The answer is quite simple. It is not possible to know if a searcher is going to be successful or not. If all investors knew who was capable of successfully finding and managing a company properly and who was not, we would be controlling almost 100% of our risk. It is like an equity investor knowing when the stock market will increase or decrease.
An equity investor in the stock market does not know when it will go up or down, but they do have some tools and methods they can use to try and analyze what is going to happen, and when. These investors each have their own methods, and all are equally valid. Investors in Search Funds do the same; we use tools and techniques to make an investment decision and try to identify who will be successful or not.
A Search Fund investor invests in people in the first phase of a Search Fund investment. That’s why it is critical to invest in the right searchers.
At ONEtoONE Asset Management, we try to pinpoint the following crucial aspects:
For us, a person who wants to become a searcher and launch their own Search Fund must perfectly understand the Search Fund model (its peculiarities and how the industry works) and demonstrate their passion for it. From the investor´s point of view, we want to identify the opportunity cost that the searchers have.
Often, searchers unexpectedly find themselves stuck in their careers, or during their MBAs they have difficulty finding a job. While trying to get out of these situations, they find out about something called a “Search Fund” where they need c.€400k (c.30k per investor) to fund the salary they choose, and two years to find a company. What a bargain! Isn’t it? These searchers are usually unsuccessful, and those that succeed (many external factors influence, as in any investment) usually suffer more than necessary. From the investor´s point of view, we try to avoid these searchers. A searcher must be convinced of the path of entrepreneurship, totally in love with the model and demonstrate it.
The following relevant aspect that I would highlight, which is closely related to the previous paragraph, is the resilience each searcher must-have during the search phase. It usually takes two years and is tremendously hard work. We should invest in searchers with demonstrated grit.
The searcher is going to experience that few companies or business owners are going to answer his letters or emails, and he is going to have potential deals under LOI that will finally be discarded after spending money on advisors, or even lose deals that were practically closed (as has happened to me in my professional experience). This is psychologically very hard to overcome, and it happens to most searchers at some point. The resilient searcher must get up and continue (which is easier said than done). If a searcher has these resilience skills, he will be able to move on. It is enormously important for an investor to identify this quality in the searchers since he knows how hard the search phase is and has seen many cases.
Lastly, identifying future CEOs who will manage, lead and grow an SME more than satisfactorily is vital. Managing and growing an SME of €10m in sales, not professionalized, with sales in different countries and around 50 employees is complex and requires experience and skills that not everyone has. Once the searcher has found the company, “the real game begins.”
In a little less than a month from the operation’s closing, the searcher becomes CEO of a company, responds to a very experienced Board of Directors and has a pool of investors who have invested a lot of money in the purchase. The searcher cannot fail them. For this reason, we consider it key to identify this aspect before making the investment decision.
These three aspects mentioned above are identified by analyzing the professional and academic experience of the searcher through the methods that we have at our disposal. This is CV analysis, numerous personal interviews, and having lunch or a coffee in different environments. Other factors are also critical, such as the explanation of the PPM and the industries where the search will focus, managerial aptitudes, etc. Of course, each investor will have their preferences, whether they are young or older, have an MBA or not, etc., but if the three previous points have not convinced the investor, it will be challenging to make them change their mind, no matter how well he does in other aspects.
Finally, the support from investors will help a searcher succeed or not. This is translated into providing adequate search tools, having a team large enough to provide support, experience in company analysis, relationships with other investors, knowledge of Private Equity, dry powder for add-ons, etc. These will help a searcher successfully find and manage a “diamond” company.
In short, it is not possible to know who will be successful or not, but we have some procedures to feel secure with our decisions, as well, and without being a big fan of this statement, luck and momentum play a relevant role.