Any PE people considered leaving to pursue search fund/entrepreneurship paths?

I've noticed a growing trend of ~mid-level professionals leaving their private equity (or other "high finance" jobs) to pursue search fund / "entrepreneurship through acquisition" opportunities.

The thesis is, broadly, that there are trillions of dollars of wealth tied up in small businesses owned by baby boomers in the U.S.  As these boomers seek retirement over the next decade plus, there is a massive supply of attractive, "main street" small businesses (think everything from car washes to roofers to landscapers) coming to market.  Many are available at 3-5x EBITDA with 80-90% LTV financing at reasonable rates through the U.S. government's SBA program. 

This broad bucket of opportunities has several structures, but generally involves using either your personal capital or a small pool of "search capital" raised from investors to finance a 1-2 year search period during which you look for a business to buy.  Over time, you can roll-up additional businesses in the same space to achieve scale and (hopefully) multiple arbitrage by selling to PE - lots of examples of this, e.g., dental clinics, vet clinics, car washes (https://www.wsj.com/articles/private-equity-wants…).  Or you can simply operate a single business and grow it organically, clipping healthy cash flows along the way.  Lately, people have been excited about the idea of creating small holding companies of small businesses - Chenmark is probably the best example (https://chenmark.com/). Historically, the search fund concept started at Harvard and Stanford's business schools in the early 2000s, but it has recently become more democratized as the idea has gained popularity, with many pursuing the "self-funded" search path without an MBA.  

The "why" is simple: making (and staying) partner at PE firms is really hard.  It's a get rich slowly scheme, not a get rich quick scheme.  It's also a grind that takes a direct toll on your personal health and family relationships over time.  It's easier said than done, but if you prudently recognize you're not cut out for the long term path, it's wise to get out sooner rather than later.

It's pretty easy to sketch out a path to 7 and 8-figure outcomes in line with, or well in excess, of available in the PE path (though obviously with significant risk!  Though I'd argue there's significant risk to getting and staying a partner in PE to see it really pay off as well).  

One other success story is Garnett Station - two guys did 2 years IB, 2 years PE, then got started buying franchises after business school.  8 years later they have a successful $1b AUM PE manager (https://www.garnettstation.com/)

Curious if others have considered this path, weighed the pros and cons, or seen other success stories/failures.  Any thoughts welcome.  

Comments (28)

1mo 
Matchstick, what's your opinion? Comment below:
Associate 3 in PE - LBOs

I've noticed a growing trend of ~mid-level professionals leaving their private equity (or other "high finance" jobs) to pursue search fund / "entrepreneurship through acquisition" opportunities.

The thesis is, broadly, that there are trillions of dollars of wealth tied up in small businesses owned by baby boomers in the U.S.  As these boomers seek retirement over the next decade plus, there is a massive supply of attractive, "main street" small businesses (think everything from car washes to roofers to landscapers) coming to market.  Many are available at 3-5x EBITDA with 80-90% LTV financing at reasonable rates through the U.S. government's SBA program. 

This broad bucket of opportunities has several structures, but generally involves using either your personal capital or a small pool of "search capital" raised from investors to finance a 1-2 year search period during which you look for a business to buy.  Over time, you can roll-up additional businesses in the same space to achieve scale and (hopefully) multiple arbitrage by selling to PE - lots of examples of this, e.g., dental clinics, vet clinics, car washes (https://www.wsj.com/articles/private-equity-wants…).  Or you can simply operate a single business and grow it organically, clipping healthy cash flows along the way.  Lately, people have been excited about the idea of creating small holding companies of small businesses - Chenmark is probably the best example (https://chenmark.com/). Historically, the search fund concept started at Harvard and Stanford's business schools in the early 2000s, but it has recently become more democratized as the idea has gained popularity, with many pursuing the "self-funded" search path without an MBA.  

The "why" is simple: making (and staying) partner at PE firms is really hard.  It's a get rich slowly scheme, not a get rich quick scheme.  It's also a grind that takes a direct toll on your personal health and family relationships over time.  It's easier said than done, but if you prudently recognize you're not cut out for the long term path, it's wise to get out sooner rather than later.

