A quick intro to the raising asset class of Search Funds - an investment vehicle in which 1 or 2 entrepreneurs ("searchers") raise money from a group of investors to search, acquire, manage and sell a company.
Tech Framework Integrated Workspace Management System
Search Funds One Pager
1. 25MARCH2017Search Funds One-PagerMichael Gallant
;
Summary:
A search fund is an investment vehicle in which 1 or 2 entrepreneurs ("searchers")
raise money from a group of investors to search, acquire, manage and eventually
sell a company.
The vehicle is similar to a one-time private equity fund (although deals are usually
too small for PE), and comprises of 5 phases:
The searchers: [i] raise first round of capital of about $500k to fund the search [ii]
search for 1-2 years for a cash flow company in a simple, stable industry [iii] find a
company that is agreeable to the investors, complete due-diligence, raise a second
round of capital (preferably pro-rata from first-round investors), and close the deal
in debt and equity [iv] assume management positions, operate and grow the
company [v] sell the company, generating value for the investors and entrepreneurs.
The model was developed in 1983 in Stanford business school (GSB) and close to 300
funds have been raised since. The search fund model is attracting attention because
it returned an average ROI of 35% (with preferred equity to investors), presents
optionality for the investors (a "call" option - the investor sponsors the search, but
can choose whether to buy into the company), and gives exposure to various
industries without having to do the legwork.
Deal Data (companies bought, excluding search process):
1) Median EBIDTA = $2.2M; Revenue $9M (25% margin); Purchase price $11M (X5
EBITDA)
2) 53% of deals yield positive returns (see distribution in chart)
3) Main reasons for value destruction – (i) low industry growth (ii) over-complex
operations (iii) execution failure (iv) bad dynamic between searchers and investors
(v) conflict with previous owner
Searchers Data:
a) # of searchers – 50% single searchers, 50% in couple; 95% men
b) Median age is 31, 80% of searchers are 1-3 years after their MBA
c) Background from private equity, investment banking, general management and
consulting
Search-Fund Data:
I) Common industries – Services (including retail, B2B, logistics), IT and Healthcare
II) Average capital raised to search - $420k; average number of investors – 15;
average time to raise first round (search capital) – 4 months; average equity per
searcher - 20%
III) Average time from first round raised to deal closed – 18 months; average life
cycle of a fund – 8-10 years [0.5 years to raise first round, 1.5 years to close, 5-7
years to operate, 1 year to sell]
Sources: INSEAD Realizing Entrepreneurial Potential course material, by Prof. Ivana Naumovska, based on Stanford GSD 2016 Search Fund Study
![25MARCH2017Search Funds One-PagerMichael Gallant
;
Summary:
A search fund is an investment vehicle in which 1 or 2 entrepreneurs ("searchers")
raise money from a group of investors to search, acquire, manage and eventually
sell a company.
The vehicle is similar to a one-time private equity fund (although deals are usually
too small for PE), and comprises of 5 phases:
The searchers: [i] raise first round of capital of about $500k to fund the search [ii]
search for 1-2 years for a cash flow company in a simple, stable industry [iii] find a
company that is agreeable to the investors, complete due-diligence, raise a second
round of capital (preferably pro-rata from first-round investors), and close the deal
in debt and equity [iv] assume management positions, operate and grow the
company [v] sell the company, generating value for the investors and entrepreneurs.
The model was developed in 1983 in Stanford business school (GSB) and close to 300
funds have been raised since. The search fund model is attracting attention because
it returned an average ROI of 35% (with preferred equity to investors), presents
optionality for the investors (a "call" option - the investor sponsors the search, but
can choose whether to buy into the company), and gives exposure to various
industries without having to do the legwork.
Deal Data (companies bought, excluding search process):
1) Median EBIDTA = $2.2M; Revenue $9M (25% margin); Purchase price $11M (X5
EBITDA)
2) 53% of deals yield positive returns (see distribution in chart)
3) Main reasons for value destruction – (i) low industry growth (ii) over-complex
operations (iii) execution failure (iv) bad dynamic between searchers and investors
(v) conflict with previous owner
Searchers Data:
a) # of searchers – 50% single searchers, 50% in couple; 95% men
b) Median age is 31, 80% of searchers are 1-3 years after their MBA
c) Background from private equity, investment banking, general management and
consulting
Search-Fund Data:
I) Common industries – Services (including retail, B2B, logistics), IT and Healthcare
II) Average capital raised to search - $420k; average number of investors – 15;
average time to raise first round (search capital) – 4 months; average equity per
searcher - 20%
III) Average time from first round raised to deal closed – 18 months; average life
cycle of a fund – 8-10 years [0.5 years to raise first round, 1.5 years to close, 5-7
years to operate, 1 year to sell]
Sources: INSEAD Realizing Entrepreneurial Potential course material, by Prof. Ivana Naumovska, based on Stanford GSD 2016 Search Fund Study](https://image.slidesharecdn.com/searchfundsonepagermichaelgallant-170406124029/85/Search-Funds-One-Pager-1-320.jpg)
