can grow meaningfully and deliver outsized returns. I won’t go too deep into the academic study here, but the headline number on the slide, 35% IRR, speaks for itself. It’s a strong endorsement that our entrepreneurship through acquisition approach can create significant value for our investors. If you guys want to dig in, there’s a link to the study at the bottom of the page.

The search fund model isn’t just about returns, it also fills an important need in the market. On the left side of the slide, you see the perspective of a typical seller. Many aging small business owners want to retire but have no succession plan. No family member ready to take over and often no attractive buyer for their business. They need an exit, yet these businesses are often too small for traditional private equity.

And selling to a strategic buyer can be a poor fit with owners who are concerned about how that might impact their employees or their legacy. On the right hand side, you see the entrepreneur’s perspective, a motivated, often post MBA entrepreneur who’s eager to run and grow a company. The search fund model connects these two. It provides the seller a graceful exit and legacy preservation and gives the entrepreneur an opportunity to own and grow a business. In short, search funds create a win win.

The retiring owner gets liquidity and peace of mind, and the young operator gets a business to lead and build. And so why do search funds tend to outperform? A big reason is the infusion of smart, energetic leadership into businesses that have often that often have untapped value. A small company run as a lifestyle business late in a founder’s career might be doing well enough, but it often hasn’t optimized for growth. When a highly motivated, incentivized operator takes over, they can uncover numerous ways to improve performance.

A founder led sales effort can be transformed into a professional sales team. Pen and paper processes can get updated to modern technology systems creating efficiency. Business operating only in its local market can expand regionally or nationally. And instead of just taking cash out of the business, the new owner reinvests for growth. In essence, the business shifts from a static dividend maximizing approach to a dynamic growth oriented approach under new leadership.

At Kingsway, this is exactly our model. We acquire solid small companies and put strong operators in charge. We typically target businesses with about 1,000,000 to $3,000,000 of EBITDA and acquire them for roughly 4.5 to 6.5 times. We finance them with roughly 2.5 turns of debt and the balance with equity, and then give the new operator the mandate, the incentives, and the support to grow the company. We assist heavily during the acquisition phase and the operating phase by implementing the Kingsway Business System, our framework for operational excellence to help these businesses professionalize and scale.

A motivated operator, plus a good small business, plus aligned incentives, plus ongoing support equals significant upside. That’s why the search model, when done right, can produce great results. Let’s talk about some broader context in the opportunity. We’re in the middle of what we call the silver tsunami of retiring business owners. Over the next two decades, record numbers of baby boomer entrepreneurs will be looking to exit their businesses.

Nearly 4,800,000,000,000.0 of wealth is expected to change hands as these owners retire, the largest intergenerational wealth transfer in US history. Over 2,000,000 small businesses are projected to transition leadership in the next ten years. This wave of retirements is gonna create a huge supply of businesses for sale. However, many of these companies are below the radar of traditional buyers. Lower middle market private equity firms often shy away from deals where the key operator, the owner, wants to step away.

That leaves a gap that search fund entrepreneurs can fill. With only 100 or so search funds active at any given time, there’s an overwhelming supply of potential acquisitions relative to the number of searchers. In other words, demand, buyers, is limited while supply, sellers, is surging, which creates very favorable dynamics for buyers. It’s an excellent environment to find quality companies at reasonable valuations, And we believe Kingsway is well positioned to ride this wave by providing retiring business owners with an attractive succession solution. Now that I’ve explained the appeal of the search fund model and the market opportunity, let’s shift focus to Kingsway itself.

This next section is about Kingsway’s value proposition, how we capitalize on the search fund model to create value for our shareholders. We’ve established that search funds can yield great returns, so now let’s focus on how Kingsway offers a unique way for public investors to participate. One of the challenges for investors is that the search fund asset class is not easy to access directly. If you wanted to invest in search deals on your own, you’d typically have to write small checks, 100,000 to 300,000 at a time into individual search funds or acquisitions sourced through very tight knit networks. It’s a very hands on, fragmented, and hard to access process that doesn’t scale well for most investors.

Another route is to invest as an LP in a private fund of search funds or a search fund accelerator. Those models can give you exposure to multiple searchers and acquisitions, but it usually means locking up your capital for years and probably paying a second layer of fees. In short, traditional search fund investing can be illiquid, time intensive, and potentially costly in fees. We believe Kingsway changes that. As a publicly traded company, we provide an instant liquid vehicle for investing in a broad portfolio of search fund acquisitions.

When you buy KFS stock, you’re effectively investing in the search fund model without having to source and vet individual deals or wait for the full fund life cycle. I can go back. I wanted to also point out as a public company we offer transparency in reporting that private search fund investors may lack. So the bottom line, we believe Kingsway offers a unique investor friendly way to participate in the attractive search fund space with liquidity, diversification, and transparency built in. So what makes Kingsway particularly well suited to succeed?

