Kingsway Financial Inc: Questions to John Fitzgerald | Value Bridge

Capital Allocation

10/11/2022 How do you set internal hurdle rates for investments, including acquisitions, TruPS repurchases, and share buybacks?

We have an audacious goal of compounding capital at 20% annually for 20 years, which guides our internal hurdle rate. We target a 20% unlevered return on invested capital. For TruPS repurchases, the IRR is about 20%, which informed our discount pricing. For acquisitions, a no-growth business with no tax leakage would be valued at about five times cash flow to meet that hurdle. For Search Xcelerator deals, we target a minimum 35% IRR on a levered basis, which aligns with the 20% unlevered target.

10/11/2022 Have you repurchased any TruPS debt under your options yet?

No, we have not repurchased any debt under the options yet. Those options expire on May 2nd, so we have until then to execute any repurchases.

10/11/2022 What is Kingsway’s financing approach for the search business, including leverage targets and lender conditions?

We target a 50/50 debt-to-equity capital structure to balance equity discipline and enhanced returns without adding insolvency risk. We typically seek 2.5 to 3 times leverage multiples. So far, we have secured attractive terms from traditional senior lenders familiar with us and the ETA space. Lenders remain open for business and competitive, though pricing is affected by rising interest rates. We maintain relationships with several lenders and solicit term sheets regularly.

08/02/2023 What is the update on the sale or exit timelines for the VA Clinic, Minnesota real estate, and insurance subsidiary?

We'll take those in reverse order. The insurance subsidiary, Miko, was put into runoff several years ago; we applied to surrender our licenses with the Florida regulator late last year and received final approval earlier this week, so we're no longer in the regulated insurance industry. The Minnesota property was part of our net lease portfolio, and we sold it in February 2023, resulting in proceeds to Kingsway of about $8.3 million. Regarding the VA Clinic, we started marketing it at the end of December; it’s currently with a broker, listed for about three or four weeks, and we’re getting good indications of interest.

08/02/2023 Do you have an expected timeline to exit the VA Clinic real estate?

It’s hard to predict when we’ll get an offer we’re willing to accept, but we’re actively marketing it. Our goal is to complete the sale this year for sure.

08/02/2023 Can you discuss your acquisition strategy, including the number of searchers and acquisition targets?

We currently have three searchers in the market daily, sourcing opportunities both directly from business owners and through a network of 4,000 to 5,000 investment bankers to ensure broad deal flow. While acquisitions depend on market conditions and finding the right businesses at the right prices, we believe that with three to four searchers, completing two to three acquisitions per year is a reasonable expectation based on historical search timelines, which average about 16 months from start to close. Our platform may help accelerate this process, but discipline remains key; we have to adhere to our investment criteria and hurdle rates despite getting close on many deals.

09/05/2023 What targets would trigger management to engage in buybacks?

Our goal is to conduct buybacks in a manner that is accretive relative to our view of intrinsic value per share. Any buybacks would be at a discount to that intrinsic value. That is the threshold we would look for when repurchasing shares.

20/05/2023 What makes your businesses attractive to private equity, and how do you view liquidity and holding periods?

Our businesses have grown to platform size with management teams of platform quality. We prefer to hold these companies long-term rather than flipping them quickly, though we remain opportunistic, as with PWSC. Our quasi-permanent capital model is unique; unlike typical GP/LP structures, we don’t have mandatory exit timelines. This makes us an excellent home for those wanting to buy and build a company over a lifetime. We can also provide intermediate liquidity options, such as exchanging private company shares for public company shares, allowing operators to gain liquidity without selling their business. Research shows that private equity returns on search fund acquisitions after five to six years are very strong, similar to search fund returns but amplified by scale and compounding. Holding these businesses for 10 to 15 years could lead to very interesting outcomes, supported by primary research on acquirer returns.

20/05/2023 How do you balance capital allocation between share buybacks, debt repayment, and investing in new businesses?

We balance two competing capital needs: returning capital to shareholders through buybacks and investing in high-return growth opportunities. It’s good practice to have a buyback plan to repurchase shares at a meaningful discount to intrinsic value. However, we must also preserve enough capital to execute our growth strategy, which offers very attractive returns. The board carefully constructs the capital allocation plan to maintain this balance, ensuring buybacks benefit shareholders while supporting sufficient capital for growth investments.

08/08/2023 What is your strategy for choosing banking partners and how have financing markets changed compared to a year ago?

We work with traditional commercial banks that provide financing for our acquisitions. We have a stable group of about five banks to whom we present opportunities and solicit term sheets. All these banks have very stable deposit bases, so they were not impacted by the deposit flight seen in February and March. The banks remain open for business. Pricing is higher than a year ago, but we typically seek moderate leverage, around 2.5 to 3 times funded debt-to-EBITDA. Current indications are closer to 2.5 times, partly because higher interest expenses require more covenant headroom. Some amortization terms have shifted from interest-only in year one to more straight-line amortization over five or six years. Overall, bank financing is available, and the banks we work with are stable.

08/08/2023 Are financing markets generally open with good competition, and what can you say about the size and multiples of deals in your M&A pipeline?

Financing markets are generally open with good competition among lenders willing to support deals. The size and multiples of deals we see are right in the middle of the fairway, with multiples ranging from 4x to 7x EBITDA. This range reflects the historical and prospective growth of the targets. Deal sizes are consistent with what we have seen in the past.

08/08/2023 What is your thought process behind recent buybacks of shares and warrants, especially considering the upcoming expiration of many warrants?

Our capital allocation balances returning capital to shareholders through buybacks with preserving liquidity to fund our acquisition pipeline. Our businesses are capital light and don’t require much capital for organic growth, but we are also deleveraging and paying down debt. We want to avoid holding excess cash while maintaining adequate capital for acquisitions. Buying back warrants provides leverage because it allows us to repurchase more effective shares per dollar spent, and these are not new dilutive shares. We believe warrant buybacks are a great use of our securities repurchase capital.

08/08/2023 What are management’s principles regarding leverage at the operating companies, and is there a target leverage level?

We generally target around 2.5 times EBITDA leverage, which aligns with current bank expectations. At acquisition, leverage is roughly 3 times EBITDA, but we aim to reduce that over time. We keep all options open regarding releveraging in the future, including dividend recapitalizations to enhance equity returns. For example, a few years ago, we leveraged the Extended Warranty businesses to acquire PWI with minimal equity. This flywheel effect allows us to finance acquisitions with little equity as businesses deleverage and grow.

08/08/2023 How much cash do the warranty businesses generate annually that can be deployed into the Search Xcelerator segment?

Our Extended Warranty businesses are covered by a loan, and the bank prefers to keep as much cash in those companies as possible. However, the holding company can extract cash through two mechanisms: an excess cash flow metric and tax distributions. For 2023, based on 2022 results, we are permitted to take out $3.3 million, up from $1.7 million in 2022, due to a lower leverage ratio and a more favorable sharing arrangement with the bank. Tax distributions, resulting from consolidated tax filings and net operating losses shielding federal taxes, amounted to about $1.6 million last year. These funds go to the holding company and are allocated as we see fit.

08/08/2023 Can management confirm share buybacks in the quarter and the number of shares repurchased?

Yes, we conducted buybacks of both warrants and common shares. Since announcing the program in late March 2023, we have repurchased 558,670 warrants and 68,446 common shares. All warrant repurchases occurred in Q2, and most common shares were bought in the last four to five weeks. Details are available in our earnings release and the 10-Q filed after market close today.

11/09/2023 Can you expand on the VMS platform and what you envision for it?

When Drew joined, he focused on Vertical Market Software (VMS) as a prime acquisition target and spent the last 12 months pursuing that. With the acquisition of SPI, we see this as a beachhead into vertical market software. We like the attributes of these businesses and hope to use this acquisition as a foundation for future acquisitions of similar companies.

There are tens of thousands of small software companies, many providing mission-critical products in niche markets. These businesses share great unit economics and high gross margins. Many are founder-led. Overall, we see strong potential here.

11/09/2023 How do you envision VMS working organizationally? Will Drew lead it and other searchers report to him, or will it operate differently?

We are open to additional acquisitions in vertical market software regardless of the operating model. The goal with building VMS through the SPI acquisition is to create a platform for Drew to learn SPI, then evaluate and hopefully pursue more software acquisitions. SPI is a small company, and the plan is to grow it organically and through acquisitions under Drew’s leadership.

11/09/2023 Drew, how did you find SPI? Was it a marketed deal?

This was a proprietary deal, sourced largely through relationships and networking. We connected with the seller about seven months ago. It was a long process of mutual assessment to ensure it was the right fit, especially for the founder’s legacy plan. It was not marketed, so we were fortunate to come across it.

31/10/2023 What is the return on invested capital and growth duration?

I don’t have the exact return number on hand. There is minimal capital investment, but those costs are passed to customers, who pay for monitors and replacements.

31/10/2023 How was the valuation multiple determined?

We compared similar hospital outsourcing recurring revenue businesses and proposed a fair multiple accepted by the seller.

07/11/2023 What is the run rate EBITDA pro forma for recent acquisitions, the pro forma debt at KFS, and the run rate interest expense for acquisitions and current base rates?

The run rate EBITDA pro forma for recent acquisitions is in the  $19 million to  $20 million range, reflecting the trailing twelve months (TTM) EBITDA of current and expected holdings. Pro forma net debt as of September 30 was roughly  $20.8 million. We borrowed an additional  $5.6 million to finance the DDI transaction and anticipate borrowing about  $3 million for the NICR acquisition, with no debt used for the SPI acquisition. Adding these amounts results in approximately  $29.5 million of net debt. Regarding interest expense, the DDI acquisition debt carries an interest rate of prime plus 50 basis points, with prime currently at 8.5%, making the rate about 9%. NICR acquisition debt is expected to have similar pricing. This translates to roughly  $500,000 of additional interest expense for DDI and about  $270,000 for NICR.

07/11/2023 How does management view levered acquisitions given current interest rates, and what spreads are typical on acquisition debt?

Acquisition debt typically carries a spread of about 50 basis points over prime, consistent across recent deals. We use a relatively conservative leverage level, targeting 3x senior funded debt-to-EBITDA or less at closing. Although debt capital costs are higher now, modeling shows that increasing debt cost from 6% to 9% reduces internal rates of return (IRRs) by only about 100 basis points over six years. We aim to balance returns with adequate covenant headroom, avoiding excessive debt that could cause coverage ratio challenges.

07/11/2023 Does management have a lower bound for interest coverage that would cause them to pull back on acquisitions?

Yes, if interest coverage fell below 1x, we would pull back on acquisitions. Each acquisition is financed independently; for example, DDI’s debt is non-recourse to Kingsway and secured only by DDI’s cash flows and assets. Loan facilities include covenants such as a maximum senior leverage ratio and a fixed charge coverage ratio of about 1.2x, which includes principal and interest. We would never approach 1x interest coverage, and our models show ample cash flow coverage on fixed charges.

07/11/2023 What is the run rate EBITDA pro forma for recent acquisitions, the pro forma debt at KFS, and the run rate interest expense for acquisitions and current base rates?

The run rate EBITDA pro forma for recent acquisitions is in the $19 million to $20 million range, reflecting the trailing twelve months (TTM) EBITDA of current and expected holdings. Pro forma net debt as of September 30 was roughly $20.8 million. We borrowed an additional $5.6 million to finance the DDI transaction and anticipate borrowing about $3 million for the NICR acquisition, with no debt used for the SPI acquisition. Adding these amounts results in approximately $29.5 million of net debt. Regarding interest expense, the DDI acquisition debt carries an interest rate of prime plus 50 basis points, with prime currently at 8.5%, making the rate about 9%. NICR acquisition debt is expected to have similar pricing. This translates to roughly $500,000 of additional interest expense for DDI and about $270,000 for NICR.

07/11/2023 How does management view levered acquisitions given current interest rates, and what spreads are typical on acquisition debt?

Acquisition debt typically carries a spread of about 50 basis points over prime, consistent across recent deals. We use a relatively conservative leverage level, targeting 3x senior funded debt-to-EBITDA or less at closing. Although debt capital costs are higher now, modeling shows that increasing debt cost from 6% to 9% reduces internal rates of return (IRRs) by only about 100 basis points over six years. We aim to balance returns with adequate covenant headroom, avoiding excessive debt that could cause coverage ratio challenges.

