The Search Fund model dates back to 1984 when it was first introduced by professor Irve Grousebeck of Stanford Graduate School of Business.

Today, Search Funds are becoming more popular and we believe they are the most exciting asset class in Private Equity, with excellent Search Fund returns being reported.

A recent report by IESE shows that a record number of Search Funds were raised between 2013 and 2019. Peter Kelly, a Lecturer in Management at Stanford, estimates that Search Funds have generated approximately £4.46 billion of equity for investors since then. 

We’ve put this article together to discuss the key benefits that Search Funds offer to both investors and entrepreneurs – and why you should get involved in this innovative asset class.

What is a Search Fund?  

Before we discuss the benefits of Search Funds, you should understand what a Search Fund is and how they work.  

A Search Fund can be described as an investment vehicle for entrepreneurs which provides them with the means to take control of an SME, rather than start a new business from scratch.

The entrepreneur (also known as the searcher) will search for, and later acquire, an established company where they can inject new ideas and creativity. 

What makes Search Funds unique? 

Search Funds are unique as they leverage the stability and low risk of investing in SMEs whilst taking learning and inspiration from the agility and diversity of Venture Capital. This innovative investment model helps bring investors bigger and more consistent returns, with lower risks involved. 

The four stages of a Search Fund 

Stage 1 (fundraising): The Search Fund investment firm raises capital from investors to fund the search for a suitable company, along with other expenses like the Search Fund salary. A report by IESE states that Search Fund units/tickets typically range from £250,000 to £420,000.

Stage 2 (search and acquisition): A searcher contacts 100s of SMEs until a suitable target is identified. The Search Fund then moves into the acquisition stage and a deal is negotiated with the seller(s).

According to CFI Education: “An average searcher takes approximately 19 months to find and acquire a company.”

Stage 3 (growth): If the acquisition is successful, the searcher will become the CEO of the company and implement a business strategy to take it to the next level of growth. 

The average Search Fund salary in the first year post-acquisition is US$253,500 according to the 2020 Stanford Search Fund study.

Stage 4 (exit): During the last stage, the searcher (now the CEO) will look for new investors to buy the company. The profits from the sale are then divided between the Search Fund investors and the searcher based on pre-agreed matrices.

How do Search Funds benefit investors? 

Diversify your portfolio  

Search Fund investors typically invest in multiple SMEs and facilitate a varied and diverse investment portfolio. 

For instance, traditional Private Equity firms typically invest a minimum of £75 million in a single company and prefer to concentrate all their efforts on a few businesses, according to Investopedia.

Whereas, Moonbase Capital is planning to invest in roughly 50 SMEs in Europe with a fund size of approximately €30 million.  

Entrepreneurship and mentoring opportunities

Similar to Venture Capital, Search Funds are centred around the concept of entrepreneurship.

Search Fund investors support entrepreneurial talent by providing finance and business knowledge in order to obtain long-term capital gain. In many cases, Search Fund investors enjoy working with and supporting searchers. 

Reduce your investment risk

Recent statistics reveal that 90% of startups fail – this is the biggest risk of venture-backed investments. Search Funds allow entrepreneurs to take control of an SME that is already established and profitable. This approach is much less risky than starting a new business.

SMEs are also easy to manage when compared to the complexity of larger organisations that other Private Equity strategies typically deal with. 

Enjoy higher returns 

Studies show that Search Funds returns are some of the highest when compared to other asset classes in Private Equity.

A recent survey by IESE found that almost 90% of SMEs acquired through Search Funds make a profit. Studies reveal that Search Funds typically generate a pre-tax IRR of 32.6% and a pre-tax return on invested capital of 5.5x.

How do Search Funds benefit entrepreneurs? 

Fast-track to becoming a CEO 

A Search Fund allows talented entrepreneurs to take over an established business where they can inject new ideas. It is essentially a fast-track route to becoming the CEO of a profitable company. 

More and more MBA graduates are now finding this more appealing than traditional routes such as launching a startup or joining a corporation. 

Support from experienced investors 

In most cases, Search Fund investors have industry knowledge that is extremely useful to entrepreneurs during the search and running of a company. 

The managing partners of Moonbase Capital all have first-hand experience running SMEs and appreciate just how valuable a support network can be. This is why we also draw on the expertise of our advisory board which was created to support entrepreneurs at every step of their Search Fund journey. 

Less risk than a startup

As mentioned above, starting a new business is risky and a huge proportion of new businesses fail – 20% in the first year alone. It is much easier to take control of an established business and increase the profits it is already generating than to scale a startup from the ground up. 

How do Search Funds benefit business owners? 

Search Funds create good potential buyers for small and medium-size business owners looking to exit their companies. Here are some of the key benefits that Search Funds offer business owners:

• Search Fund entrepreneurs want to work with the existing management team to build the company post-acquisition, whereas traditional strategic buyers may seek to downsize the structure and headcount.
• Business owners can sell their companies to a talented entrepreneur with the drive, skills, and passion to succeed. 
• Search Funds give business owners the opportunity to pass their business onto a well-educated entrepreneur, which can be particularly attractive if they want to retire and don’t have anyone who can inherit the business. The Search Fund entrepreneur is supported by a strong network of investors who will help them drive business growth, so the owner knows their company is in safe hands. 
• Search Funds manage the acquired company for an average of seven years or more. When business owners sell to Search Fund entrepreneurs, they benefit from responsible, long-term investment management.
• With Search Funds, there may be co-investment opportunities which allow business owners to retain equity in the company even after the acquisition.

How can I get involved with Search Funds? 

The Moonbase Capital team has more than 50 years of experience managing small and medium-sized businesses.

We are passionate about supporting entrepreneurs to succeed in acquiring and managing an SME and we leverage our industry knowledge to identify companies with the highest growth potential.   

Get in touch if you would like to learn more about Search Funds or have any questions. You can also find lots of useful information and resources on our website.