We believe we’re positioned with several key advantages to differentiate us and drive our performance. First, we have a strong track record already. We’ve proven this model can work with successful acquisitions and exits under our belt. Second, we maintain disciplined investment criteria. We’re very selective about the businesses we acquire, sticking to our sweet spot in terms of size, quality, and valuation.

We also provide robust infrastructure and support to the companies we buy and the operators who run them. Thanks to the systems and expertise we’ve developed, like our Kingsway Business System. Another advantage is our world class advisory board. We have seasoned experts guiding our strategy and mentoring our operators. We attract top quality searcher talent.

Entrepreneurs know Kingsway is a great platform, so we get to partner with some of the very best up and coming operator CEOs. Being a public company gives us gives us a strong reputation and credibility with sellers. Owners take comfort knowing their company will be owned by a stable transparent firm. We have permanent equity capital, meaning we aren’t forced to sell assets on a fund timetable. We can hold in compound value as long as it makes sense.

We also enjoy excellent access to debt financing, us to structure deals efficiently with leverage when appropriate. And finally, as I mentioned, we have a tax advantage structure, significant tax assets that boost our net returns. All these factors together make for a powerful combination. Kingsway isn’t just another investment firm. We’re a platform built with the right ingredients, track record, discipline, talent, capital, and structure to thrive in the space.

Let me drill down on how we operate because our structure is intentionally designed for entrepreneurial growth. We believe deeply in the power of a decentralized model with properly incentivized operators. Kingsway, at the top, is a very lean holding company. My small team sets high level strategy, makes capital allocation decisions, and provides oversight and accounting and tax support. But we don’t micromanage the businesses day to day.

We have operators in residence. These are in house entrepreneurs who are actively searching for acquisitions under the Kingsway umbrella. When they acquire a company, they step into the leadership role of that business. Each of these operating companies is run by its own CEO entrepreneur with the autonomy to build their business, while Kingsway provides support and governance. This decentralized approach means decisions are made close to the customers and the market.

The folks running each business are empowered to make decisions and are deeply invested in its success both professionally and financially. Our structure lets talented operators do what they do best, build their businesses while we, at the Kingsway corporate level, ensure they have the resources and guidance to succeed. It’s a model that fosters entrepreneurship within our company, and we believe it’s a major factor in our success so far. Another strength of Kings Way is our actively engaged and world class advisory board, an exceptional team of advisors who lend their expertise and insights to our mission. We deliberately assembled advisors who have deep experience in search fund acquisitions, capital allocation, and company operations, and have operated at the very highest levels.

Tom Joyce is the former CEO of Danaher. During his tenure there, he helped triple the company’s stock price, and he was instrumental in developing and deploying the famed Danaher Business System, DBS, which is a gold standard for operational excellence and a set of tools we have modeled with the Kingsway Business System. No points for originality there. Tom brings his experience and playbook of disciplined growth and operational rigor to our companies. We’re grateful to have him.

Will Thorndyke is widely known as the author of the book The Outsiders, but he’s also had a very successful career in private and public equity investing. Will is the original and perhaps most prolific institutional investor in search funds and has been deeply involved in the search fund community for decades. He has a very deep well of experience and pattern recognition to provide powerful insights to our OIR’s and CEOs. And finally, Tyler Gordy is a great example of our model in action. He’s a West Point grad and Harvard MBA who became the CEO of PWSC, a business we acquired in late twenty seventeen.

Under his leadership, PWSC’s value grew tremendously and we sold that business in 2022 and achieved roughly 10x net return on our investment. His experience and insights about leadership in a small company, particularly within the Kingsway structure, are incredibly valuable to our entrepreneurs. Our operators in residence and CEOs have structured access to active and engaged advisors who serve as mentors to help them acquire and grow their businesses. As I mentioned, one of our advantages is a highly tax advantaged structure. Kingsway has accumulated roughly $622,000,000 of net operating loss carryforwards over the years.

These are essentially tax credits from past losses that we can use to offset future taxable income. The origin of these NOLs goes back to a legacy insurance business that suffered losses around the global financial crisis. While that was a painful period for the company historically, today it means we have a large stockpile of tax assets. Why is this important? Because it means that as we grow our earnings, a significant portion can be sheltered from federal taxes, which enhances our cash flow and the rate at which we can compound value.

Now that I’ve covered search funds and our value proposition, let’s talk about how we put it all into motion for growth. This graphic illustrates our strategy succinctly. Think of it as a self funding growth flywheel. The process has three steps. One, partner with amazing talent to acquire great businesses.

We seek out high quality, profitable, small companies that fit our criteria and acquire them at reasonable valuations. Step two is invest to grow. Once acquired, we actively invest in these businesses. That typically means upgrading the talent, upgrading the technology, and improving internal processes. There’s often a j curve transition period where we’re investing heavily to position the company and transition it from a legacy lifestyle business to a growth business.