07/11/2023 Does management have a lower bound for interest coverage that would cause them to pull back on acquisitions?

Yes, if interest coverage fell below 1x, we would pull back on acquisitions. Each acquisition is financed independently; for example, DDI’s debt is non-recourse to Kingsway and secured only by DDI’s cash flows and assets. Loan facilities include covenants such as a maximum senior leverage ratio and a fixed charge coverage ratio of about 1.2x, which includes principal and interest. We would never approach 1x interest coverage, and our models show ample cash flow coverage on fixed charges.

05/03/2024 Are you still hoping to close two to three new acquisitions by the end of 2023?

Yes, that is certainly the goal. We are actively engaged in many conversations with business owners and have leading measures that are predictive and influenceable by our team. While there is some serendipity involved, based on the current level of activity, it remains our hope to close two to three acquisitions by the end of 2023.

08/05/2024 Do you prefer to fund KSX or the warranty business, or both, given attractive opportunities?

Warranty businesses require zero capital to scale due to their capital-light nature; any growth capital would come from acquisitions. However, good warranty businesses are hard to buy because valuations are high, around 15x EBITDA, which is above what we are willing to pay. Therefore, all else equal except valuation, we prefer to allocate capital to backing talented young entrepreneurs seeking businesses with similar attributes in the search Accelerator segment.

08/05/2024 What are the pros and cons of pairing the extended warranty business with KSX?

The warranty business is a wonderful cash generator, though it has some volatility due to cyclicality. We have strong managers focused on organic growth and have acquired a few businesses at reasonable prices. Since acquiring more warranty businesses has been difficult, the cash flow from warranties funds our acquisition program by leveraging KSX. As KSX scales, it will also generate cash to fund ongoing acquisitions.

20/05/2024 What are your internal return on investment hurdles?

We look at levered and unlevered pre-tax returns, which for us as a non-federal taxpayer are similar. Our unlevered hurdle is 20%, and levered is 35%. We also consider multiple invested capital.

20/05/2024 How do you estimate intrinsic value when repurchasing stock?

We evaluate the package of businesses owned, apply an appropriate multiple of EBITDA, adjust for net debt (subtracting it in our case), and calculate enterprise value. Dividing by shares outstanding gives intrinsic value per share. We then assign a probability to our ability to monetize the remaining intrinsic value per share.

20/05/2024 For fast-growing businesses that consume capital, do you foresee putting more capital into organic growth rather than acquisitions?

We focus on capital-light businesses. Peter’s business grows quickly but requires little capital, mainly computer monitors and hiring people, with minimal capex and a cash conversion cycle of about 15 days. It can grow organically at high returns while generating cash. We emphasize revenue quality and return on tangible capital, buying businesses with low capital intensity and high returns.

20/05/2024 Does the business have sufficient owner earnings to increase acquisitions annually, or might you need to issue equity?

We currently have sufficient owner earnings to support two to three acquisitions. We can also do dividend recaps on warranty businesses and others to increase capacity. We treat equity capital as precious and avoid common share issuance unless in unique structures. Deleveraging takes about six years mathematically, but excess free cash flow recapture accelerates this.

20/05/2024 When will extended warranty businesses be ready for a dividend recap?

They are probably ready now.

20/05/2024 If you wanted to scale acquisitions beyond two to three next year, do you have internal financing options without issuing shares?

Yes, we have options internally. We are cautious about discussing scaling but have historically focused on two acquisitions, then two to three, and now leaning into more. We needed scalable processes and capital availability to do so.

28/08/2024 How does the searcher's equity and preferred equity structure work on the KSX side?

The searcher can earn up to 19.9% equity in the company, with the remaining usually being Phantom equity. Our equity goes into the STACK as preferred equity. Before the searcher's equity has any value, our preferred must be paid back plus preferred interest. For example, if we invest $5,000,000, the business must return that amount plus interest before the searcher's equity participates in any value, similar to a traditional model.

28/08/2024 How do net operating losses (NOLs) affect federal income tax and returns to preferred equity?

Since we have all those net operating loss carry-forwards (NOLs), we don't pay federal income tax. Instead, we prepare a standalone tax return for the company to figure out what the tax would have been. Rather than remitting that to the U.S. government, the company remits it to Kingsway, which counts as a return of our preferred equity. In a traditional search, that money would leak to the U.S. government, but here it accelerates the searcher's equity becoming valuable.

28/08/2024 What ownership is required to tax consolidate the entities?

We have to own 80.1% to tax consolidate the entities. The searchers are only on the KSX side, where we own 100% of the warranty companies.

28/08/2024 How does the searcher's equity and preferred equity structure work on the KSX side?

The searcher can earn up to 19.9% equity in the company, with the remaining usually being Phantom equity. Our equity goes into the STACK as preferred equity. Before the searcher's equity has any value, our preferred must be paid back plus preferred interest. For example, if we invest $5,000,000, the business must return that amount plus interest before the searcher's equity participates in any value, similar to a traditional model.

06/11/2024 Will DDI use debt for expansion or always self-fund?

We have used acquisition debt but are focused on paying it down, which is a key value creation lever. Most of these businesses are capital light and don’t require much incremental cash to grow. For DDI, we invested in headcount and a new facility anticipating volume growth. The plan is to use cash flow to deleverage and fund growth, mainly through working capital. As customers take longer to pay than we pay suppliers, growth naturally requires working capital investment, which would be the primary use of cash for expansion.

06/11/2024 What was the financial impact of the VA sale?

We received about $1 million in cash from the sale. There was no profit and loss impact; any P&L effect is shown in discontinued operations.

11/01/2025 What valuation multiples do you typically pay, and what seller situations do you target?

Valuations in the lower middle market have remained fairly constant, generally between five and six and a half times earnings before interest, taxes, depreciation, and amortization (EBITDA). These acquisitions are rarely reliant on large debt amounts. We look for founder- or family-led businesses where the owner wants to retire without a succession plan. Search funds uniquely solve this succession problem by providing a management team to take over.

22/01/2025 Can you share initial thoughts on the acquisition of Image Solutions, how the deal materialized, and its performance so far?

We acquired Image Solutions in late September, and the results through September were included in the run rate EBITDA we posted. We haven't filed our annual report yet, so I can't comment on forward-looking performance. Davide has transitioned in and out the previous owner-operator and is in the early stages of developing his vision and strategy for the company. We have a typical first 100-day plan focused on learning the business, engaging employees, and gathering customer feedback to identify what’s working and what isn’t. This will inform the strategy to grow the business. He is still in the early transition and learning phase, after which we will develop and begin executing his strategy and action plans.

22/01/2025 What is the typical funding breakdown for acquisitions, and how much growth is tied to access to low-cost capital?

Each acquisition uses bank debt at the operating subsidiary level only, with no recourse to Kings Way; the debt is collateralized by the assets and cash flow of that company. We don’t use much leverage. The 50% debt figure is a byproduct; typically, we aim for 2.25 to 2.75 turns of leverage through traditional amortizing bank financing. Access to debt capital has never driven acquisition activity in search fund investing or the search accelerator. Bank financing is generally available, and we don’t rely on high leverage. We believe this will always be the case, so it’s not a concern.

22/01/2025 What are your thoughts on the current acquisition pipeline, including size, valuation, and recent changes?

We have four active Operating Interim Resources (OIRs) generating opportunities daily through proprietary outreach to business owners in attractive industries and non-proprietary deal flow via brokers and intermediaries. We expect 2025 to see increased M&A activity after election uncertainty, with a typical Q1 bump in deal flow. Our pipeline remains strong, targeting businesses with EBITDA between $1.5 million and $3 million. We could consider slightly lower EBITDA, but above that range, multiples rise due to private equity and larger strategic buyers. Valuations in the lower middle market have remained stable over the years, typically between 4.5 and 7 times EBITDA, as these businesses don’t rely on debt capital markets. Recently, average acquisition multiples may have increased by about half a turn, driven by focus on business quality and growth profiles.

18/03/2025 Are your acquisition opportunities targeting specific verticals within existing segments or new industries?

It's probably a bit of both. We bucket KSX industries into four broad verticals: B2B services, healthcare services, vertical market software, and skilled trades. Our existing Operating Industry Representatives (OIRs) focus on B2B services like accounting and IT/cyber managed service providers, as well as vertical market software. They may not be directly focused on plumbing and HVAC but are looking at other skilled trades and field services like pest control or fire and life safety.

25/03/2025 Was the HVAC business sold at a premium compared to what was paid for the individual businesses?

When I left Orion, we had not exited the HVAC or plumbing businesses. The businesses were purchased at multiples ranging from four to twelve times earnings, so quite a range.

08/05/2025 How did the Viewpoint acquisition come about and why does it make strategic sense?

The Viewpoint acquisition was sourced by Drew at SPI, who developed a relationship with its former owners and advanced the conversation around the middle of the fourth quarter last year. Strategically, it makes sense because SPI is a hosted and on-premises software solution for enterprise customers mainly in North America, while Viewpoint is a cloud-native software serving smaller, often single-location resort operators in Asia Pacific and Australia. This acquisition allows Drew to offer a cloud-native solution to a segment in North America without rewriting code and also expands his enterprise solution into new geographies, making it a strong strategic fit.

08/05/2025 What do you mean by the J curve with search acquisitions and how does it work in practice?

The J curve refers to the performance curve over time in search fund acquisitions. Initially, investing in talent, professionalizing processes, and upgrading technology negatively impacts profitability for several quarters. Additionally, there is an operator experience curve: an inexperienced but high-attribute operator may underperform an experienced one initially due to mistakes, but their performance typically surpasses the experienced operator after two to three years. So, the search J curve combines the impact of growth investments and the operator’s learning curve, requiring patience before value creation becomes evident. We see this pattern at DDI, Ravix, SNS, and Image Solutions, and we are confident in the operators and their growth investments.

08/05/2025 Can you share more about the current state of your Search M&A deal pipeline?

We currently have three Operators Year-Round (OYRs) fully engaged and experienced in building strong M&A pipelines, and we are excited about their progress. Additionally, some platforms are seeking bolt-on acquisitions, such as Skilled Trades, which was formed for transactions led by experienced, high-attribute operators. We recently made an acquisition within VMS and see many tuck-in opportunities in fragmented markets where experienced entrepreneurs are active. Overall, we are very optimistic about the deal flow and opportunities.

08/05/2025 Why is the owner of Bud's staying on as president for a one-year transition, and could this be replicated with future acquisitions?

In search acquisitions, it is typical and desirable for the previous owner to stay on during a transition period. Using a horse racing analogy, the industry is the track, the business is the horse, and the entrepreneur is the jockey. Having the former owner ride alongside the new operator during their first lap helps transition customer relationships and transfer institutional knowledge, which is very valuable. We appreciate owners who want to hand over their legacy to young entrepreneurs and work with them through a long transition. We hope to see this model in future acquisitions.

Competitive Advantage

10/11/2022 What is your strategy for growing operating profitability and deploying capital, and what competitive advantages help you succeed in acquisitions?

We see a flywheel effect where growing operating businesses generate cash that funds further acquisitions without needing additional capital. Currently, we have three entrepreneurs in our Kingsway Search Xcelerator program actively seeking acquisitions, aiming to expand to four or five, which could yield two to three acquisitions annually in the $1.5 million to $3 million EBITDA range. Our competitive edge lies in Entrepreneurship Through Acquisition (ETA), which addresses founder-led businesses' needs for liquidity and management succession. Many founders prefer selling to ETA operators over strategics or private equity because we preserve their legacy, brand, and employees. ETA provides both capital and management talent, often allowing us to win deals at lower prices. Kingsway adds credibility as a publicly traded company backing our entrepreneurs, enhancing confidence in deal processes.

20/05/2023 How are you using incentives to increase customer stickiness in the extended warranty business?

It depends on the channel. For example, in the case of IWS, they have different programs with credit unions that provide commissions to those credit unions. They also have a referral program for loan officers at many credit unions. Their largest credit union recently instituted a new referral program where the loan officer receives an incentive paid out of the credit union's commission for sending opportunities to our product information center. At PWI, they work with different dealers using various incentive structures to make them more competitive against the competition, ensuring they promote our product over others. Each channel uses different levers to create awareness and drive action at the point of sale.

