Our search fund team provides expert merger, acquisition, and capital advisory solutions for searchers at every stage of their journey. With years of market-specific industry experience our bankers can help identify viable acquisition targets and assist throughout the fund’s life cycle.
Our partners assist across the value-chain in identifying, engaging, and acquiring desirable businesses.
We link searchers with both the capital and connections to ensure our clients meet their capital and acquisition goals. Our platform, the DealMachine, features high-quality, vetted deals from a variety of industries and all with willing sellers. The best part: we don’t charge clients to view our sell-side inventory.
Our team has experience in the following industries:
• Media & Entertainment
• Real Estate
• Medical Technology
• Oil & Gas Production
• Software / SaaS
• Automotive Parts
• Metals & Mining
• Consumer Products
Our expertise and services for search funds includes raising acquisition capital and identifying acceptable targets for the fund. Through our deal flow we are able to help searchers connect with active sellers in a wide variety of industries, both domestic and global. Many searchers can attest that the search for a company to acquire can be both time consuming and frustrating. By having a steady supply of active sell-side deals we can help reduce the time taken to find a quality company to acquire.
The search fund model was introduced in 1984 by H. Irving Grousbeck, the Director of the Center for Entrepreneurial Studies at Stanford Graduate School of Business. The objective of the search fund model is to provide young and capable individuals (the “searcher”) with the opportunity to acquire and grow an existing business. Investors earn a return on their capital if and when the business experiences a liquidity event. This could include an IPO, acquisition by a private equity firm, or acquisition by a strategic buyer.
In the first stage, the searcher will seek to raise a small amount of capital. Typically, less than $400,000, this initial capital will provide the searcher with a modest salary and cover general and administrative expenses as they search for a target to acquire. The shortest part of the process, the initial raise is usually done in 4 months or less.
Once the target has been identified the searcher will conduct due diligence and, if everything checks out, will acquire the company and become the CEO. Prior to acquiring the business, the searcher will typical raise additional acquisition capital to cover the various expenses. Capital can come from the initial investors or a new group. The search can be a long process as a willing buyer must be identified and approached. This phase can last up to two years and more in some cases.
With the acquisition complete, the new CEO will be tasked with growing the business. This may be through growing revenues, expanding margins, add-on acquisitions, or diversification (product lines, geography, etc.). This is typically the longest part of the process and can last 4 – 7 years, or more.
Finally, the business is sold and the investors receive a return on their capital. The searcher also earns a portion of the sale proceeds for putting in years of hard work finding, acquiring, scaling, and exiting the business.
Search funds are typically started by individuals who come from a private equity, investment banking, or venture capital background. Many also have an advance degree, such as an MBA. Those who seek to raise a search fund are intrigued by the idea of running a company; however, they do not typically wish to build something from the ground up. Sometimes it is better to make the car go faster, rather than try and build a new car.
Any business venture comes with a healthy dose of risk. Search funds by nature seek to reduce some of the downside risk and focus on acquiring existing, profitable businesses. While some entrepreneurs are trying to create “the next big thing” from the ground up, search funds focus on businesses with a steady history of cash flows. The searcher will be tasked with finding an existing business that they believe can be scaled to create an acceptable return for all parties involved.
The pre-tax internal rate of return (IRR) for the asset class through 2015 is 36.7% with an aggregate pre-tax return on invested capital of 8.4x.
Returns to searchers upon exit after 5 – 7 years of operation have averaged $9M – $10M.
Phase 1: The initial search capital. Investing here provides pro-rata follow-on rights, and a stepped up conversion.
Phase 2: Investors provide acquisition capital once a suitable target has been identified. This usually comes with participating preferred stock and a 1x liquidation preference.
Phase 3: Bolt-on acquisitions and other growth strategies require capital, providing investors with further opportunities to invest in winners.