And finally, ideally, reap increased cash flow and reinvest. As these improvements take hold, the businesses grow their earnings and cash flow. Because we bought them at good prices and made them better, the return on our investment is strong. Those increased cash flows after delevering can be returned to Kingsway to redeploy to fund the next acquisitions. Over time, this creates a compounding effect.

More acquisitions lead to more cash flow, which enables even more acquisitions and this flywheel will drive our long term growth. Does the model work in practice? Absolutely, and we have a promising track record to prove it. As I discussed earlier, we began slowly pivoting to the search fund model only in late twenty seventeen with the acquisition of PWSC. We had a great outcome there over our four and a half years of ownership turning an initial $5,000,000 equity investment into more than $50,000,000 in cash for Kingsway.

We began to ramp up the accelerator efforts in 2020 and 2021. In the relatively short time since, we’ve completed seven acquisitions and seen excellent performance from many of our companies. And I think it’s also worth highlighting that I’ve personally been involved as both a searcher and an investor in traditional search funds for over twenty years through Argo and have experienced very good results. We’re still in the early innings of our strategy, but the evidence so far validates our approach. As a result of these successes, our overall financial profile has improved significantly.

We’re growing both by acquiring new companies and expanding the earnings of the ones we own. We’re currently targeting two to three acquisitions per year and set an underwriting hurdle of greater than 30% IRR for our acquisitions. If you sum up our operating company’s performance, our current run rate adjusted EBITDA is around 19,000,000 to $20,000,000 over the last twelve months and we intend to keep that trajectory going through a combination of organic growth and acquisitions. I think it’s worth noting what types of business we own and how the market values such businesses. Our portfolio is diversified across several attractive sectors.

We have companies in B2B services, healthcare services, vertical market software, and we just launched a skilled trades platform with the acquisition of Budd’s Plumbing. These are sectors where successful companies often command high valuation multiples. In fact, if you look at comps, both public and recent private transactions in these industries, EBITDA multiples are frequently well into the double digits. Our diversified approach also means that we’re not overly exposed to one industry’s cycle. We have a spread of businesses in high demand sectors.

We have a nice mix of industries in our portfolio, and public peers in these categories trade at full valuations. Finally, let’s summarize our acquisition performance and what it means for the future. We’ve been very disciplined in the prices we pay for acquisitions, typically targeting mid single digit EBITDA multiples. We like to say we get our margin of safety from business quality, not price paid, but due to the structural inefficiency in the area of the market we’re targeting, we’re able to acquire nice businesses on very reasonable terms. And perhaps I’d like to end on a quick case study of one of our acquisitions, SPI, which we acquired in Q3 of twenty twenty three.

We partnered with Drew Richard as an OIR in this acquisition. Drew is a West Point grad and was an Apache helicopter pilot army before attending HBS. After an early career in a large corporation, Drew was drawn to entrepreneurship and joined Kingsway as an OIR. Drew focused his search on vertical market software companies and successfully closed on the acquisition and transitioned into the leadership at SPI. Since taking over, Drew has completely rebuilt the leadership team and invested significantly in professionalizing the operations.

In eighteen short months, he has transitioned a sleepy lifestyle business with great unit economics into a growing rule of 40 software company. Experiences like this give us confidence as we pursue new opportunities. We plan to continue the cycle, partner with exceedingly talented entrepreneurs, find great businesses at good prices, unlock their growth, and repeat. We have a robust pipeline of potential acquisition targets, thanks to both the silver tsunami of sellers out there and our hungry and hardworking group of OIRs. We believe our strategy is working and we see significant runway ahead.

We offer a unique entry into a high return asset class. We’ve built a platform with several distinct advantages and we’re demonstrating results with our growth flywheel. As we look forward, we intend to keep compounding value for our shareholders by sticking to this disciplined, repeatable model. Thank you for your time and attention. I’m excited about what the future holds for Kingsway, and I hope you share that excitement after hearing our story.

Thank you. I may have gone a little long. I don’t know if we have time for questions or not. Are we out of time? Yeah.

I think we’re out of time, but we’ll we’ll see if we can sneak a question. That’s right. So Nearly identical. We pay them roughly the same, very low salary during the search phase, and then their equity opportunity is roughly identical as a president, you know, sort of up to 25% upside participation in the common, investing in three tranches, a third, third, a third. So it’s nearly identical.

I would say one kind of distinct advantage of it, I think, allows us to attract really the the best talent is because of our tax and you know, our tax assets. We view that as sort of a wasting asset that we want to monetize. And so we allow distributions made to the holding company for tax to be treated as a return of our preferred equity investment. So it allows those entrepreneurs to get into their common participation faster. We can take additional questions in the hallway.

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