08/08/2023 What valuable insights have you gained from advisors Will Thorndike and Tom over the past year or two?

Both Will and Tom are amazing, generous with their time and insights. Earlier this year, we held a workshop with Will, leveraging his investor history to identify attributes of good search acquisitions and industries that typically have those attributes. He also uses data from the Stanford search fund database for attribution analysis, helping us understand valuation, such as how much to pay for a business with 98% gross recurring revenue and 105% net revenue retention to achieve top decile returns. Tom has developed strong personal relationships with our presidents, is available via text, and has helped us better implement Danaher Business System tools by teaching us the right sequence and focus areas. Their guidance has been invaluable.

11/09/2023 Drew, what made SPI special compared to other companies you considered? Why do customers choose SPI, and who are its competitors?

The market is highly fragmented and special. Competitors are often unknown to outsiders. Vertical market software companies like SPI succeed because broader industry solutions are often inferior for niche needs. For example, major hotel software players don’t effectively serve the timeshare segment. SPI’s advantage is its deep understanding and dedication to a small customer base, which drives success despite smaller total addressable markets. This hyper-focus on customer needs is key.

11/09/2023 Why didn’t Constellation Software acquire SPI, and why do you think you will manage SPI better?

Constellation is the dominant player in vertical market software and has been very successful. This deal was proprietary, and relationships matter a lot, especially with founder-led businesses that have been family-run for decades. The match between the operator and the founder’s legacy plan is crucial. We see this like selling a house: some sellers want the highest price regardless, others want a buyer who will care for the business. We believe our philosophy resonates with sellers. Kingsway offers strong talent, growth plans, and the support of a larger corporate parent, which gives us confidence in building something special.

11/09/2023 What about you or Kingsway personally attracted the founding family of SPI?

That’s a great question for them, but we genuinely mean legacy preservation, it’s not just a talking point for us.

31/10/2023 What is the competitive moat of this business, and why is it successful compared to others?

DDI is the only qualified vendor in the cardiac monitoring niche for long-term acute care and inpatient rehab hospital models. The competitive moat has four key elements: first, established assets at customer sites in the form of cardiac monitors create stickiness; second, over 10 years of company experience and developed processes; third, high switching costs for customers to change vendors; and fourth, a clear market leader position confirmed by current and former customers.

05/03/2024 Why should Kingsway trade at a higher multiple than the five to seven times EBITDA paid for acquisitions?

There are several reasons. First, many of these small companies have operational inefficiencies, such as cash-basis financials and founder-operators looking to retire, making them available at 5x to 7x EBITDA. Kingsway cleans these businesses up with audited financials, internal controls, and risk mitigation, and installs strong leadership to unlock latent growth. We also shield cash flows from taxes due to our net operating loss (NOL) tax attributes. A diversified portfolio of these businesses is less risky than individual acquisitions. Finally, companies that can reinvest free cash flow at high rates of return over a long time command higher multiples, and we believe KSX is building that flywheel with a strong pipeline and cash flow redeployment.

08/05/2024 What are the most important ongoing actions in the KSX segment that will benefit shareholders long term?

KSX has a unique model of matching talented entrepreneurs to small businesses that otherwise couldn’t attract such talent. The model aligns incentives and focuses on acquiring businesses in large, growing industries supported by long-term secular trends. These businesses have great models with recurring revenue, high margins, and low capital intensity, purchased at fair multiples, typically under 7x EBITDA from founders or retiring owners. Kingsway is an exciting platform with a long-term outlook and tax efficiency due to net operating loss carry-forwards (NOLs).

20/05/2024 How important is recurring business from existing customers as you acquire more companies?

Revenue quality has become increasingly important, especially for us at the search accelerator. We prioritize diversified contractual revenue on a take-or-pay basis, like Drew’s vertical market software business. In Peter’s case, while not contractual or take-or-pay, high switch costs create strong stickiness, which is crucial. Revenue quality is the number one focus.

28/08/2024 How is annual compensation determined for the searchers?

Annual compensation is usually EBITDA-based versus a budget. There have been some past grants based on when people joined, plus some annual grants. The compensation committee looks at EBITDA achievement to budget and possibly some return on capital metrics.

06/11/2024 What industries are most attractive for new acquisitions, and is talent recruitment improving in the KSX model?

We approach talent acquisition in several ways, including maintaining an active presence at elite business schools with ETA programs, engaging with their clubs, and attending ETA conferences. Our best source of talent is referrals from existing Operators in Residence (OIRs). As more OIRs become CEOs, we get higher quality referrals, creating a real flywheel effect. Regarding industries, each OIR develops a few industry theses. We've done white papers on about 45 industries, mostly focused on recurring revenue, high-margin, low-capital-intensity businesses like asset-light business services and vertical market software. We avoid manufacturing and focus on niches where smaller businesses can have a competitive advantage.

11/01/2025 What motivates the operators, and what is their typical background?

Operators, or "searchers," are generally in their late 20s to mid-30s, not 23-year-old recent graduates. We believe in people-based investing, where attributes trump experience over time. High-attribute individuals may underperform experienced ones initially but outperform after about two years. Search funds tap into entrepreneurial energy by giving these high-attribute people incentives to run small businesses, often founder- or family-owned lifestyle businesses, unlocking growth potential.

23/04/2025 What advantage does your tax asset structure provide in attracting talent?

Our tax assets are viewed as a wasting asset we want to monetize. We allow distributions made to the holding company for tax purposes to be treated as a return of our preferred equity investment. This enables entrepreneurs to enter their common participation faster.

16/10/2024 What drives Image Solutions’ strong EBITDA margin, and are those margins sustainable as the business scales?

The company has a strong gross margin profile, supported by high customer satisfaction and the mission-critical nature of its services. These factors, along with high service levels and sticky customer relationships, contribute to pricing power and robust margins.

It's also a lean, entrepreneurial organization without excess overhead. As the business scales, we believe there are operating leverage opportunities, certain costs are quasi-fixed, though the priority will be to maintain current margins while investing for growth.

Operations

10/11/2022 How do you source acquisition opportunities for the Xcelerator program?

We use a two-pronged business development approach. Each entrepreneur targets specific industries and mines private company databases to identify high-level contacts. We run proprietary outbound campaigns involving emails, snail mail, and follow-up calls to engage business owners, even if they are not actively for sale. Additionally, we maintain a database of 3,000 to 4,000 intermediaries, including brokers, investment bankers, wealth managers, accountants, and law firms, and conduct drip marketing campaigns to keep Kingsway top of mind for opportunities that fit our criteria. This combination of proactive outreach and intermediary relationships drives our deal flow.

10/11/2022 How was the CSuite deal sourced, and why did it go to Ravix instead of as a standalone?

CSuite was sourced by another Search Xcelerator entrepreneur, Charles Mokuolu, who developed a relationship with the seller, Arthur. The opportunity was a great fit for Ravix, so Charles handed the relationship to Timi, who progressed the deal. This illustrates the power of the Search Xcelerator model to find opportunities for existing portfolio companies.

10/11/2022 Will existing CEOs like Timi at Ravix continue making acquisitions alongside new search entrepreneurs?

Yes. Each acquisition under the Search Xcelerator can serve as a platform for follow-on tuck-in acquisitions if it fits the original investment thesis. High-growth businesses that can reinvest capital at strong returns will generally receive continued capital allocation to maximize organic growth. Typically, a new CEO focuses first on learning the business, deleveraging, and driving organic growth for one to two years before pursuing additional acquisitions funded by internal cash flow and deleveraging, without needing extra capital.

09/05/2023 Can you expand on Charlie Joyce’s role and what he will bring to the team, especially regarding attracting additional OIRs and concluding purchases in the KSX segment?

Charlie has a great background and was doing a self-funded search, so he understands the ETA community broadly. His role is to focus on building our database of intermediaries, brokers, and investment bankers, enhancing outreach to describe the search accelerator, acquisition criteria, and the solutions we offer business owners transitioning into retirement. This will allow our OIRs to focus more on direct sourcing in specific industries.

The goal is to increase opportunities coming through traditional broker and intermediary channels with a single point of contact at the search accelerator, providing continuity as new OIRs join and others leave after acquisitions. Charlie will also focus on recruiting, being a presence at ETA conferences and business school campuses. This enhances our product offering for OIRs by providing a vibrant pipeline of ongoing deal flow and helps spread the word in the community.

20/05/2023 Can you explain the economics of the warranty business, including claims frequency, severity, and loss ratios?

The warranty business operates like an insurance business. For example, we might sell a policy for $2,000, with the price depending on the car’s age, mileage, and policy length. Typically, about half the premium is placed into a trust fund mandated by the backstop insurer (such as Assurance or AmTrust), while the other half covers ongoing costs. Our extended warranty covers mechanical breakdowns, which are very predictable compared to liability claims. We have extensive data on when and how much repairs will cost. Claim frequency has slightly decreased, likely due to improved driving habits and better car quality, but labor rates and parts costs have increased, offsetting those gains. Claims are usually paid between two and three years after policy issuance. Our loss ratios are stable and predictable, with regular reviews with the insurer to adjust reserves as needed. During inflation spikes, we increased reserves proactively and have performed well over time.

08/08/2023 Can you describe the current status and strategy for finding new operators and residents (OIRs) for the Kingsway Search Xcelerator?

We aim to maintain an active pipeline of prospective OIRs to keep momentum on the Search platform as we launch OIRs into CEO roles and acquisitions. We have a signed offer letter for a new OIR expected to join in the third quarter, which is exciting. We recently hired Charlie Joyce, a former searcher with a strong network, who focuses on business development and building the M&A pipeline, as well as recruiting new OIRs. As we approach the fall, we will engage in search fund conferences, post on business school job boards, and leverage personal networks of our OIRs and CEOs to build the pipeline for late 2023 and 2024.

08/08/2023 How has your search effort to find new searchers evolved over the last two or three years?

As we demonstrate success and people see us backing individuals who successfully close acquisitions, the ETA community, which is quite small, spreads word of mouth strongly. People do due diligence when considering ETA as a career path and reach out after witnessing our progress. This creates a natural, self-reinforcing virtuous cycle that helps us build momentum. The visibility of our advisory board also greatly helps. For example, Davide came to us through Will Thorndike. We continue recruiting on business school campuses, and the combination of these efforts improves both the quality and quantity of candidates.

08/08/2023 Can you provide an update on the performance and growth stage of CSuite and Secure Nurse Staffing?

Both CSuite and Secure Nurse Staffing are in the professionalization stage, transitioning from founder-led to building strong teams and systems that create a platform for growth. We are very pleased with the performance of their leaders, Timi and Charles, who are doing admirably.

11/09/2023 Which 2 or 3 KPIs should investors focus on to evaluate this business?

Annual recurring revenue (ARR) and ARR growth are key, along with gross and net revenue churn, gross margin, EBITDA, and EBITDA margin. Drew will also focus on customer-facing metrics to ensure quality and customer delight, which supports financial performance.

31/10/2023 What changes are needed in the sales function to support growth?

We need to hire dedicated sales and account management staff to manage the growing demand. Currently, I am the only person handling sales.

31/10/2023 Where is the monitoring work done, and what qualifications do technicians have?

All monitoring happens at a single control center in Wall, New Jersey, near New York Metro for recruiting ECG staff. Technicians are certified by nationally recognized organizations like the Cardiovascular Credentialing Institute (CCI) and hold the Certified Rhythm Analysis Technician (CRAT) credential. Senior supervisors have master's degrees in electrophysiology and maintain frequent communication with customers.

07/11/2023 Can you provide an update on the VA Lafayette sales process?

The VA Lafayette property continues to be marketed by a national broker, attracting several interested parties. The commercial real estate market has been challenging this year, but we are targeting potential buyers who find the property's profile and existing debt attractive. Some buyers are motivated by depreciation recapture needs before year-end, keeping the market active.

07/11/2023 Why was CSuite's pipeline disrupted during the acquisition process?

Arthur, the primary business development person at CSuite, was deeply involved in selling his business, which distracted him and caused the pipeline of new business to suffer. He has since left the company after fulfilling a one-year consulting agreement. Timi has promoted someone internally to rebuild the pipeline and has been focused on this throughout the year.

05/03/2024 Can you provide an update on the VA Lafayette process and its current status?

We currently have the VA Lafayette asset under a letter of intent (LOI), and we are progressing through the process at this point.

