Search Fund Check In
Anyone go down the search fund route recently? Would love to hear some stories from the ground on how competitive the market is, multiples trending up, economic uncertainty etc. Please also list your geo(s)
Considering going down this path later this year
Fwiw the few folks I know who have gone down this path have all had decent success finding and closing deals (tbd on how those turn out). General consensus is that market is saturated with MBA type buyers but pretty easy to differentiate if you know a thing or two about M&A and aren't a complete idiot. Also a ton of "fake" buyers who are just putting up a website / story while they recruit for buy side jobs
Just an anecdote but I know some very qualified people that went down this route and were shocked at how competitive it has become to find and buy a somewhat decent business. It sounds pretty brutal. Any business worth buying is getting called on multiple times a week and I’m talking about 1m of EBITDA
I think search funds are a lot less compelling than they used to be because entry prices are so high now. I think I'd rather put ~$100k into trying 4 business ideas, then use personally guaranteed SBA debt to scale w/e actually works best.
For color, we used to bid a lot against people in that size range, now we are upstream. Part of the problem with search funds is that you're now bidding against some 45 yr old that spent decades in corporate and are hilariously confident in buying at very high multiples because they're using SBA debt. I've seen some insanely stupid transaction happen lol.
If you do go the search fund route, I'd focus on something NOT red hot...IMO it's extremely tough to make money if you overpay for something.
Don’t you think it’s bad to not be all in on one idea? Splitting time between 4 seems like a great way to have 0 succeed
I've been running one for a couple months now. I don't really relate to what you're saying about saturated market... most sellers I'm engaging with aren't familiar with the model and have never spoken to a searcher before. I mostly compete with true strategic buyers and aggregator / holdco types (more the latter), who aren't too tough to pitch against as you're selling a fundamentally different "product." Pricing is tough but it's tough in every segment of private investing.
I generally agree with your take -- if you put in a little effort and especially if you have a sourcing background, it's not hard to stand out. Business owners are bombarded with more inbounds than ever but so much of it is AI slop that a thoughtful entreaty still gets noticed.
Edit: to the poster's point above, I would not recommend using an SBA loan or looking at assets of the size you could buy with one. The personal guarantee aspect is super scary, and it only goes up to $5M... at that size range you're basically buying a job versus buying something with true operating infra. The search fund LP world is very welcoming of people with legit finance backgrounds and it's not hard to get a deal with attractive economics with no personal capital at risk.
"Great deal with attractive economics" - aren't traditional search LP terms 1.0x liquidity prefs @ 8% pref interest? On top of that, you still need to negotiate catch up on the pref interest, and ~8% of your 25% carry is only fully vested when >35% IRR...
In what world are those "attractive" economics? You better pray to god you (i) don't overpay, and (ii) buy something with astronomic growth potential, if you want to see any real dollars that would compare to your outcome of simply sticking around in PE.
On second thought, maybe I should just become a search LP!
I saw it as more appealing than carry but you may be more bullish on institutional PE than I am. You have more control over the success or failure of the situation and the asset class in general is better performing (aggregate search returns in the last decade are >40% IRR, even taking out the Top 5 highest performers). Top quintile of equity proceeds for search entrepreneurs is >$10M, but there was exactly a 0.00% chance I would achieve that in 6 more years of PE as a midlevel guy.
If you're happy as a cog, you won't be happy searching and vice versa. They're fundamentally different paths based on how risk-on you are.
(source for all the above is the 2024 Stanford search study, for the curious)
The real COG is the searcher that got swindled into operating Joe's Corner Liquor Store in the middle of nowhere on behalf of their LPs, while simultaneously getting flooded out of the economics.
this is crazy bias bro.
can we see your search fund acquired company if u don't mind? what company did u buy and what are ur economics
Can you give an example of the capital structure / terms you are referring to? Curious what kind of debt you can get without SBA and how much ownership / control is realistic with traditional search fund LPs
Why do ETA if they have an IB/PE background? Your opportunity cost is so high. Might as well go bigger and do an independent sponsor model. Am I missing something here? I plan on going from IB/PE to an investor role and not an operator role/job.
Bought a building materials company 2 years ago.. 2m EBITDA. The search fund model is a waste of time IMO. You are better off operating as an independent sponsor. Do some deals as a minority partner (but NOT the operator) and get some ‘track record’ under your belt.
I am actively trying to source a big proprietary deal (ideally >5m ebita) and I will hustle to capitalize / operate it. Don’t waste your time operating something sub 1m
Why do you think your search is a waste of time even with 2M EBITDA? Are you referring to comp / upside potential?
It's funny I said the same thing and got monkey poo for it. My thoughts are: why would someone leave an IB/PE (presuming Sr. Assc level) role where you're getting paid ~$400k total comp (that's increasing per yr) with no risk beyond showing up to lever up and personally guarantee an SBA loan to buy a small business?
Even if earnings meet the Search Fund sweet spot of ~$750k, that's 2x the earnings of your less risky career yet potentially hundreds of thousands/millions at risk should the business go bad. Say you do a Search Fund, and you make $3m after 5yrs. In IB/PE you likely would've made ~$2.3m at little to no risk. So ~$700k more for a larger downside?
I like the independent sponsor approach where you're an investor with a management team in place. IB/PE skills directly more applicable, and you can build a portfolio over time all while possibly working remote. Same amount of time, larger deals, management team, and larger upside?
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