It's pretty easy to sketch out a path to 7 and 8-figure outcomes in line with, or well in excess, of available in the PE path (though obviously with significant risk!  Though I'd argue there's significant risk to getting and staying a partner in PE to see it really pay off as well).  

One other success story is Garnett Station - two guys did 2 years IB, 2 years PE, then got started buying franchises after business school.  8 years later they have a successful $1b AUM PE manager (https://www.garnettstation.com/)

Curious if others have considered this path, weighed the pros and cons, or seen other success stories/failures.  Any thoughts welcome.  

Can you really get 80-90% LTV from SBA program on acquisition loans?

Most Helpful
1mo 
APAE, what's your opinion? Comment below:

You don't have to restrict yourself to the lower middle market. If you find a worthwhile asset, you can run an equity raise among the audience of capital partners publicly interested in partnerships with independent or fundless sponsors.

The SBA route is full of pain. It's slow and requires a PG. And the businesses at that scale are such a pain to run. You really want a management team (as in at the platform level) in place to deal with the operational annoyance, otherwise you've turned yourself from the investor into the operator-who-handles-intern-level-shit-nonstop. But because your 'main street' business is so small, you can't afford those hires, and if for some reason you could, you aren't going to attract anyone to your itzy-bitzy asset. Any equity package you offer is going to be unappetizing, and if for some reason you were going to size it to avoid that, you'd be giving up too much of the pie yourself.

The younger brother of one of the Garnett Station guys has this down pat. He and his partner have three platforms, last I heard, and are just adding more and more small businesses under each relevant umbrella. Mechanical, veterinary, and I can't remember the third.

My recommendation is to trawl hard for a good middle market business. You can set yourself up with a company with (i) adequate cash flow to pay yourself livable salary out of the company, (ii) adequate scale to provide a non-zero management fee if you raised external equity, (iii) adequate management in place already, or at least an adequate comp layer for roles you intend to replace the humans currently in, (iv) a higher multiple that allows you to enjoy multiple re-rating as you do add-on acquisitions, rather than a constant adding of equals like you will with the 'main street' thing.

Here is a comment I wrote a couple years back answering someone on the 'best path to prepare for a search fund as an analyst'.

Here is another older one, the relevant part is "I know three different guys". (FYI it looks like when the forum updated the other year, it cut a big section out of the middle somehow, so that section got cut in half, the "He bought a business for MBA was worth it." sentence was not originally a sentence, there was half a dozen paragraphs there before "MBA was worth it".)

The takeaway is that it's absolutely doable. You come across worthwhile businesses in your day job all the time. If you run at one of them, you can close one. If you have the financial cushion and risk tolerance to give yourself two years, it would be pretty hard to fail to close on something if you worked with the same intensity a day job in this industry requires you to. 

I am permanently behind on PMs, it's not personal.

  • 20
  • Investment Analyst in HF - Event
1mo 

Thoughtful comments. I will just offer rational counterfactuals to this without judging your comments in a negative way (which I am not doing). 

I did ~6 years in traditional finance (IB, PE, HF) until last year when I decided to go down this path. I currently own 3 franchise units, all self-funded, that produce ~$600K/year in cash flows. I am currently looking at acquisitions and greenfield expansion opportunities with FCF from the existing units - no further personal capital required. I have a very high-level 10-year model that sketches out how I can compound my own capital vs. what it would look like to raise significant external capital but take smaller ownership %. I decided to stick it out on my own for as long as I can with 100% ownership and compound FCF organically because of the following reasons.