05/03/2024 Can you provide more detail on how the transitions of SPI and DDI have gone and how these businesses are performing under KSX?

Starting with SPI, under the leadership of Drew Richard, a talented young executive, this was a family-owned software business with significant untapped potential, particularly in terms of organic growth. Drew has been transitioning in, building rapport, and developing a vision and strategy. They have a new Head of Sales who has been building out the sales process and have had early success adding new customers. Although it will take time to build the sales team and processes, things are going well, and we are pleased with the company.

Regarding DDI, also founder-led with the founder largely transitioned out, Peter Dousman is our President. DDI has been growing rapidly, with year-over-year revenues up over 30% in the first months of ownership in 2023, driven by existing customers expanding into new rehab and LTAC hospitals and interest from other hospital systems. Peter is focused on creating internal processes and a team to support thoughtful growth while ensuring high-quality service and patient care. He has a strong growth runway ahead.

Additionally, we published an investor deck in January with an appendix slide providing more color on run rate EBITDA, which I encourage people to review for better understanding.

05/03/2024 How does the demand for nurses benefiting SNS compare with the challenge SNS faces in hiring travel nurses?

The demand challenge in 2023 was a post-pandemic hangover. During the pandemic, hospitals relied heavily on contingent labor, which is expensive, and then pushed back hard to reduce it, impacting near-term demand for travel nurses. SNS has contracts with about 70 hospitals in California, and there is unmet demand. The strategy is to hire recruiters to bring more nurses onto the platform to fill open positions. Meanwhile, the per diem business, which is harder to fill, has been effectively managed and continues to grow.

05/03/2024 How are you managing the potential strong growth of the cardiac monitoring business?

We are taking a crawl, walk, run approach. The new manager is focused on understanding the team, customers, and their needs. We emphasize not dropping any "glass balls" while building processes and protocols around safety, given the critical nature of monitoring patients' lives. The manager, with a background as a nuclear engineer, is professionalizing operations and will be deliberate about onboarding new hospital locations while maintaining high standards of care. We believe he will do a great job.

08/05/2024 What KPIs do you use to judge your deal pipeline, and what systems have you put in place to improve your sourcing funnel?

We break down our KPIs into lead measures, which are influenced by our Owners, Investors, and Representatives (OIRs) and predict lag metrics. Lead measures include industries identified and qualified, and first outreach to primary business owners via email, LinkedIn InMail, snail mail, or phone calls. Lag measures include NDAs executed, SIMs received through brokers and intermediaries, indications of interest issued, conversations with owners, and ultimately letters of intent executed into closed deals. We track all this weekly, monthly, and quarterly by OIR.

We use a CRM system called HubSpot to track everything. Our NDA execution is managed on an electronic platform that outsources some legal work and tracks NDAs. We also have internal repositories for standard forms like NDAs and indications of interest. In Q1, we added an outsourced sales development resource. We made about 15,000 first contacts with business owners, with a low single-digit percent conversion to conversations, dozens of NDAs executed, and continued activity down the funnel.

08/05/2024 Is this the most activity you have had in your deal pipeline?

Yes, there is a lot more structure and rigor around tracking and monitoring. We believe that what gets measured gets done, and the team is focused on maximizing lead measures that predict lag measures.

08/05/2024 How do you utilize your advisory board, and how do they interact with your OIRs?

We have structured meetings three times a year, full-day in person. In March, we focused on talent development and coaching for new presidents, time management for new CEOs, and investment underwriting and key criteria in search acquisitions. Each advisor, Will Thorndike, Tom Joyce, and Tyler Gordy, led a workshop on one of these topics. The rest of the day covered operating updates, challenges for each KSX CEO, and pipeline reviews of new opportunities and deals.

Advisors encourage informal mentor-mentee relationships with OIRs, which I’m not involved in. There is frequent natural back and forth via text and phone calls for advice on matters they prefer not to bring to me. Their time is invaluable, and our gatherings are very impactful.

20/05/2024 Why won’t large hospital systems provide remote cardiac telemetry for smaller rural hospitals?

There is some consolidation in the market, but it remains fragmented enough that smaller hospital systems find it more sensible to manage telemetry themselves. Larger systems like Cleveland Clinic centralize telemetry, but many smaller systems prefer outsourcing due to cost structure and operational focus. They have many priorities and see telemetry as a clear outsourcing opportunity rather than investing heavily in it themselves.

20/05/2024 How does business quality factor into the multiple you pay?

Margin of safety comes from business quality, not price paid. We focus on high-quality businesses and are willing to pay more for the best ones. We use heuristics like revenue quality, gross and net retention relative to EBITDA multiples. In the lower middle market, businesses often have retiring founders and limited debt capital, keeping multiples low, typically under seven times. For the best quality, we still buy around 5.5 to 6.5 times. For example, Peter’s business growing 30% annually with 33% free cash flow margins might have been worth paying more for in hindsight.

20/05/2024 How do you see corporate overhead scaling going forward?

Core holding company cash expenses, including board and public company costs, are about  $4-5 million annually and expected to grow only with inflation. We support operating interim resources (OIRs) who get paid modestly while searching, which may increase as we add OIRs, but this is an investment in deal flow. Core holding company costs won’t scale significantly; acquisitions’ overhead shifts to segments.

20/05/2024 Will corporate overhead remain much lower relative to growth in operating company EBITDA?

Yes, decentralization creates operating leverage, allowing scale without proportional overhead increases.

28/08/2024 How is annual compensation determined for the searchers?

Annual compensation is usually EBITDA-based versus a budget. There have been some past grants based on when people joined, plus some annual grants. The compensation committee looks at EBITDA achievement to budget and possibly some return on capital metrics.

06/11/2024 Can you share more about the new Operator in Residence (OIR) you brought on board and the categories he is focusing on?

Rob, our new OIR, exemplifies our 5 H's, attributes we believe indicate a successful small business operator. He is a bit later in his career than others. After Harvard Business School, he spent 10 to 11 years in two private equity-backed roll-up strategies: veterinary care, where he rolled up about 300 vet hospitals, and more recently at Alpine, a West Coast private equity firm, working on HVAC and plumbing roll-ups. Rob has developed theses around early-stage consolidation opportunities in service-related industries. His goal is to buy a platform, run it, and use it to make follow-on acquisitions ahead of expected private equity consolidation.

06/11/2024 How long have your other Operators in Residence (OIRs) been with the firm?

Peter Hearne joined in May last year, about 17 to 18 months ago. Miles joined in September last year, around 14 months ago. Paul Vidal joined at the beginning of this year. We have a nice sequence of OIRs at different stages of their development, bringing them on roughly quarterly, aiming to match that cadence with new acquisitions.

11/01/2025 Can you explain the operational advisory you provide to companies?

Our operational advisory is comprehensive. We start with a 100-day transition plan, helping new operators build trust and rapport with the team and learn the business before making changes. We coach them on time management to avoid getting caught in the whirlwind of urgent but less important tasks, focusing on key priorities. We provide tools for value creation, whether growth, salesforce optimization, or new product introduction, and planning tools like policy deployment to identify key priorities, develop action plans, and establish accountability for execution.

11/01/2025 How do you support these operators to succeed?

We aim to minimize the experience gap in the first two years by providing tools, scaffolding, and counsel. We advise operators to first learn the business thoroughly, sit in every seat, talk to employees and customers, before making changes. It’s a "go slow to go fast" approach, supporting them with frameworks and guidance to avoid common pitfalls and accelerate success.

22/01/2025 How should investors think about the warranty business? Is it a core part of operations going forward?

I came to Kingsway to build the extended warranty platform because I like the attributes of these businesses: diversified contractual prepaid revenue at high margin and an investable float. They have a different growth profile, being more mature markets that don’t grow at twice GDP. They are somewhat cyclical, tied to consumer credit and used car cycles. Historically, we view them as cash cows that support the holding company and provide free cash flow to reinvest in acquisitions in the Search Accelerator segment.

18/03/2025 How long have your current OIRs been searching, and how many do you still need to backfill? Is it just Casper?

We have three current OIRs. Peter Hearne is the longest tenured, coming up on two years in May. Miles has been here about 18 months, and Paul Vidal just over a year. With Davide and Rob launching, to maintain our current pace, we will need to backfill. Last year, we talked to over 130 prospective OIRs, so we have great inbound interest. Our focus is maintaining discipline in selecting people with the right attributes, competencies, and background for this challenging entrepreneurial endeavor.

25/03/2025 Will acquired skilled trades businesses be run separately or will back office functions be consolidated?

We will consolidate some back office functions that benefit from scale or specialization, such as recruiting and insurance. However, the overwhelming majority of operations will continue to be run separately and in a decentralized manner.

25/03/2025 Will there be a significant investment needed in back office IT infrastructure?

No. Buzz has implemented what we believe are best-in-class back office IT systems, including ServiceTitan and Sage Intacct. Hopefully, that answers the question.

Competition

10/11/2022 Are private transaction multiples like PWSC’s still high, or are they starting to decline?

I have not seen tangible evidence of a reset yet. There is sorting out in the market, with some deals paused. High-quality assets, especially in the managing general agent (MGA) space like PWSC, remain in demand with significant capital chasing them. Pricing and leverage availability will influence this, but high-quality assets are still valued highly.

20/05/2023 Have you lost any credit unions in the last 12 to 18 months?

We typically lose one or two credit unions out of about 130 relationships. Gross churn is in the low single digits, but net retention is greater than 100% because credit unions continue to grow. Credit unions are slowly expanding their market share. Most churn involves smaller credit unions that either switch to a competitor or are acquired. There has been no significant change in this pattern over the last six months, as far as I am aware.

20/05/2023 Have you lost any credit unions in the last 12 to 18 months?

We typically lose one or two credit unions out of about 130 relationships. Gross churn is in the low single digits, but net retention is greater than 100% because credit unions continue to grow. Credit unions are slowly expanding their market share. Most churn involves smaller credit unions that either switch to a competitor or are acquired. There has been no significant change in this pattern over the last six months, as far as I am aware.

11/09/2023 Is Vaca a competitor to SPI?

Probably not directly. There are differentiating factors among competitors, including the modules and tools offered for key functions in this specific industry. I wouldn’t consider any true head-to-head competitor.

31/10/2023 Was the deal process competitive, or were you the sole bidders?

It was a competitive bid process with significant interest in the business. The seller saw a strong fit with Kingsway, as our long-term hold model combined with our search fund approach appeals to CEOs and founders who want to transition while maintaining their business legacy.

31/10/2023 Is there customer concentration risk with the two main customers?

At the system level, the largest customer accounts for about 52% of revenue, and the second about 44%. However, decisions are made at the individual hospital level, mitigating concentration risk. DDI is the only qualified vendor, and the second customer is expanding DDI rollout to all their facilities, adding 15 hospitals this year. We feel confident about the customer concentration risk.

20/05/2024 Are there other public companies using the search fund model or doing similar serial acquisitions?

To my knowledge, no public companies leverage the ETA model for serial acquisitions. Traditional search funds and private search incubators exist but are not public. Some public serial acquirers specialize in niches, like Constellation Software in BMS, or Nordic generalists, but they don’t operate much in the US. Competition mainly comes from traditional search funds and incubators.

20/05/2024 How competitive is the acquisition environment today compared to five or three years ago?

I’d rate it 3 to 4 out of 10. The “silver tsunami” demographic wave means many founders are retiring without succession, shrinking the acquirer universe. Private equity backs management teams, and strategics often worry sellers. The search fund model remains a strong solution for sellers, giving us a long runway based on demographics.

06/11/2024 Will Ravix and CSuite remain tied to the venture and private equity markets, or are there opportunities to diversify into new verticals?

The original thesis for CSuite was to cross-sell complementary services into different verticals. Ravix has historically been venture capital exposed, and CSuite private equity exposed, but both are cross-selling into each other’s verticals. There is always demand from new private equity or venture capital investments for sophisticated accounting, often fractional or interim, which fits well with CSuite’s services. Strategically, we focus on market penetration, optimizing pricing, upselling, and cross-selling within existing verticals, before pursuing the harder task of entering new verticals. We want to fully exhaust this penetration phase before expanding.

16/10/2024 What is the growth rate of the IT Managed Services market, and is Image Solutions gaining or losing market share?

