How to Invest in Search Funds
Investing in search funds offers an exciting opportunity for accredited investors to participate in acquiring and growing privately held businesses. Whether you are a seasoned investor or new to this asset class, understanding the different avenues for investment is crucial. This article explores three primary methods: investing alone, joining an investor group, and investing through managed funds. Each approach has its own advantages and challenges.
Accredited Investor Requirement
Before diving into the specifics, it's essential to note that investing in search funds requires one to be an accredited investor. This designation typically means having a net worth of over $1 million, excluding your primary residence, or having an annual income of $200,000 ($300,000 for joint income) for the past two years with the expectation of earning the same or higher income in the current year.
Investing Alone
The Solo Act
Investing in search funds independently requires networking with search fund entrepreneurs, analyzing deals, and conducting due diligence. This method, historically a solo act, involves significant time and effort. Here are the key points to consider:
Networking: Building relationships with search fund entrepreneurs is crucial. This process can be time-consuming and may initially yield limited deal flow since the best deals are often invite-only.
Due Diligence: Investors must thoroughly analyze each deal. This involves assessing the target company's financial health, market position, and growth potential.
Investment Size: The minimum check size for the search portion of the fund is typically $50,000, while the acquisition phase often requires $100,000 to $150,000. This high entry point can make it challenging to diversify investments.
While investing alone offers full control and the potential for higher returns, it demands considerable time, expertise, and a strong network.
Investing Through Managed Funds
Set-It-and-Forget-It
Managed funds offer a more hands-off approach to investing in search funds. Here’s why you might consider this option:
Professional Management: Managed funds are run by investment managers who are often seasoned professionals with backgrounds in finance and investment banking. They dedicate their time to sourcing, analyzing, and managing investments.
Diversification: By pooling funds from multiple investors, managed funds can diversify across several deals, reducing individual risk.
Ease of Investment: This approach allows investors to entrust their capital to professionals, who will handle all aspects of the investment process.
However, managed funds typically charge a management fee and a performance carry. While this can still yield good returns, it may not appeal to those who prefer more involvement and lower fees.
Joining an Investor Group
The Middle Ground
For those seeking a balance between the two extremes, joining an investor group like Search Fund Ventures is an excellent option. Here’s how it works:
Deal Flow: As a member of an investor group, you gain access to a steady flow of vetted deals. This exposure is invaluable for learning and growing your network.
Smaller Check Sizes: Investor groups often use Special Purpose Vehicles (SPVs) to pool investments, allowing members to invest smaller amounts in each deal. This makes it easier to diversify your investments.
Due Diligence Support: Group leaders typically conduct a level of due diligence, reducing the burden on individual investors. This ensures that you are investing in well-researched opportunities.
Cost Savings: Unlike managed funds, investor groups generally do not charge management fees, only a performance carry. This saves money while still providing the benefits of professional oversight.
Joining an investor group offers a blend of professional diligence and investor education without the high fees associated with managed funds. It allows you to build your network, gain valuable insights, and invest alongside experienced peers.
Invest with SFV
Are you interested in gaining access to top-tier search fund deals and building your network in this exciting asset class? Learn more about joining our investor group. Contact us today to explore how you can benefit from our curated deal flow, professional diligence, and investment opportunities.
Investing in search funds can be a rewarding addition to your portfolio. Whether you choose to go it alone, join an investor group, or invest through a managed fund, understanding the pros and cons of each method will help you make an informed decision that aligns with your financial goals and risk tolerance.
