What is a Search Fund?
The traditional search fund model was developed at Stanford University and the model has been active since approximately 1984. The market has tended to be very US focused and has experienced rapid growth in the past 10 years. From 1984 through to 2017, almost US$1 billion of equity capital has been invested into search funds generating an aggregate equity value for investors of US$5.7 billion. The model generally involves a recent MBA graduate from a top‑rated business school who is looking to become an entrepreneur searching for and then buying control of a small private business.
The traditional search process can be broken down into the five following steps:
1
Raise Search Capital
Key Activities
- Raise capital to fund the search
Timelines
- 3 – 6 months
2
Source and Evaluate Opportunities
Key Activities
- Generate proprietary and brokered investment opportunities
- Up to 24 months from fund close
Timelines
- Up to 24 months from fund close
3
Finance and Close a Transaction
Key Activities
- Perform due diligence
- Arrange debt financing
- Arrange equity financing, ideally from the search capital investor group
Timelines
- 3 – 12 months from opportunity identification
4
Operate the Business
Key Activities
- Operate and grow the business
Timelines
- 4 – 6 years
5
Exit the Business
Key Activities
- Sell to new investors, which may include private equity or strategic buyers
Timelines
- Typically a 6 month process
By participating in the seed round and providing the initial search capital, investors are given the option to participate in the ultimate acquisition if the searcher is successful in finding a business to acquire. In cases where the searcher is unsuccessful in finding a business to acquire the seed investors write-off the amount of their seed investment. In the event that the searcher is successful in finding a business to acquire, the seed investors have the option (but not the obligation) to either take up their pro rata share of the acquisition, ask to subscribe for more than their pro rata share, or, if they are not satisfied with the abilities of the searcher or the disapprove of the business itself, they can elect not to participate in which case the seed investor is entitled to 1.5 times their initial investment in form of either cash or equity in the acquired business.