Image Solutions sits at the intersection of the managed service provider (MSP) and hardware-as-a-service industries. Both sectors are projected to grow at a compound annual growth rate (CAGR) of 11% to 12% over the next 10 years.

That positioning gives the company exposure to two fast-growing segments, which supports its ability to sustain competitive momentum in the market.

Growth

10/11/2022 What common characteristics do the businesses you acquire share, and how do you decide which to include in Kingsway's portfolio?

When I joined Kingsway, I was drawn to the extended warranty industry because of its fundamental attributes, unit economics, and growth potential, despite having no prior experience in it. We focus on industries with large addressable markets, generally over $1 billion to $2 billion, that are growing faster than twice the GDP and are fragmented, offering many niches and acquisition targets. Within these industries, we seek companies with recurring, high-margin revenue, low capital intensity, and predictable high returns on tangible capital. Our acquisitions, including warranty businesses and those in the Search Xcelerator segment, fit these criteria: sticky customer bases, low customer concentration, recurring revenue, high margins, and low or no capital intensity.

10/11/2022 What is the pipeline for potential acquisitions in extended warranty and Search Xcelerator segments?

The extended warranty market is large and fragmented but has relatively few high-quality companies. We have seen some opportunities this year but have passed on those that did not fit our distribution or product criteria or were priced too high. We expect some market sorting due to higher interest rates, which may create better valuation opportunities. The Search Xcelerator segment has a very active pipeline, with each operator maintaining dozens of potential deals at various stages. We follow a "100 to 1" principle, reviewing many opportunities to find one great acquisition. At any time, we may have around 30 NDAs active.

08/02/2023 How many searchers do you plan to support going forward, and is there still interest in working at Kingsway?

We believe we can effectively support four to five searchers at any time, maybe more, but our focus is on accelerating the cycle time from onboarding to acquisition rather than simply increasing searcher numbers. We are actively talking to several candidates, and momentum is building. Success stories like the sale of PWSC and the leadership of Timmy and Charles create a positive feedback loop. Our advisory board, including Tom Joyce and Will Thorndike, provides operational and capital allocation coaching, which is a strong attraction for potential searchers.

08/02/2023 What are your strategies to build and grow the existing companies you own?

Predicting organic growth in an uncertain macroeconomic environment is tough, but we have great managers who have historically demonstrated the ability to grow, and they are motivated through their incentive compensation to grow EBITDA. I don’t create their strategies; they present them to me. For example, IWS distributes exclusively through the credit union channel, which is growing compared to traditional commercial banks. Their strategy is to grow the number of credit union relationships where their product is distributed exclusively, actively adding new credit union partners. Credit unions are also lower-cost lenders than other alternatives, insulating them somewhat from higher interest rates.

08/02/2023 What are the growth strategies for PWI, Geminus, and related businesses?

We brought Brian in February 2020 to run both Penn and PWI. He had previously been president at PWI and grew that business significantly. Bringing him back is like bringing back an all-star to reinvigorate growth. He has a specific strategy to activate the existing dealer network to sell more warranty contracts. For instance, PWI has thousands of dealers in their system who don’t sell much of our product, and Brian is reengaging those dealers to move forward. Based on his success at Penn last year, we expect similar results at PWI.

08/02/2023 What are the growth plans for Trinity’s T&A and ESA businesses?

Trinity has two lines: T&A, which dispatches mechanical service providers to retailers, and ESA, the extended service agreement side, which has been growing at mid to high teens annually. Peter is building scale and brand identity, penetrating wholesaler, distributor, contractor, and installer channels with a defined strategy. These are their strategies, and I’m comfortable with their plans and incentives.

08/02/2023 How is Ravix positioned for growth and what are the industry tailwinds?

Timmy stepped in and grew Ravix by over 15%, 16% year-over-year in his first year. The accounting profession is experiencing increasing complexity in regulations, meaning more work, while there is a structural shortage of accountants. The rise of cloud-based accounting systems allows fractional accounting work, which is scalable and cost-effective. This creates a secular tailwind. Timmy is focused on business development and hiring to actively grow what was previously more of a lifestyle business. Growth will be bolstered by the C suite acquisition and cross-selling opportunities between the two companies.

08/02/2023 What is your outlook on growth for SNS and the nursing industry?

It’s too early to make big growth projections for SNS, but we strongly believe in the long-term tailwinds in nursing. Demographics drive strong demand, and there is a chronic shortage of nurses due to burnout and demographics. Remaining nurses tend to be younger and prefer flexibility, which aligns with the travel and per diem nurse staffing model we focus on. We feel good about this positioning.

09/05/2023 How is your pipeline looking compared to last quarter, and what progress have you made with the OIRs and business acquisitions?

The general M&A environment was a bit slow in the first quarter, especially at CSuite and Ravix, but the lower end of the lower middle market remained solid. Credit conditions tightened, and there’s a mismatch between buyers’ cost of capital and sellers’ expectations, but I expect this to revert and the M&A environment to thaw as we head into summer.

Our pipeline looks strong. Peter and Drew are at full speed, and Peter Hearne just joined us, so we expect to get him going soon. Charlie’s efforts will enhance this further. We parted ways with one OIR after quarter-end, so we currently have three OIRs including Peter.

20/05/2023 How have pricing and market efficiency changed in the search fund market over the last 12 to 18 months?

Anecdotally, valuations may have come down slightly recently due to tighter credit markets and buyer cost of capital, causing some divergence between buyer pricing and seller expectations. Historically, in the lower middle market and search funds, valuations have stayed relatively constant in the four to seven times EBITDA range, depending on growth and profitability. This stability is because these markets don’t rely heavily on leveraged finance as a capital source. Over the last 10 years, valuations may have crept up a bit but could come back slightly now. Regarding market efficiency and competitiveness, there are many more searchers today, over a hundred annually compared to just five or six in the early 2000s. Despite this growth, the supply of opportunities remains strong due to demographic trends, so there is still a mismatch between buyers and owners looking to transition. More capital is available, and we aim to differentiate ourselves through credibility, especially as a public company-backed entity, which gives our investors an advantage when dealing with bankers, brokers, and sellers amid increased competition.

20/05/2023 Timmy, what growth initiatives are you pursuing at Ravix, and what do you expect the business to look like in a few years?

To date, Ravix has grown opportunistically with no dedicated business development function, most business came through referrals, making forecasting unpredictable. We are now building a sales and marketing function, currently searching for a Director of Business Development and Marketing. The goal over the next two to three years is to establish a clear, repeatable go-to-market process with a quantifiable sales funnel to better predict closed opportunities and bottom-line impact. Past growth was driven by operational improvements like pricing adjustments and performance-based compensation plans for senior staff, which reduced bonus expenses and supported expansion. Going forward, we see significant opportunity to grow top-line revenue and customer base through more proactive business development.

20/05/2023 Kent and JT, how scalable is your search accelerator platform, and how many Searchers can you support?

Our guiding principle is "go slow to go fast", we focus on building a strong foundation, professionalizing operations, and developing infrastructure before scaling growth. The search accelerator platform is designed to be highly scalable through decentralized execution support. The main constraint is access to top-tier operators (OIRs). While we can’t predict exactly how many great candidates we’ll attract annually, we are open to adding as many as meet our profile and standards. We won’t turn down qualified talent simply due to capacity limits. The board has grown increasingly comfortable with our measured approach and now fully supports leaning into growth. We aim to build a world-class search and underwriting platform, and talent acquisition remains the rate limiter.

08/08/2023 What is the quality and growth profile of the businesses you are targeting in your M&A pipeline?

We have been focusing on high-growth opportunities with very high gross margins. If a business is not high growth, then it typically has a very high percentage of truly recurring revenue. We continue to seek quality businesses that fit these criteria.

11/09/2023 What are the main growth opportunities you see for SPI? Is it product innovation, more properties, deeper penetration, pricing, or something else?

SPI has very low customer churn and strong profitability with a mission-critical product. The timeshare industry is a unique subset of travel and hospitality, underserved by broader enterprise solutions. We plan to focus first on serving existing customers and leveraging long-standing relationships. Pricing adjustments could be explored, but more exciting growth opportunities will emerge after we’ve had time to learn the business deeply.

11/09/2023 Does this software only serve the timeshare industry, or could it expand to Airbnb, VRBO, or other verticals?

We are considering whether other vertical markets might be close or exact fits. We won’t rush to build new products for new markets immediately but will assess potential synergies and overlaps for future expansion.

11/09/2023 So you plan to learn the business, identify the best growth opportunities, and potentially expand beyond timeshare into a larger total addressable market (TAM)?

Yes, that’s a fair summary.

11/09/2023 Why are you attracted to the vertical software industry?

Vertical software businesses are small, niche, mission-critical, with sticky customer bases, high recurring revenue, low churn, and high margins, offering excellent unit economics.

11/09/2023 Are there particular vertical software sectors that are most attractive?

We are sector-agnostic, focusing first on business fundamentals and unit economics, then on subsectors or industry.

31/10/2023 What is your value creation plan for the business and growth opportunities?

The current pipeline from the two largest hospital customers alone would drive 40% revenue growth in the 12 months following the transaction. DDI currently serves 150 hospitals in the core market, with an estimated 450 potential customers remaining. After addressing current customer needs, we plan to roll out to the rest of the core market and develop the sales function to support this expansion.

31/10/2023 Is the growth plan entirely organic, or are inorganic opportunities possible?

We strongly believe in the organic growth opportunity and will focus on that initially. However, we remain open to inorganic opportunities down the line.

31/10/2023 What profit growth opportunities exist beyond initial appearances?

Profit growth will come from organic growth in the core market, requiring continued staffing of ECG technicians alongside a 20% CAGR. With only 150 hospitals served out of approximately 750 potential, there is significant growth opportunity.

07/11/2023 How are the current searchers progressing, and what is your confidence in attracting more high-quality candidates?

Peter Hearne joined in early May, and Miles joined in late August. We have launched Drew, Peter Dausman, and soon Davide, actively recruiting through networks of current CEOs and operating independent representatives (OIRs). We have engaged with over 60 high-quality candidates and are in advanced stages with several. Our goal is to have 4 to 5 searchers actively pursuing 2 to 3 acquisitions annually. While some transactions close quickly, others take longer, and we maintain discipline focusing on business quality to ensure effective searchers and strong CEOs.

05/03/2024 Do you believe you can organically grow the software business, and can you provide examples of growth?

Yes, Drew Richard, the President of the software company, believes strongly in its organic growth potential. We operate a decentralized model that attracts and retains great talent. The software is mission-critical for customers, so the sales cycle is longer, but there have been early successes with new client additions currently onboarding. We are optimistic about the organic growth opportunity.

08/05/2024 Can you share signs of business improvement over the next 6 to 12 months?

In the warranty business, cash revenue grew about 1.5% year-over-year last quarter, and operating expenses fell 4%, reflecting pricing increases from late last year coming through earned revenue over time. Trinity’s equipment backlogs are clearing, and the business is picking up. IWS, our vehicle service contract company distributing to credit unions, recently signed a large new credit union customer launching late Q2 or early Q3, which could be a significant growth driver.

In KSX, the nurse staffing business SNS has likely found its bottom; travel nurse demand has stabilized. Charles built an internal tech stack and recruited three new recruiters, resulting in a 40% increase in travel nurses on assignment (TOAs) from December to March, with growth continuing in April. This reverses last year’s decline and should improve performance in the back half of the year.

DDI is onboarding new hospital customers roughly every 1.5 weeks, incurring upfront technology and equipment expenses that are expensed but have quick payback periods. The business is ramping significantly while maintaining high patient care and service quality, which is very encouraging.

08/05/2024 When do you decide to recruit new OIRs, and does it relate to being closer to transactions?

Recruiting is ongoing. We expect each current OIR to close a deal in the normal timeframe, so we want to be thoughtful about bringing new people on as current ones move into President and CEO roles, ensuring we have backfills and aren’t behind the curve. We post job descriptions and profiles quarterly and also get organic development through other channels. This reflects our confidence and ongoing recruitment efforts. We will discuss this more at Investor Day, as talent recruitment is a big part of our process.

08/05/2024 How much of your communication with potential OIRs is outbound versus inbound, and has this changed over time?

Communication is both outbound and inbound. Outbound efforts build awareness, but the highest quality communication is inbound through growing networks of current presidents and OIRs like Tyler, Will, and Tom. These networks act as brand ambassadors, making inbound communication the more valuable channel.

