What is a Search Fund?

Key Takeaway:

• The search fund model offers more stable and predictable returns to investors than venture capital and traditional private equity while providing mid-career professionals with the opportunity to run a company.

The search fund model (search fund) was first created by Professor H. Irving Grousbeck at the Harvard Business School in 1984 to help students raise capital to purchase their first business. It is now one of the most attractive asset classes in private equity. The Stanford 2024 Search Fund Study found that 681 search funds were in operation in the United States and Canada.

A search fund involves a mid-career business professional, termed the “searcher,” who is funded by a source of capital (typically from investors or a search fund program). The searcher searches for and acquires a target company to manage and to later sell at a profit. Searchers typically target small-to-medium-sized companies, valued between $5 million and $30 million, in operation for more than 10 years in large, fragmented markets where cash flow is stable. Once the search fund sells the company, the searcher leaves with executive level experience, and investors leave with a positive return on investment.

Search Fund Model Benefits

The success rate is in the searcher and investor’s favor under the search fund model. More than half of searchers ultimately acquire a target company, and of those, almost 70% increase the company’s overall value resulting in a positive return on the initial investment.

Not only does the searcher quickly gain high-level executive experience by owning, operating and growing a business, but also, depending on their arrangement with investors,  the searcher has potential to earn equity in the acquired company.

Investors can profit from the capital gained in the search fund as well. According to the Stanford 2024 Search Fund Study, search funds have an average IRR of 35.1% and an average ROI of 4.5x. Investors can also take a more proactive and hands-on approach in their investment. In a search fund, an investor invests in the searcher’s ingenuity and grit as much as in the target company.

Navigating the search fund model for the first time can be difficult. Fredrikson attorneys are well-versed in the search fund model and ready to guide entrepreneurs and investors through every stage of the process. Stay tuned for more insights.