A search fund is a vehicle that allows aspiring entrepreneurs, who do not possess executive level management experience, to find, acquire, manage and grow existing successful businesses. In this article, we explore the details of search funds, examining their financial backers, the backgrounds of supported entrepreneurs, acquisition strategies, financing mechanisms, equity distribution, and draw comparisons with Management Buy-Ins (MBIs).
Understanding the Search Fund Model:
A search fund is an investment vehicle where an entrepreneur, known as the searcher, raises capital from investors, the financial backers, to identify, acquire, and manage a privately-held company. The search fund model provides a structured approach to entrepreneurship by combining the entrepreneurial spirit of the searcher with the financial support of investors.
Typical Financial Backers:
The financial backers of search funds are typically high-net-worth individuals, family offices, and institutional investors seeking to diversify their portfolios. These backers are drawn to the potential returns generated by successful acquisitions. The searcher, having committed a significant personal investment, aligns the interests of the backers with their own, fostering a shared goal of identifying and nurturing profitable business ventures.
Entrepreneurial Backgrounds:
Search fund entrepreneurs come from diverse backgrounds, including recent graduates from top-tier MBA programs, experienced professionals seeking a shift into entrepreneurship, or industry experts looking to leverage their sector-specific knowledge. The common thread among these entrepreneurs is a deep commitment to the search process and the skills necessary to identify and manage a target company successfully.
Acquisition Strategies:
The process of finding acquisition targets is a critical component of the search fund model. Searchers employ a combination of industry research, networking, and outreach to identify potential companies. Proprietary deal flow, where relationships and industry knowledge play a crucial role, is often prioritized, giving searchers a competitive edge in sourcing high-quality opportunities.
Financing Mechanisms:
Once a target company is identified, searchers turn to their financial backers for the necessary capital to complete the acquisition. Financing structures can vary but often involve a combination of equity and debt. The searcher typically retains a significant equity stake in the acquired company, aligning their interests with the ongoing success and growth of the business.
Equity Distribution:
The final share of equity for a searcher in the acquired company is a negotiated aspect of the deal. It commonly ranges from 10% to 30%, reflecting the searcher's commitment to the business and their alignment with the financial backers. This distribution ensures that the incentives of both parties are closely aligned, fostering a collaborative and mutually beneficial relationship.
Comparing Search Funds with MBIs:
While both search funds and Management Buy-Ins (MBIs) involve entrepreneurs acquiring and managing businesses, there are key differences. In a search fund, the entrepreneur raises funds before identifying a target, whereas in an MBI, the entrepreneur typically identifies the target first and then seeks financing. Search funds often involve a structured search period, distinguishing them from the more immediate and targeted nature of MBIs.
Q&A Section:
1. What is a search fund?
A search fund is an investment vehicle where an entrepreneur raises capital from investors to identify, acquire, and manage a privately-held company.
2. Who are the typical financial backers of search funds?
Financial backers are typically high-net-worth individuals, family offices, and institutional investors seeking diversification.
3. How are acquisition targets found by search fund entrepreneurs?
Searchers use a combination of industry research, networking, and outreach to identify potential companies, often relying on proprietary deal flow.
4. How are search fund acquisitions typically financed?
Acquisitions are financed through a combination of equity and debt, with the searcher retaining a significant equity stake in the acquired company.
Enquiries
For further information, please contact info@langdoncap.com
About the author
Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
Langdon Capital assists innovative, high-growth companies, with >£1m in annual revenue and >30% in annual revenue growth, raise between £1m and £25m in debt or equity at Series A and later funding rounds from a network of alternative investors spanning venture capital funds, corporate VC arms, family offices, venture debt funds, private credit funds, real estate funds and hedge funds.
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