20/05/2024 What conditions would increase the number of Searchers from four to five or six over time?

We want to define and consistently deliver a quality spec for both Searchers and businesses before scaling. We’re at that point now and plan to increase deal flow gradually. This creates a powerful flywheel effect, especially with no tax leakage, leading to parabolic growth. We expect to lean into scaling more in the future.

06/11/2024 How does SPI plan to sustain growth, organic growth, acquisitions, or more sales hires?

Drew’s strategy is a “yes and” approach. Initially, the focus is on organic growth in a market growing faster than GDP, with opportunities to add customers and increase adoption. Drew is focused on growing the existing business and will continue until that thesis is exhausted. The holding company creates vertical market solutions, and once Drew builds operational muscle, he may pursue acquisitions of other vertical market software businesses. So far, he has grown annual recurring revenue (ARR) by 16%, with gross retention in the mid-90s and net retention over 100%, and is just getting started.

18/03/2025 What is your vision for growing the new skilled trade services platform within KSX?

I think it's a huge opportunity within plumbing service and repair, and mechanical services, and it's a great fit for Rob's background. He has experience in consolidation in veterinary care and more recently in plumbing and HVAC. He came with a precise thesis around organic and inorganic growth opportunities in plumbing and HVAC. Our first focus is organic growth, penetrating existing markets more fully through pricing enhancements, search engine optimization, and expanding into adjacent markets nearby. Then we plan to cross-sell new plumbing services like hydro jetting and eventually hope to expand into HVAC, though that would be a few years out.

Rob’s thesis is that plumbing is a beautiful trade because of their service level agreements and time requirements to serve customers. It's easier to add complementary trades to a plumbing business than vice versa, so there are many organic growth opportunities for the businesses we acquire, as well as inorganic growth potential through acquisitions in this large, fragmented industry. Rob will focus on Tier 2 and Tier 3 markets, partnering with number one or two incumbents. So, besides organic growth, we have a strategy around growing via consolidation, which fits his background well.

08/05/2025 Are there other industries you might target for platforms beyond Vertical Market Solutions and Skilled Trades?

We evaluate industries carefully using an internal game board that categorizes them into two types: power law industries with high organic growth, and rule of 10 industries with lower organic growth but higher recurring revenue and fragmentation. Rule of 10 industries are attractive for platform building through inorganic growth. Some compelling industries include insurance brokerage, wealth management Registered Investment Advisors (RIAs), and accounting services. We already have a platform in accounting services, though we don’t call it that. The key is finding great industries that support acquisition-driven growth and fit the interests of our Operators Year-Round, where they are passionate about spending their careers.

16/10/2024 How much of Image Solutions' growth comes from existing customers versus new ones? What is the net revenue retention rate?

About half of the company's growth has come from expanding wallet share with existing customers. That includes cross-selling between MSP services and hardware-as-a-service offerings, things like equipment, software, help desk support, and pricing optimization. The other half of growth comes from acquiring new customers. Over the past three years, the average net revenue retention rate has been 106%, with gross churn around 2%.

16/10/2024 Are there opportunities to expand Image Solutions’ addressable market through new services or customer segments?

Yes. In the near term, the focus is on integrating Domino’s into the business, building systems and processes, and developing a strong team to support growth. That team will help shape the longer-term strategy.

We view both product expansion, such as moving into cybersecurity or cloud services, and geographic expansion beyond Western North Carolina as medium-term growth opportunities. Using an Ansoff matrix framework, we’re focused first on deepening penetration with existing customers, followed by product or market expansion.

Financials

10/11/2022 How should I interpret Kingsway's adjusted pro forma EBITDA and the profitability runway of your operating businesses?

EBITDA is our internal proxy for pre-tax cash flow, and because of our net operating loss carry-forwards (NOLs), it also approximates after-tax cash flow. In warranty businesses, we use a modified cash EBITDA metric, which differs from GAAP due to deferred revenue but better reflects economic value added. This method is detailed in our CIBC loan agreement filed with our 2020 Form 10-K. At quarter-end, our senior debt under the CIBC facility was $16.7 million, with a senior leverage ratio of 1.39 times. Ravix and CSuite do not have deferred revenue, so GAAP EBITDA suffices for internal purposes. Your estimate of $16 to $17 million annualized EBITDA combining warranty, Ravix, and CSuite is a reasonable proxy for economic cash flow.

10/11/2022 How does Kingsway use its net operating losses (NOLs) against taxable income of subsidiaries?

We treat each subsidiary as a standalone entity for federal tax purposes, calculating their tax as if independent. If a subsidiary owes tax, it pays that to the holding company; if it has tax benefits, it remits those back. This process monetizes the NOLs and provides additional cash flow to the holding company. These payments comply with our credit agreement and effectively allow distributions from operating businesses to the parent company, similar to paying taxes to the IRS if they were standalone entities.

10/11/2022 How long do Kingsway’s NOLs last before expiring?

Most NOLs originated in the late 2000s and early 2010s with a 20-year life. They begin expiring in 2027, with a significant $500 million expiring in 2029. Smaller amounts expire annually thereafter through about 2037. The schedule is detailed in our latest 10-K, likely in note 15.

08/02/2023 What are the costs and benefits of the $10 million loan from CIBC?

There is a small commitment fee: $25,000 paid at close and 75 basis points on any future draws. This cost is reasonable for having dry powder available. We plan to use much of our holding company cash soon to repurchase trust preferred securities and potentially redeem some non-converting preferred shares. Having this standby facility provides prudent additional dry powder for acquisitions in the near future.

09/05/2023 Can you comment on the run rate operating costs of the Holdco and the level of consolidated EBITDA required for KFS to cash flow?

The Holdco includes the corporate team and the KSX team, which hasn’t migrated to operations yet. Looking at cash-only spend excluding interest expense, which is variable and small, we target runway cash expenses of about $1 million to $1.2 million per quarter.

20/05/2023 Can you break down the drivers behind the 10x MOIC in PWSC? Is it pricing, volume, cost, or multiple expansion?

The 10x MOIC is driven by three main factors. About 25% of the returns come from financial leverage and the return on equity gained by paying down debt. Another 25% is from growth in EBITDA, which more than doubled under our ownership. The remaining 50% is multiple expansion. We were fortunate to get a very high multiple because the business, with a strong management team, became an attractive target for a consolidator who paid a premium. Even without multiple expansion, the returns would have been strong.

20/05/2023 Is the 35% IRR similarly broken down across leverage, growth, and multiple expansion?

The 35% IRR is somewhat less skewed toward multiple expansion but still a combination of three factors: conservative financial leverage enhancing equity returns, EBITDA growth, and multiple expansion. Typically, when you double EBITDA, you reach a new valuation threshold, so all three contribute roughly equally, about a third each.

31/10/2023 Is EBITDA or EBIT the better metric for cash flow?

EBITDA minus minimal maintenance CapEx is a good proxy for free cash flow. Purchase accounting intangibles amortization is not capital-related, so EBITDA is more relevant than EBIT.

05/03/2024 How do you calculate the run rate EBITDA for the operating businesses? Does it include the depressed warranty results from 2023, or is it normalized for improvements?

Run rate EBITDA, as we define it, is truly the last 12 months of earnings power of the businesses we currently own. It includes the trailing 12 months of all the warranty businesses, plus the trailing 12 months of CSuite, Ravix, and SNS, and the last 12 months of operating performance of DDI and SPI as if we had owned them for the whole 12 months. The only normalizing adjustment we make is an estimate of the increase in investment income we would receive on the warranty float if reinvested at current market yields. This adjustment has compressed over time as we have rolled over many of those securities.

08/05/2024 Why is the extended warranty business a good or bad stand-alone business over the long term?

The extended warranty business has natural exposure to economic and consumer credit cycles, causing some cyclicality, which is a downside. However, the underlying economics are attractive: it generates diversified contractual revenue at high margins with negative working capital since these are prepaid contracts. Returns on tangible capital are effectively infinite due to the negative capital requirement, making the economic characteristics very appealing despite the cyclicality.

08/05/2024 Do new businesses you buy experience economic drag in the first quarter or two, even if they meet expectations?

We have a very long-term view, so one or two quarters are not make or break. We do expect some drag in the first couple of quarters because small businesses we acquire are often unsophisticated and have never been part of public company reporting. We add incremental overhead immediately, including external and internal audits, new accounting systems, HR, and benefits enhancements. This professionalization creates a foundation for growth. Also, young managers and first-time presidents make mistakes and learn, so some initial drag is expected.

08/05/2024 What is the size and yield of the insurance companies' float portfolio, and how long until it reaches market rates above 5%?

Assuming the question refers to the warranty business, we have about a $40 million bond portfolio and $8 million in restricted cash. The bond portfolio is externally managed with a duration of about two years, which has been decreasing to match the yield curve's sweet spot. The current market yield on the portfolio is over 5%. As maturities roll over, it will take about one more year to be fully invested at market rates. Currently, the yield is in the low 3% range and is expected to rise as the portfolio turns over.

20/05/2024 Can you clarify the discrepancy between trailing 12-month OpCo adjusted EBITDA and Q1 results?

Seasonality affects results; Q1 was down year-over-year. The run rate is higher because we acquired two businesses in late 2023, now included in the run rate.

28/08/2024 Do we have to mark to market our investments in these companies?

No, because we own 100% of them and they are consolidated into our balance sheet. When we buy them, we value them at current value under purchase accounting, but once that value is set, they become just another column in our consolidated financials.

28/08/2024 What ownership is required to tax consolidate the entities?

We have to own 80.1% to tax consolidate the entities. The searchers are only on the KSX side, where we own 100% of the warranty companies.

28/08/2024 Do we have to mark to market our investments in these companies?

No, because we own 100% of them and they are consolidated into our balance sheet. When we buy them, we value them at current value under purchase accounting, but once that value is set, they become just another column in our consolidated financials.

28/08/2024 How do net operating losses (NOLs) affect federal income tax and returns to preferred equity?

Since we have all those net operating loss carry-forwards (NOLs), we don't pay federal income tax. Instead, we prepare a standalone tax return for the company to figure out what the tax would have been. Rather than remitting that to the U.S. government, the company remits it to Kingsway, which counts as a return of our preferred equity. In a traditional search, that money would leak to the U.S. government, but here it accelerates the searcher's equity becoming valuable.

06/11/2024 Why is claims expense growth moderating, and what is a normal percentage for warranty claims expense growth?

Claims expense growth is moderating because the Consumer Price Index (CPI) for vehicle repair, which we track monthly, has slowed. In September, the year-over-year change was 6%, down from a peak of 14-15% about a year ago. Claims severity, the cost per claim, is not decreasing but is rising more slowly. Claims expense depends on parts and labor, with labor being the main driver recently due to a shortage of qualified technicians and tight labor markets. Historically, parts and labor inflation tend to mirror CPI, so we expect claims expense growth to moderate as labor rate increases slowly, though this is speculative.

11/01/2025 What are search funds, and what historical returns do they offer?

Search funds have been around since the 1980s, and median pre-tax returns tracked by Stanford show about a 35% internal rate of return (IRR) and a 4.5x multiple of invested capital (MOIC). These returns include all search funds, even those that failed to acquire or return capital. While there are some huge outliers, the dispersion of returns has narrowed over time due to tighter underwriting criteria, but aggregate returns remain strong.

22/01/2025 Can you describe the expense structure at the HoldCo and OpCo levels? Are OpCo expenses consolidated?

We negotiate some costs centrally, such as corporate audit and insurance, but prefer a decentralized structure to give businesses autonomy. There are cost savings from pooling resources, like providing accounting services from corporate to newer subsidiaries, which results in substantial savings. The holding company’s annual cash burn varies depending on how many OIRs are on staff but is roughly $5 million to $6 million per year.

18/03/2025 Could you provide more color on the claims expense moderation in the Extended Warranty segment during the second half of 2024?

Yes, great question. In 2023, claims increased roughly 10% year-over-year versus 2022. For the full year 2024, claims increased about 6.6%. In Q1 2024, claims were up 13% year-over-year, but from Q2 through Q4, that subsided to roughly 4.5%, with Q4 at only 4.1%. So after 10% in 2023 and 6.6% for the full year 2024, the trend from Q2 to Q4 was just north of 4%. We are definitely seeing things calm down, with most of the benefit coming from declining frequency, but also severity.

