Creating investment vehicles for a successful acquisition

What is a Search Fund?

What is a Search Fund?

The Search Fund Model was created in 1984 by Stanford Professor H. Irving Grousbeck, who defined the characteristics of this investment vehicle in his famous manual Primer.

A Search Fund is “an investment vehicle typically created by one or two entrepreneurial, top-tier MBA graduates who raise funds from a group of advising investors to support their efforts to locate, acquire, and lead a privately held company day-to-day, over the medium to long-term”.

This Company should have a set of characteristics (including positive cash flows, low capital expenditure or being in a fragmented industry), but most importantly, it must be the owner who is looking to sell it for reasons external to the Company (illness, retirement, etc.). This will allow a good acquisition price.

Phases of the Search Fund

Search Phase

A first round or search round, in which they will raise 300,000-500,000€ from a group of 10 to 15 investors to finance the process of searching for the Company: salary for them and their interns, databases, due diligence, etc.

This process may take up to 24 months.

Acquisition Phase

The second round or acquisition round is when, once the Company has been identified by the Searcher, they will buy it through a combination of debt, equity and seller’s financing. The investors have the right, but not the obligation, to finance the equity of the target. In case they do not cover the total price, the Searcher will look for additional investors to cover this ‘equity gap’.

Management and growth Phase

From 4 to 7 years: Searchers, now CEOs, develop value-creating growth strategies for investors and themselves.

They tend to focus on organic growth, using several operational levers and running their business for several years.

Return capital Phase

From 3 to 6 months: CEOs return to their investors their invested capital with an additional profit, then according to the results, they participate in the distribution of profits with their investors.
The most recent studies from Stanford (USA) and IESE (Spain) Business Schools reported an average IRR of 35% and 28.7%, respectively.

Adding the finishing touches

Once the Company has been fully acquired, the Searcher will start running it normally as “CEO”, with the objective of increasing its sales and profit, exiting the Company 5 to 7 years later for a price much higher than the one from the acquisition.

At ONEtoONE Asset Management, we invest in exceptional Search Funds and support Searchers to become great leaders.

Whether you are already a Searcher or are looking to become a Searcher, we are here to support you. We finance your search, invest in the acquisition, empower you to build a great business, and help you exit successfully, with our sole purpose being to devote our time to ensuring your success.