Types of Search Fund Investments
nvesting in search funds can be an attractive proposition for investors looking for above-market returns. However, understanding the different types of search funds and their respective advantages and disadvantages is crucial. Here, we explore the various types of search fund investments—self-funded, traditional, accelerator-backed, and solo-sponsor—and their pros and cons from an investor's perspective.
Self-Funded Search
Description: Self-funded searchers use their own capital to finance the search process. They often seek smaller companies with innovative acquisition structures and have the freedom to choose the type of business and its location.
Pros:
High Equity Retention: Self-funded searchers often retain a significant portion of the equity (51-100%), providing investors with potentially higher returns.
Flexibility: Self-funded searchers have more freedom in their acquisition choices and methods.
Innovation: These searchers tend to employ innovative structures and acquisition methods, often resulting in attractive deals.
Cons:
Higher Risk: Self-funded searchers bear more personal financial risk, which might translate into higher operational risk for investors.
Loneliness: Lack of official support can make the journey isolating, though there are supportive communities like Slack and Searchfunder.
Resource Intensive: Investors might need to provide more hands-on support and guidance .
Traditional Search Fund
Description: Traditional search funds are backed by a group of investors who provide initial capital to cover search and due diligence expenses. Searchers typically receive a salary during the search phase.
Pros:
Reduced Risk: Searchers receive financial support and guidance, reducing their personal financial risk.
Experienced Investors: Backing from seasoned investors can lead to better acquisition decisions and successful operations.
Structure and Support: Traditional search funds offer a structured process and access to a network of advisors.
Cons:
Lower Equity for Searchers: Searchers typically receive only 20-30% of the equity, which might limit their motivation and impact investor returns.
Passive Investors: Some investors may be less involved, potentially leading to less strategic guidance and support .
Accelerator-Backed Search
Description: Accelerator-backed search funds offer a combination of salary, benefits, training, and tools to searchers. These programs aim to reduce the financial, time, and emotional burdens of the search process.
Pros:
Comprehensive Support: Accelerators provide day-to-day support, training, and resources, making the process smoother for searchers.
Cohort Collaboration: Searchers benefit from being part of a cohort, promoting collaboration and shared learning.
Lower Financial Risk: Searchers receive a salary and benefits, reducing their personal financial risk.
Cons:
Equity Dilution: Equity is often shared among cohort members, potentially diluting returns for investors.
Control: Accelerators may retain control over deal flow and acquisition decisions, limiting the searcher's autonomy and possibly impacting the quality of deals .
Solo-Sponsor / Family Office
Description: Solo-sponsors or family offices support a limited number of searchers, combining elements of traditional and accelerator-backed models. They offer significant capital, experience, and long-term partnership.
Pros:
Long-Term Focus: These investors are more focused on long-term results, often preferring stable, low-growth industries.
Significant Resources: Family offices and solo-sponsors have substantial resources and pre-established relationships with lenders and advisors, facilitating smoother transactions.
Attractive Terms: These investors can offer favorable financing terms and are often willing to provide significant operational support.
Cons:
Less Control: Searchers might have less control over specific acquisition choices due to the need for investor approval.
Narrow Focus: The long-term, low-growth focus might not align with all investors' return expectations .
Conclusion
Each type of search fund investment offers unique benefits and challenges. As an investor, it's essential to align your investment strategy with the characteristics of the search fund model you choose. Understanding the nuances of each model can help in making informed decisions and optimizing returns on investment.
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Investing in search funds can be highly rewarding, but careful consideration of the structure and support mechanisms of each type is crucial to mitigate risks and maximize returns.