1. The true "middle market" target is much more expensive than operating at the <$1-2M EBITDA level SMBs/franchises. The multiple arbitrage opportunity is completely gone, unless you think you got something on your hand that you could take public (that nobody else saw previously). If you're going for ~$10M EBITDA middle market business with in-place management layers, be prepared to pay 7-8x EBITDA. This is because you will inevitably compete with LMM PE and a bunch of "search fund" bros from HBS that's throwing shit on the wall all the time. This game has been discovered and getting efficient, real quick. I can pay 2-4x EBITDA to roll up single franchises on my own. That means I never, ever worry about what I can sell this for or even whether it is sellable. I can just run it for cash yield in perpetuity and realize 3-4x DVPI. Sure, I go into my stores several times a week, travel a lot, and manage personalities that you wouldn't ever imagine having in a professional financial firm setting. But that's the fun part. It's a real business, not numbers on a spreadsheet. I learned more business-building and operational/leadership skills in the first year that I did this vs. 6 years I spent "analyzing" and "valuing" businesses from afar at some of the most "prestigious" firms. Just a different ball game, you have to understand who you are and what you want. But if you don't want to get you hands dirty, just stay at a PE or HF and collect that fat paycheck. It's a better risk-adjusted NPV decision when you strip out the value of personal satisfaction and sense of true autonomy and independence that you will experience going down this path. You do this because you want to be on your own and control your destiny, not because you think this is a better risk-adjusted path relative to working at KKR.

2. When you raise outside capital for this scale of business, you will inevitably give up control. Yes, the "search funds" are putting you in a driver's seat initially from an operational perspective. They are not in the game to operate these businesses. But losing control comes in more subtle ways, too. You have to make expansion decisions against your own judgement because of the need to shoot for hurdle IRRs and MOICs for your external investors. You are under pressure to grow at a pace they want you to. It is hard to share equity with employees who you value and truly want to have partner's seat in your journey. What you started doing to get away from the artificiality that is called institutional investing, you end up succumbing to once again. This is fine if your goal was just to make money in a different way than carry/bonus in a PE firm setting. This is likely not fine, if you had philosophical reasons about why your PE career felt empty and soul-crushing.

Everyone has his/her own personalities and priorities. Just know what they are, and that should guide your decision-making. 

1mo 
harveyspankster, what's your opinion? Comment below:

Hey - I would like to ask you a few questions. Would you mind DMing me?

“Self-control is strength. Right thought is mastery. Calmness is power. ” - James Allen
1mo 
APAE, what's your opinion? Comment below:

I love this post. I don't believe your facts run counter to the body of work I've written on this topic at all, and I love your willingness to share real numbers from your real-life situation. 

You can run a site-specific search (site:wallstreetoasis.com "apae" + "[whatever word you want]") to see how many times I've highlighted how soul-crushing the capital raise process is, how flighty and frustrating capital partners are, and how exhausting and unfamiliar it is to deal with actual operational topics in any scale of business, particularly micro or lower middle market. (an example)

You sign up for either pain dealing with other people's money in your deal or pain dealing with the type of asset you can access without other people's money. There's no free lunch. 

Just a different ball game, you have to understand who you are and what you want. .... What you started doing to get away from the artificiality that is called institutional investing, you end up succumbing to once again. This is fine if your goal was just to make money in a different way than carry/bonus in a PE firm setting. This is likely not fine, if you had philosophical reasons about why your PE career felt empty and soul-crushing.

This is concise and valuable. One "yes, and" comment is that if you are willing to take a 4-5 year timeframe where you're still operating under that forced artificiality, it's possible to create an outcome for yourself where you have the financial means and track record to afford yourself more independence for the next one. And you may be able to skip the dirty hands aspect inevitable to the assets like those you're dealing with today. Said differently, use partner capital to buy a better asset today that you have to operate in a way you don't love in order to have an exit where you're more of the capital in your next deal and enjoy a better dynamic with any partners you do bring in.

There's no one right path. I love your story, am glad it's working for you, and salute you for the strength of spirit to successfully step off 'the path' and execute in this strategy. 

I hope you're having a wonderful holiday season.

I am permanently behind on PMs, it's not personal.

  • 5
1mo 
maineiac42, what's your opinion? Comment below:

Chenmark is a landscaping company.

