Is the long-term compensation higher doing search fund compared to PE?
I am working in non-finance with some interest in switching to PE but the more I look at the PE route, the more I question the decision. Purely from the perspective of the fact that I want to really own my own businesses and have a bit more freedom on how I adjust my life. I have met a searcher who raised money for a $100m business and then sold it a couple years back for 2.6x its value and profited massively. Now this guy just sits around investing in Lower mid market PE funds and other search funds. He is in his late 30s years now. Whereas, I do feel like PE may probably have the highest risk adjusted returns but looking at Search fund success rate of 1/3 successfully acquiring, operating and selling. It makes it tempting to go down this path. What is the biggest reason you guys/girls aren’t interested in pursuing this?
Not in most cases. Survivorship bias is the problem here. Vast majority of search funds are much smaller than the guy you met and fail to return at comparable rate when looking at both the average and median performance of the asset class. The actual returns of the entire asset class when you dig into the studies done by BSchools like GSB are mostly driven by 10 major successes which if removed make it fall below that of PE/VC averages. If you're successful at it of course you're going to have outsized personal wealth creation because you took on substantially more risk, but there's of course a huge luck component + the operators of those particular deals are typically people with prior PE experience or previously successful operators. The average career PE investor/banker will in most cases make more long-term comp than someone that's done a search or two.
That is a interesting point which I do agree with but there have not been enough search funds for a clear picture to be formed either. I do agree with you largely though.
What may be the reason the returns for search funds being lower than PE/VC? Is this the same with lower middle market PE firms compared to, say, the MF firms - do they have higher returns?
There's like at least 500-700 search funds in the US only
(1) It depends. On average, PE pays better and, for the most part, pays better at just about every percentile as well. The only time I can think of where this may not be the case is a competent PE professional who is not on the partnership path. That type of person is the only one where I can see going search would lead to a higher comp.
We can look at your example. That's about the best-case scenario for search funds. Is that Schwarzman money? Is that Kravis money? Is that on the same wealth scale as Glenn Hutchins?
It should also be worth noting that running a small business, or in the example you provided a middle market business, is fundamentally different than working in PE. Actually operating a business and investing in a business are two very different skillsets.
(2) The reason why I am not interested in search funds is because pretty much my only professional interest is in doing deals. That is not what a search fund is. A search fund is one deal which then makes you effectively the CEO of a small company. I don't care for becoming a CEO... even if my background is pretty well suited for it
Search funds are magic in that they somehow convinced a generation of HBS/GSB grads to take jobs as plumbers after graduation but call themselves "search fund CEO"
That's because it is true.
Plumbing > PE > IB
Ha! Very true, but I have to admit some of the most stable businesses tend to be the boring ones.
The issue I have with the startup scene that many GSB/HBS kids also try jump into is that the big incubators like Y Combinator have this kind of focus on worshipping of a few Silicon Valley titans that it makes the whole thing feel more like when loads of wide eyed college kids move to Hollywood to try and become the next Tom Cruise when in reality very few make it and those who fail end up in a random software engineering job in a startup hoping to get rich when this startup succeeds which FYI it won’t.
It’s just for someone purely in it to make money but not aim to become the next Kravis or Zuckerberg search fund is a reasonable instrument to get to a good net worth.
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