Search Fund investing has been a small niche segment of the private equity market for over 30 years. As an asset class, its results have been stellar.
There is a basic two-step process to search fund investing:
- Search Round: Back talented entrepreneurs (‘Search Funders’) for up to two years so they can conduct a search process with the specific objective of identifying a company to buy. There are typically 10 to 12 investors participating in this round, each providing its pro-rata share of the total Search Round capital.
- Acquisition Round: Once a Search Funder has a company under Letter of Intent to purchase, the search fund investor has the option to invest its pro-rata share of the acquisition capital. But, if an investor decides not to invest, its initial Search Round investment would roll into the closed Acquisition Round at a 1.5x step up in value.
During the hold period of the investment, the entrepreneur will create a board of directors, drawing usually from its investor group. The board is responsible for oversight of the company and being a sounding board for Search Funders as they grow the businesses that they have acquired.
Our Investment Strategy
We back entrepreneurs who want to find a company that they will operate, grow, and successfully exit. We begin by working closely with entrepreneurs to support their efforts at identifying businesses that have a recurring revenue model and compete in attractive and growing markets.
Through the life cycle of the investment period, we interact with the entrepreneurs and advise them at every key phase: search process, deal structuring, due diligence and closing, upgrading management teams, investing in growth initiatives, implementation of key performance drivers, preparation for exit, and ultimately sale of the company.
LSFC believes that its partners can provide significant assistance to entrepreneurs in the following key areas:
- Choosing the right business to acquire. With our advice, there will be less room for error of choosing an unattractive business or a weak industry. We have seen hundreds of business models and made a number of good to great calls as well as learned what to avoid. Investing is an experiential business and we will leverage our experience to support Search Funders at making quality decisions.
- Getting the deal right. Closing a deal is often an art and not a science. We have been closing deals for 25 years. Structuring and negotiating a deal with the owner of a company requires a deft touch and awareness of key issues that can make or break a deal. Search Funders will be able to draw from LSFC’s experience while getting to ‘Yes’ with owners.
- Growing the business. Investment success ultimately depends on growing the acquired business. We have advised hundreds of entrepreneurs and managers in our careers and will bring to bear our 50 years of strategic, operating, and consulting experience to support Search Funders’ efforts at building and growing their businesses.
Additional Resources:
Stanford University Graduate School of Business: 2016 Search Fund Study
Stanford GSB Search Fund CEO Conference (2017): Conversation with Irv Grousbeck
Search Funds in Central Europe
Search Fund investing in Central Europe represents a unique opportunity that is akin to early search fund investing in the US. As we consider this geography, we are excited by the pool of search fund talent, availability of acquisition targets, and high growth rates of the economies.
Additional Resources:
IESE International Search Funds – 2016: Selected Observations