Outlook & Guidance

18/03/2025 Were there areas Kingsway did not do well in 2024, and what are your plans to improve them?

Yes, absolutely. While we had several notable successes, there are always areas for improvement. One of our core values is kaizen, or continuous improvement. Within warranty, a key focus is pricing, continuously re-underwriting our book to ensure adequate pricing to offset claims inflation, even though it's subsiding and we have been taking price increases. Much of the claims inflation was at one company, Geminus, in a product called Guaranteed Asset Protection (GAP), which protects against negative equity in car loans. Declining used car prices and high loan-to-value ratios created a tough environment for GAP pricing in 2023. We were probably not fast enough to respond but have since taken significant price increases, around 50%, which may impact volume and revenues but will protect earnings in 2025.

Regarding KSX, talent is an area for improvement. SNS and CSuite brought on new people they were excited about, but some did not work out as hoped. We use a talent identification and screening process called top grading to improve our hit rate on new hires, but there is always room for improvement. Finally, KSX has a goal of two to three acquisitions per year. We only did one last year, which was larger, but had a few misses. This reflects our discipline, but we want to improve the velocity of moving deals through the pipeline from indication of interest to closing.

10/11/2022 Did the buyer of PWSC use the modified cash EBITDA metric, and what multiples were involved?

Yes, the buyer considered modified cash EBITDA. We sold PWSC for $51.2 million, with trailing twelve months (TTM) GAAP EBITDA around $2.2 million, implying a 25x multiple. Modified cash EBITDA was about $3.3 to $3.4 million, so the effective multiple was lower. The buyer also credited pro forma run-rate new business, leading to a forward multiple estimate of 12x to 13x.

09/05/2023 Is there a targeted hold or exit period for investments in the accelerator segment, or do you hold indefinitely unless a compelling external bid arises?

Our general preference is to hold great assets indefinitely. We don’t enter investments with a preconceived exit plan. However, if a compelling external bid arises that allows us to realize a return and redeploy capital at a higher rate, we would consider it. Our goal is to build and compound with great businesses on an indefinite horizon.

20/05/2023 What is your vision for the search funds and warranty business in five to ten years?

We are focusing heavily on the search accelerator and hope to acquire two to three businesses annually going forward. Over time, this will become a much larger portion of our total earnings power. We like warranty businesses for their large, growing, fragmented markets, recurring high-margin revenue, and negative capital intensity. Customers pay us in advance, providing float, and these businesses don’t require statutory surplus or capital expenditures like traditional property and casualty insurance. However, the number of warranty businesses of our size and quality is small, and they command high prices, so future acquisitions will likely be episodic and hard to predict. Overall, the search accelerator will be a much larger part of our business going forward.

20/05/2023 How do you approach reinvestment of cash flow by operators in the search accelerator, especially for new business lines?

We view the holding company’s role as managing financial reporting, tax, risk management, operational excellence, accountability, and capital allocation. Operators run capital-light businesses, so investments typically focus on new product development or sales and marketing growth. We evaluate investment decisions collaboratively and data-informed, calculating return on investment, customer acquisition costs, and lifetime value. Operators spend the first year deeply learning the business and market before making growth investments. Once they identify promising opportunities, we discuss how to support scaling.

11/09/2023 JT, can you add your perspective on this approach?

Every acquisition comes with a preformed thesis, but with a new CEO, company, and industry, the first 100 days focus on learning. Drew’s marching orders are to meet employees, understand what’s working and what can improve, then develop and execute a plan. We buy great businesses with stable revenues and profitability, so the initial goal is to learn before articulating a growth thesis.

31/10/2023 How mature is the market for inpatient rehab and long-term acute care hospitals?

Both markets are over 10 years old. Inpatient rehab is growing at 20%, and long-term acute care is growing at 100%.

07/11/2023 How should I think about normalized earnings or go-forward earnings, especially regarding warranty business performance?

The trailing twelve months (TTM) adjusted EBITDA of $19 million to $20 million is our best predictor of future performance in a more normal environment. Currently, the warranty business is not in a normal state; it faces challenges in sales and claims. Cost reductions have offset revenue declines, with claims in the quarter about $600,000 higher than the prior quarter. We are conducting a comprehensive pricing exercise, adjusting vehicle mileage bands and applying mid- to high single-digit price increases across the book. These price increases should offset claim severity, and if operating expense improvements continue, profitability could improve by around $2 million. This is not formal guidance but a way to think through normalized earnings power.

07/11/2023 How do you view normalized warranty earnings and the car market's impact on the business?

In a more normal environment, we expect the warranty business to perform closer to past levels, with adjusted EBITDA potentially reaching $22 million to $23 million. While car prices have declined and may continue to do so, we are confident the market will normalize, supporting this outlook.

05/03/2024 Should the normalized earnings power be higher than the run rate EBITDA number provided, considering expected recovery and growth?

Yes, that is a very fair comment. We feel good about where we stand today compared to several months ago, and there are positive developments. We believe we have momentum, so the normalized earnings power should indeed be higher than the current run rate EBITDA number.

05/03/2024 How do you see the warranty business performing in 2024?

2023 was a tough year for the warranty businesses from a revenue standpoint, but claim severity has started to recede, and year-over-year inflation is moderating. Despite revenue headwinds, these businesses have added new distribution partners and channels, increased activity with existing customers, and improved conversion and attachment rates. We feel fairly optimistic about their performance this year, though we are not providing formal guidance.

08/05/2024 When will the financials of the software and cardiac monitoring businesses start to show positive momentum?

We added eight new enterprise customers recently, and onboarding involves some software customization that will increase annual recurring revenue (ARR). The software business is focused on growing ARR to achieve the "rule of 40", ARR growth plus EBITDA margin greater than 40%. Currently, the focus is on ARR growth, with margin improvement expected later. The cardiac monitoring business (DDI) is onboarding new hospitals every 1.5 weeks, incurring upfront technology and equipment costs with very fast payback, and is growing rapidly.

08/05/2024 Do you expect to close two new acquisitions before the end of 2024?

With all the usual caution, we feel very good about the level of activity, lead measures, and a healthy pipeline. We have demonstrated the ability to close acquisitions, but buying 100% of a small business is always challenging and carries risks. So while optimistic, it is hard to predict with certainty.

08/05/2024 Will EBITDA growth start to show positive momentum in the next two to three quarters?

Without giving formal guidance, we believe that with claims expenses on the warranty side having increased about a year ago in Q2 and Q3, we should have favorable year-over-year comparisons going forward, supporting positive EBITDA momentum.

06/08/2024 How are warranty rates trending relative to cost inflation, and what is the outlook for the rest of the year?

Warranty claims were up 2.9% year-over-year in the quarter, driven mostly by severity rather than frequency. We started increasing rates in the second half of last year and into this year, with price increases in the high single digits across the businesses. About 4% to 5% of that increase is coming through in rates. Since late second quarter and into the third quarter of last year, we saw accelerating claims inflation, mainly in parts and labor. We are now facing easier comparisons in the second half of the year, so I expect year-over-year inflation to be much lower, while the rate increases will continue to come through.

06/08/2024 Why do you remain confident in the recent acquisitions despite their current financial performance?

SPI, acquired in September last year, is a vertical market software business serving the fractional ownership vacation property industry. Since acquisition, its annual recurring revenue (ARR) has grown roughly 12%, with several new clients being onboarded. We expect ARR growth of about 20% by year-end. Drew has done a great job focusing on investing in new customer growth on the high-margin recurring revenue platform, even if it means sacrificing some near-term profitability. DDI’s revenue increased roughly 15% over the prior year before our ownership, with EBITDA improving even more dramatically. Peter is successfully growing the customer base, onboarding more facilities, and we are opening a new facility in Salt Lake to support growth, create operational redundancy, and tap a new labor pool for high-quality EKG technicians. We are very excited about the trajectory of both businesses.

06/08/2024 Are there signs of a turnaround in CSuite or the nursing business, and what indicates better days ahead?

In the nurse staffing business (SNS), for the first time, we ended the quarter with more travelers on assignment than at the same time last year. Total on-assignment (TOA) shifts increased 35% over the first quarter. Charles is doing a great job recruiting nurses and increasing TOA shifts. The industry is seeing gross margin compression abate, settling into a steady state. Seasonally, demand for travel and per diem nurses grows in the second half of the year as hospital census rises during cold and flu season, putting us in a good position to capture that demand. For CSuite, challenges persist. Much of their business is recruiting permanent accounting staff for private equity portfolio companies, and hiring has been slow due to business optimism concerns. There is a large backlog of retained searches and interim CFO work, but closing deals has been slow. Timi is pushing hard to move these along, and we are hopeful sentiment improves in the second half. The backlog and pipeline of deals are as strong as we've seen.

06/11/2024 What is the appropriate time frame to measure success after acquiring a business?

There is always a J-curve when transitioning a new CEO into an acquired business, starting with team assessment and growth investments. After about 18 months, the CEO gains experience, and real progress begins. The 3-year mark is a good point to assess success. For example, Timi acquired Ravix three years ago when its trailing twelve months (TTM) EBITDA was around $1.7 million. Since then, he has learned the business, built and optimized the team, improved pricing, and focused on business development, nearly doubling EBITDA despite a tough private equity M&A environment in the first nine months of this year.

06/11/2024 What is happening with DDI’s growth and EBITDA, and when will EBITDA improvements show in the financials?

DDI’s growth is entirely inbound; they currently have no sales force, which we plan to build. Because they monitor patients, safety and quality are paramount. We have been cautious about adding volume to ensure a reliable monitoring experience. To prepare, we hired EKG technicians ahead of onboarding new customers and opened a second operations facility in Salt Lake City for redundancy and access to talent. These investments in people and facilities were necessary to handle the pipeline and scale. We expect to see bottom-line profitability start to improve now that capacity is in place.

06/11/2024 Is the major investment in DDI behind you, and when will operating leverage begin?

Most of the big investment is behind us. We expect to start seeing operating leverage even in the fourth quarter of this year.

06/11/2024 How is the pipeline tracking with KPIs and new deals, especially after the recent presidential election?

We are very active. Our monthly KPIs show incredible activity, focusing on lead measures that are both influenceable and predictive of lag metrics like letters of intent and acquisitions. Top-of-funnel proprietary outreach, NDAs signed, and conversations with business owners are exceeding internal goals. We did incur some costs this quarter related to broken deals, which is part of due diligence. With four OIRs, we expect to complete two to three acquisitions annually, subject to the unpredictable nature of lower middle market buyouts.

06/11/2024 What is the expected EBITDA impact in Q4 and 2025 from Hurricane Helene delaying hardware installations at Image Solutions?

I prefer not to provide specific guidance. As mentioned in the prepared remarks, the revenue from equipment installations is delayed, not lost. As businesses in the region reopen and focus on replacing existing technology, we will resume hardware installations. A large portion of Image Solutions’ revenue comes from monthly contractual recurring service and IT help desk revenue, which was unaffected. We believe the hardware sales and installations are pushed out by about two months rather than lost.

06/11/2024 What are the attractive dynamics of the SNS market and business outlook?

The SNS market is driven by supply and demand. There is a persistent shortage of nurses in the U.S. that is unlikely to be resolved soon, as nursing schools cannot produce enough graduates to replace an aging workforce or meet growing healthcare demand. Recently, the pandemic caused a surge in demand for nurses, leading hospitals to rely heavily on contingent labor, which increased costs and attracted many new staffing entrants. Over the past 12 to 18 months, the industry has been sorting out, with hospitals pushing back on contingent labor use and negotiating prices. Some new entrants will likely exit. We believe SNS is well positioned to benefit from these long-term trends. In the quarter, travel nurse shifts increased 73% year-over-year. The per diem business was slightly down due to the hospital census but is expected to rebound. Charles has professionalized the business with new technology and recruiters, positioning it well for future growth.

11/01/2025 What types of businesses do you acquire, and what growth prospects do you look for?

We target businesses in industries growing faster than GDP with strong organic growth potential. We also consider companies in fragmented industries with opportunities for growth via acquisitions, though we prefer capital-efficient strategies. Operators typically run a single company for a year or two to learn the business and industry before pursuing acquisitions, ensuring equity capital efficiency and deleveraging the balance sheet.

