Search Funds- An Alternative Buyer Group

When entrepreneurs and their advisors consider the options available for a full or partial exit of their business, potential buyers will broadly fall into two buckets – private equity or trade. In terms of private equity, this may prove problematic where the business is over reliant on the exiting shareholder(s) (often the founding management team) and/or, there is no clear management succession plan. However, in these circumstances, Search Funds have emerged as an alternative buyer group in the lower mid-market.

A Search Fund is an investment vehicles formed by aspiring entrepreneurs to acquire and operate a single privately-held company. Unlike traditional private equity, search funds focus specifically on acquiring and actively managing a single business rather than investing in a portfolio of companies. Search Funds are either funded (i.e the Searcher raises capital from a mix of high net worth investors, family offices and institutional investors on the formation of the fund and the investors have pre-emption rights to follow their money when the acquisition is found) or they are more informal and unfunded with the Searcher having commitment from investors in principal to invest at the point of the acquisition.

We have recently completed a sale of PCB fabrication and assembly business, Garner Osborne. We concluded early in the process that a sale to a Search Fund best met the objectives of the major stakeholders. The founder and principal shareholder, who was in his early 60s and still CEO, was looking to retire from his business and the Operations Director, who was a minority shareholder, had ambitions to take the business forward. The founder was attracted at the idea of his legacy continuing, however, there was no succession solution for his retirement and a CEO with strong sales credentials was required to compliment the skills of the remaining management team. We spoke to an institutional investor who has supported circa 20 Searcher Funds and asked if they had any Searchers with specific experience in this sector, which they did. The relationship between the remaining management team and the Searcher (who is  looking to take on the role of the running the business) is key to the success of any Search Fund investment, and after a number of meetings both the Searcher and the remaining management team were comfortable they could work with one another going forward and the Search Fund made an offer for the business which was successfully completed, with the Searcher stepping into the business as CEO.

Whilst it is dangerous to generalise, it would appear from our experience that the funded searchers are typically accomplished business operators (with first hand knowledge of running a business, or division of a larger organisation) looking to own their first business and many of the unfunded searchers are accomplished investors (maybe with a private equity background) looking to personally lead their own investment. Whilst in these circumstances, the funded searcher will typically provide the neater solution to management succession, given the likely lack of deal experience, it is essential that they have strong corporate finance and other advisors particularly where they need to navigate through a competitive auction. In these circumstances, they really are offering the best of both worlds.

Share this Article

Andrew Thomson

Partner