SEARCH FUND PRIMER
Search Funds Fill the Lower Middle-Market Capital Gap
A search fund is an investment vehicle to allow an aspiring entrepreneur the opportunity to search for, acquire, manage, and grow a company. The model originated at the Stanford Graduate School of Business in the mid-1980s as a new path to entrepreneurship -- through acquisition. High-potential MBA graduates were attracted to search funds as a way to accelerate their careers and become CEOs of their own small companies.
Search funds merge talent, incentive equity, a fragmented opportunity set, and a community of advisors to create a potent combination for entrepreneurs and investors, alike. A Stanford study found that search funds, on average, have generated IRRs of 34% and returns of capital exceeding 8x.
In recent years, search funds have become a force in the lower middle market. There are currently more than 200 active searches in the US. Despite the strong growth, search funds still represent a fraction of expected business sales in this target market.
The success of search funds has demonstrated that partnering with high-potential entrepreneurs, providing them with resources, and structuring the right equity incentives are an effective strategy to promote long-term value creation. Further, search funds seek structurally low-risk businesses that feature moderate growth, stable margins, high recurring revenues, and low capital intensity. Finally, paying a reasonable price and employing moderate leverage create a financial structure with an intrinsically favorable risk-reward profile.
Southeast Acquisition Capital capitalizes on the trends underlying the rapid growth of search funds and leverage the strengths of the innovative model while adapting it to the business landscape in the Southeast.