What better way to show how special Search Funds are than sharing with you the story of one of the first successful European Search Funds. Meet Marc Bartomeus.

When Marc graduated from MIT Sloan with an MBA, he didn’t jump into a consulting role or join a large firm in Silicon Valley. Instead, he returned to his native Spain and raised the country’s first Search Fund. In 2014, after searching for 3 years, he successfully acquired Repli, a plastic packaging company with €17 million in annual revenues. The original founder had run the business since 1988 and wanted to retire. After running and developing the business for 6 years, he successfully exited in 2020 offering an impressive return on investment for its shareholders. 

Since then, Search Funds have been growing in popularity in Europe. According to IESE’s International Search Funds 2020 report, when looking at the recorded number of Search Funds raised between 2013 and 2019, we can see that Search Funds have become one of the fastest-growing niches in the alternative investment sphere. 

We believe Search Funds are one of the most exciting asset classes in private equity today, and we would like to share with you exactly what the concept is, and what makes it so special.

What are Search Funds? 

The term “Search Fund” was coined by Irvin Grousbeck, a professor at the Stanford Graduate School of Business, back in 1984. Search Funds are an investment vehicle for entrepreneurs – providing them with the means to acquire and grow an established but stagnating SME, rather than build a start-up business from scratch.

Alex Hodgkin, an MBA graduate and co-founder of financial advisory firm Intrinsic states: “The first Search Fund was created when Professor Grousbeck helped some of his students secure investments from several alumni to fund their search for, and later acquisition of, a small business.”

Are Search Funds becoming more popular?

Search Funds have been well-established in the US for many years but were relatively unheard of in Europe until recently. Simon Webster, an investor and entrepreneur, was the first person to create a Search Fund in Europe in 1993.

Search Funds have been growing in popularity since and 83 international Search Funds (defined as those outside of the US and Canada) were tracked by IESE between 1993 and 2017 – a quarter of those (21 funds) appeared in the last year alone. The number of Search Funds being raised has been increasing

annually with over 50 new Search Funds formed in 2021 according to searchfund.org.

What are the benefits of Search Funds?

Search Funds offer numerous benefits to both entrepreneurs and investors. Here are the top five reasons why we believe Search Funds are so special:

1. An established SME is acquired

The most obvious benefit of a Search Fund is that it allows entrepreneurs to own, manage and scale an established SME. This is the opposite of the Venture Capital model where investors typically invest in startups. Acquiring a company that has been operating for many years reduces business risks significantly when compared to starting a company from scratch.

An entrepreneur can study the company in detail and talk to its customers and employees. Furthermore, SMEs are relatively simple to manage when compared to the complexity of larger corporations that other asset classes deal with. 

Stats show that 20% of small businesses fail in their first year and 50% of small businesses fail in their fifth year. Buying an established business like the SMEs that Search Funds deal with is a huge advantage as it reduces the risks significantly.

2. The business is run by a talented entrepreneur 

Entrepreneurship is the cornerstone of what makes Venture Capital work so well. This same concept is recreated in the Search Fund world. 

Search Fund investors invest in talented entrepreneurs with the skills and expertise to drive business success. Searchers are typically MBA graduates from top business schools (82% of searchers have MBAs according to Stanford) or entrepreneurs with experience in relevant fields such as private equity, investment banking, consulting and general management.  

Read our recent blog to learn about Search Funds from the entrepreneur’s perspective, with tips on how to buy a private company and impress investors.

3. The entrepreneur is supported by experienced investors

One of the biggest benefits for entrepreneurs is that many Search Fund investors have an in-depth knowledge of the industry and expertise across various sectors. This allows them to offer valuable support and advice that is crucial for entrepreneurs during the search and running of a company.

At Moonbase Capital, we believe that having a support network is essential for SME success, which is why we are taking it one step further. In addition to our partners offering entrepreneurs access to their extensive SME experience, we have also created an advisory group that can offer valuable support and guidance throughout the Search Fund process. 

4. Entrepreneurs can raise debt from banks  

One aspect that helps investors improve their IRRs in other asset classes is leverage. Entrepreneurs in Europe, for example, can get up to 70% financed by banks when acquiring SMEs. In addition to that, they may also be able to agree to seller financing as part of the business transaction. Seller financing is a type of loan that the seller gives to the buyer, of their business, to facilitate the sales process. 

Since the SMEs that searchers acquire are all making profits and producing cash, paying back the debt is a main value creation lever that helps SFs reach these high returns for investors.  

5. Investing in Search Funds allows for greater diversification 

Given that the average ticket size is just €500,000, Search Funds allow investors to invest in a high number of acquisitions. For example, Moonbase Capital is planning to invest in around 50 SMEs in Europe with a fund size of 30 million euros, whereas a typical private equity would need more than 10 times that much to reach that diversity. 

A report by IESE analysing Search Funds formed outside of the US and Canada found that 89% of the SMEs acquired through Search Funds made a profit.

Final thoughts

There is clear evidence to support the claim that Search Funds are one of the best performing asset classes in terms of returns, producing an impressive pre-tax IRR of 32.6% and a pre-tax return on invested capital of 5.5x. 

When looking at a report by Peter Kelly, a Lecturer in Management at Stanford, we can see that Search Funds have created roughly $6 billion (roughly £4.46 billion) in additional equity and investors have recouped almost 7x their original capital.

Would you like to learn more about how to get involved?

The Moonbase Capital partners share over 50 years of experience leading small and medium size businesses. We form partnerships with entrepreneurs and support them at every step of the Search Fund process. Get in touch if you would like expert guidance on Search Funds or have any questions. We are always happy to help!