Array
  • 1
1mo 
2rigged2fail, what's your opinion? Comment below:

yes I'm researching it heavily. I've read the search fund trifecta - buy and build/stanford study/IESE study. following podcasts and YouTube acquisition ride alongs daily. some great search fund twitter threads too. part of the main search fund community forum - I've been asked by two separate people if I'm currently searching as they are looking to deploy capital.. market seems hot. I'm researching niche healthcare/care/education businesses that could scale. one issue In the UK is that we don't have a concept of SBA, I need to find a cash flow lender and pay through the nose for it... not many search funds here... read a few studies which had the a total of 10-20 in the UK. some unsophisticated non finance guys running successfully acquired businesses, using creative financing.  fuck working on someone else's business for the rest of your life in fihnaunce honestly. 

what sectors you got in mind? there is a guy rolling up foundries across the mid-west US

  • 5
1mo 
iercurenc, what's your opinion? Comment below:

Sounds interesting. You should make a thread about your experience if you decide to go through with this.

  • 1
1mo 
2rigged2fail, what's your opinion? Comment below:

yeah I'll do a ride along 100% and I have other ideas like building a course etc

1mo 
2rigged2fail, what's your opinion? Comment below:

I'd start with the books - buy and build, Stanford search fund, IESE search fund, HBR guide to buying your own business

Pods (most re-publish on YouTube too) - acquiring minds, acquisitions anonymous, think like an owner. other pods which I listen to more for trend awareness - All-In (chamath et al.), my first million, Alex Hormozi 

YouTube - Codie Sanchez, James Sinclair (UK based), Jonathan Jay (UK based). Bonus business walkthrough type channels that I used to watch (but got bored with) - Ashville, Sweaty start-up, Investment Joy

  • 3
Funniest
  • Works at Other
1mo 

If I get fired / laid off I think I will. I've been finding it surprisingly hard to be fired (despite pushing the boundaries of insubordination against a bad senior) and I don't know why.

I thought it was supposed to be recession time. Maybe in a few months

  • 3
1mo 
jl12, what's your opinion? Comment below:

I can speak through personal experience about this. 

Search funds are incredibly high risk. It is entirely possible that you can make a massive amount of money but most search funds generate far less returns to the individual than a typical PE role would. If you are at the very top, if you are a Henry Kravis of search funds, then yeah. You can make $50m, 100m, or even more. However, the odds are that you will not be the Henry Kravis of search funds and will end up with a $200-500k a year annual compensation and a $5-20m payout on the backend (most search fund operators receive a 20-25% equity interest). By absolutely no means is this bad. This puts you in the top 1%. But if you are in private equity you will most likely be giving up a lot on the financial side ON AVERAGE. Remember, most search funds are for small businesses, with the operative word being small (you'll often see sub-$25m EV deals). Although this assumes that you stay in private equity over the same period which is not a guarantee as you have said.

However, I would argue that this is far more interesting work. Done correctly and you can build a real, quality, business using mostly other people's money. If you are interested in running a business I think this is the best way to go about doing that. As a "career pivot" I think this is good for someone who wants to be more involved operationally. However, this is not the same as a private equity role. That is important to remember. The mechanics are the same but creating a search fund means you will be in there operating the business which is not at all what most PE firms do. Just like how being in IB doesn't necessarily mean that you would make a great PE investor, being good at PE doesn't necessarily mean you will be good at running a search fund. While there is some overlap in skill, it is a very different animal.

  • 3
  • Associate 3 in PE - LBOs
1mo 

Interesting, thanks.  What's your personal experience?

I tend to agree with this tweet:

Doing deals in SMB looks like a sexy role from the outside, especially the way it's taught (cash flows, tools, etc). The reality is it's about 75% interpersonal, 20% checklists/busy work, and 5% modeling.  (https://twitter.com/regzeller/status/1600159050376744960?s=46&t=Vm8J3FcfWY3JQtEVhsDBGw)

1mo 
jl12, what's your opinion? Comment below:

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