Why Invest in Search Funds? Here’s 8 Reasons.
You may be familiar with various asset classes such as venture capital, private equity, and real estate. However, one lesser-known, but burgeoning segment is the search fund. Search funds allow investors to back entrepreneurs, known as searchers, who seek to acquire, manage, and grow small to medium-sized businesses. Here are a few reasons why search funds could be an attractive addition to your investment portfolio:
1. Unique Value Proposition
Search funds provide a unique mix of upside and downside protection by combining the entrepreneurial spirit of angel investments with a structured investment processes in cash flowing businesses. Unlike venture capital, where the focus is often on high-growth startups, search funds target established, cash flowing, small businesses. This reduces the risk associated with early-stage ventures while still offering significant growth potential.
2. Alignment of Interests
One of the most compelling aspects of search funds is the alignment of interests between searchers and investors. Searchers typically invest their own capital and receive a substantial equity stake in the acquired business. This means their success is directly tied to the performance of the company, ensuring they are highly motivated to drive growth and profitability. Moreover, it is fairly commonplace for searchers to personally guarantee an SBA loan to acquire the target company, further incentivizing the searcher to achieve a positive outcome (as well as avoid a serious downside scenario).
3. Proven Track Record
The search fund model has been around since the mid-1980s and has demonstrated impressive returns. According to a study by Stanford Graduate School of Business, search funds have delivered an average internal rate of return (IRR) of over 30% since inception. This track record surpasses many traditional investment vehicles and highlights the potential for substantial returns.
4. Access to High-Quality Deals
Searchers often come from top business schools or tremendous operating backgrounds and possess significant industry experience, enabling them to identify, acquire and lead high-quality businesses. Additionally, the rigorous selection process searchers undergo to raise equity for their deals helps ensure that only the most capable and committed individuals succeed in this space.
5. Diversification
Investing in search funds allows you to diversify your portfolio beyond traditional asset classes. By including search funds, you gain exposure to a range of industries and geographies, reducing the overall risk of your investment portfolio.
6. Hands-On Involvement
Search fund investments offer the opportunity for hands-on involvement. Investors often act as advisors or board members, providing strategic guidance and leveraging their expertise to help the business succeed. This active role can be highly rewarding, both financially and personally, as you contribute to the growth of a business.
7. Strong Community and Support Network
The search fund community is robust and supportive, comprising experienced searchers, investors, and industry professionals. This network offers valuable resources, mentorship, and collaboration opportunities, increasing the likelihood of success for both searchers and investors.
8. Long-Term Focus
Search funds typically have a longer investment horizon compared to other investment vehicles. This long-term focus allows for sustainable growth and value creation, aligning well with investors looking for stable, long-term returns.
Conclusion
Investing in search funds presents a compelling opportunity for accredited investors seeking high returns, diversification, and active involvement in growing businesses. With a proven track record, strong alignment of interests, and access to high-quality deals, search funds offer a unique investment proposition. By considering search funds, you can tap into a thriving investment model that combines entrepreneurial drive with the potential for substantial financial rewards.