11/01/2025 What is your view on warranty businesses, and would you buy more?

We like warranty businesses for their diversified, contractual prepaid revenue at high margins and negative working capital. However, their industry dynamics are more cyclical and tied to consumer and credit cycles. We would need compelling unit economics or a specific niche to pursue acquisitions. While attractive to many buyers, valuations have been high, so we’d be opportunistic, likely supporting acquisitions through existing companies or operators rather than buying directly.

Risks & Macro

10/11/2022 What is the status and strategy regarding the sale of your non-recourse real estate debt?

We are currently working on strategies to achieve the best possible return on those assets. Beyond that, I cannot provide further details at this time.

08/02/2023 Is the rise in interest rates affecting deal pricing or credit availability

In the lower middle market where we operate, deal multiples and availability of credit are not significantly impacted. Cost of capital has increased, which may cause sellers to adjust their valuation expectations, but based on our limited data, the impact is minimal. The availability of capital remains strong, especially for the types of traditional, low-leverage bank lending structures we use.

20/05/2023 What happens when a search investment underperforms, and what rights does Kingsway have to exit or cut losses?

As the majority shareholder, Kingsway has significant contractual rights. However, this is a talent-first model, so if the business is performing well, the key factor is whether the Searcher/operator wants to continue running it. If the Searcher decides it’s time to seek liquidity, we would likely support that decision. If the Searcher wants to sell, we don’t envision a scenario where we would oppose it.

If a business underperforms or the Searcher isn’t executing well, we approach it from a talent perspective. If the deal was sound but the Searcher is managing through tough times, we continue to support them and have candid conversations about whether to cut bait. The Searchers are the largest investors in these acquisitions, committing their careers and opportunity costs, so if they want to continue and are doing the right things, we back them. If not, we agree to exit. This balance respects both the capital provider role and the Searcher’s personal investment and incentives.

11/09/2023 How fragmented is the niche industry, and what is the customer concentration for SPI?

Customer concentration is low. The timeshare industry has big names like Marriott Vacation Club and Hilton Grand, but many operators are smaller and fragmented, with one to a few resorts. This fragmentation is similar to real estate markets that won’t consolidate nationally. SPI is positioned to serve all these customer types. Industry consolidation trends could present opportunities depending on how they unfold.

11/09/2023 What percentage of the market do the big public timeshare companies hold?

We don’t have exact numbers but consider the industry in Phase 3 of consolidation.

31/10/2023 What are the main risks if the business does not succeed?

It’s hard to specify without knowing exact causes. We conducted thorough diligence over seven months, interviewing over 20 industry participants, and feel confident in the business’s competitive position and loyal customer base.

20/05/2024 Why won’t you face massive competition buying businesses at 5-6x EBITDA while trading at 10-12x?

It’s hard to do well. We’re building the muscle to succeed. Most start at the lower end of the middle market and pay higher multiples as they move up. We’ve found a unique sweet spot, but it’s difficult. The search fund model helps by bringing talented people focused on one business, then transitioning to run it, solving the hard-to-scale problem.

22/01/2025 Are any industries more attractive now due to the election or other factors?

We focus on long-term secular growth trends, such as aging populations or water scarcity, which provide secular tailwinds. Election outcomes don’t significantly alter our core thesis on industries. We are very focused on the potential impact of artificial intelligence (AI), both the risks it poses to B2B service companies and the opportunities to leverage AI for efficiencies in the businesses we own or will own.

Personal Questions

10/11/2022 How do you identify qualified search entrepreneurs, and what gives you confidence in continuing to find them?

We source candidates through multiple channels. The Entrepreneurship Through Acquisition (ETA) community is close-knit, and we remain active in it, including through our investment firm Argo Partners, which invests in search funds. We also recruit actively at top business schools via presentations and job postings, generating inbound interest. Referrals from existing operators and residents are common, often through shared backgrounds and networks. ETA has become a popular postgrad career path, and Kingsway offers a differentiated model that attracts candidates.

20/05/2023 How is the incentive alignment structured between Kingsway and operators like Timmy regarding capital returns and upside participation?

The Searcher, such as Timmy, is incentivized to return capital to Kingsway because he stands behind Kingsway’s preferred equity. Until Kingsway recovers its invested capital plus preferred return, Timmy does not participate in the upside. This creates a balance between growth incentives and financial discipline. The structure avoids the classic tension between sales and finance by aligning interests.

20/05/2023 Can you describe the deal terms and equity vesting structure in the search accelerator?

When we acquire a business, Kingsway provides capital as preferred equity with a preferred return. The Searcher can participate in up to 25% of the common equity, while Kingsway retains at least 75%. Before the Searcher earns economic upside, they must return all capital plus the preferred return. The common equity vests in three parts: one-third vests at closing as a reward for closing the deal, one-third vests over time, and the final third vests based on achieving IRR hurdles, no vesting below 20% IRR, fully vested at 35% IRR on a sliding scale. This structure aligns incentives to first return capital and then share in equity value creation.

11/09/2023 Why do you think your skill set is suited to run this business, and how do you plan to improve it over the next year or two?

I’ve had diverse leadership experiences, starting in the armed services and moving through various corporate roles. In lower middle market businesses, especially software, successful operators can be technicians or industry specialists, but eventually, you need an integrator who brings the pieces together. That person may not be a technical or industry expert. My approach is to take time to learn the business, build credibility, and then apply lessons from other contexts to improve the company.

31/10/2023 What value can you and Kingsway add to the business beyond the seller’s capabilities?

The seller, Tom Korny, and his wife, Marissa, built a great business and team. I bring energy and focus on growth, supporting the existing team, building out sales and frontline staff, and applying my background in process improvement.

11/01/2025 What intrinsic qualities do you look for in your operators?

We focus on five key attributes we call the five Hs, in ascending order of priority: first is "horizon," meaning intellectual capacity and omnipresent curiosity, we want lifelong learners. Next is hunger, an insatiable desire to succeed with grit, tenacity, and perseverance. More importantly, humility is crucial, the ability to admit what you don’t know and seek advice. Most importantly, especially in a decentralized structure, we value honesty, including unimpeachable integrity and transparency.

11/01/2025 Do you have a specific process to evaluate these qualities over time?

Yes, over the last 20 years, through trial and error, we’ve developed a robust screening and interview process to identify these attributes. While there’s no perfect formula for what an entrepreneur looks like or the expected return, we focus heavily on these qualities during interviews to assess fit and potential.

11/01/2025 How do you assess the five Hs during interviews?

We use a process called top grading, a thorough interview method starting with resume screening and cultural fit assessment, followed by competency-based interviews. Then, we conduct a comprehensive chronological structured interview covering their history from high school to present, focusing on career inflection points. We also emphasize reference checks early in the process, talking to people the candidate has worked with to drill down on those attributes.

25/03/2025 What is Rob's background in the HVAC and plumbing industry?

Most recently, I oversaw five businesses at Orion. We had two large regional HVAC companies with combined revenue of just over $90,000,000 serving more than 30 states. On the plumbing side, I managed three businesses with combined revenues approaching $50,000,000 operating in five states. Orion as a whole is a combination of over 40 skilled trades businesses with more than $1,000,000,000 in revenue assembled over approximately five years.

23/04/2025 How are presidents compensated during the search phase and equity participation structured?

We pay presidents roughly the same very low salary during the search phase, with an equity opportunity that offers up to 25% upside participation in the common stock, invested in three equal tranches. It’s nearly identical across the board.

Other

10/11/2022 Is expanding your shareholder base and investor relations a priority alongside growing the business?

Yes. We recently switched investor relations firms and are now focused on expanding our group of high-quality, long-term shareholders who are engaged and understand the company. We are developing a campaign to tell our story to attract such investors.

10/11/2022 Have you retired five of six TruPS debt series at an average cost of $0.65 on the dollar, including deferred interest?

Generally accurate. We have options to retire TruPS debt on five of six series at between 63% and 63.75% of the cumulative outstanding principal plus deferred interest up to August 2nd, which is slightly less than the deferred amount shown on our 9/30 balance sheet.

10/11/2022 What synergies exist between Ravix and CSuite, and are additional acquisitions planned for Ravix?

We dislike the term "synergies" as they often fail to materialize, but these businesses are complementary. Ravix provides outsourced accounting and HR services, including fractional CFOs, mainly to venture capital portfolio companies. CSuite offers interim CFO services and CFO placement, referring lower-level accounting and HR work to competitors of Ravix. Combining them allows cross-referral of services and a more comprehensive offering. On the cost side, Timi will run both businesses, eliminating one redundancy, but we do not model cost synergies and treat acquisitions as standalone. Regarding further acquisitions, the focus is first on integrating CSuite smoothly. After deleveraging, we expect to pursue additional opportunities; over 200 potential targets have been identified, but prudence and patience are key.

10/11/2022 How does the Ravix earn-out work, and when are payments due?

The earn-out is based on cumulative gross profit exceeding a hurdle over three years post-closing, capped at $4.5 million. There are two accelerated payment dates: the first was paid $750,000 at the end of October following the first accelerated timeline, and the next is due next October with a potential $375,000 payment if targets are met. The final payment is in October 2024, equal to the cap minus prior accelerated payments. As of Q3, we accrued about $4 million of the liability. The earn-out rewards outsized growth beyond management’s projections at closing.

09/05/2023 Can you explain the $1.1 million unrealized gain related to Limbach shares and your plans for those shares?

The gain relates to warrants we received in Limbach as part of a back sponsorship Kingsway did in 2016 when Limbach went public via a reverse merger. We have $400,015 strike warrants in Limbach, which are available for cashless exercise and expire in July. If the stock price is above the strike price, we will exercise them cashlessly.
The shares will be restricted for six months, after which we can monetize the asset.

09/05/2023 Have you exercised the Limbach warrants yet, and what are your plans regarding them given the recent stock price increase?

We tested the cashless exercise process to ensure we understood all mechanics and could execute timely. We exercised a small portion recently. The plan is to wait through earnings and the potential addition to the Russell index, then monitor stock momentum heading into expiration. We aim to maximize value, leveraging the option to delay exercise if the stock price continues to rise.

31/10/2023 How was the deal sourced, and can you describe your search process with Kingsway?

A year into the search, we progressed far with a fire inspection deal but backed out due to concerns about its recurring revenue profile. We chose to be disciplined investors and wait for a better fit, which is advice we give future searchers: develop rigid acquisition criteria and stick to them, even if it means turning down opportunities early on. This diligence process took seven months, reflecting the thorough understanding required of the space and business.

31/10/2023 How did you find the business and decide it was the right one to pursue?

The deal began as a brokered opportunity but quickly transitioned to a direct relationship with the seller CEO. From the start, we worked closely with the CEO to understand the business. We conducted extensive customer and market diligence, interviewing over 20 industry participants, including cardiologists, AI and wearable experts, and current customers.

31/10/2023 Can you explain the customer need for cardiac monitoring in these hospitals?

DDI’s core market is two hospital business models: inpatient rehab hospitals (60% of revenue) and long-term acute care hospitals (40%). Inpatient rehab hospitals historically did not provide cardiac monitoring, so outsourcing allows them to keep patients longer onsite, improving continuity of care and reducing ambulatory costs. For long-term acute care hospitals, ECG monitoring is required for 99% of reimbursement codes, making it essential for revenue.

31/10/2023 Do long-term acute care hospitals outsource monitoring or do it themselves?

They have systems installed but outsourcing ECG monitoring unburdens hospital staff, allowing them to focus on other tasks.

07/11/2023 How do you plan to disclose business performance as the portfolio mix shifts toward higher-growth acquisitions?

Currently, the Kingsway Search Xclerator (KSX) is treated as a single reportable segment under U.S. GAAP, with internal focus on similar business profiles. We unpack individual business performance within that segment and plan to continue providing quarterly updates in our investor deck. Warranty remains a valued, more mature business with diversified contractual prepaid revenue and investable float. While we may not create separate reportable segments within KSX, we will break out and discuss underlying performance quarterly, balancing transparency with competitive considerations.

Sources

Kingsway Financial Services Inc. (NYSE: KFS) Webcast | Planet MicroCap Showcase: VEGAS 2025

Kingsway Financial Services: Revolutionizing the Search Fund Model

Kingsway Financial Services Inc.

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