Search fund model vs Sponsorless PE Fund
Hey everyone,
We’re a small team who have prior acquisition experience through own deals and under another PE fund, specialized in operating online businesses and have decided to move towards a fund model to buy and grow our own portfolio of SaaS companies.
The previous way we’ve always done it has been sourcing deals with a fundless sponsor route and would go around raising equity Post-LOI, during due diligence from several investors ($50-$100K checks) to get the deal closed (all under $3 mm in valuation).
As this is something we want to commit to a full time basis, build a solid track record under existing team with 2-3 deals before going to raise an actual PE Fund, we want to explore the search fund model. This model is new to all of us (can see more team at horizencapital). We have a very defined target of companies, solid due diligence process and investment thesis. We think it would help in being able to focus all our efforts on the company vs trying to solve our cash flow to pay bills from our own savings/doing consulting work, etc. until we can close a deal. The other big benefit we like is the speed in which we can close on a deal vs raising from many individual investors and the mind share/time of managing investor relations with 10+ investors vs 1.
Would love to hear other members thoughts on comparing these models and how would you suggest getting started in meeting LP’s who understand this model to explore if it’s even the right fit? Would also be interested to know the details of how much you'd suggest raising for this and how you’ve budgeted the search fund around 3 partners?
Thanks in advance!
bro you spelled horizon wrong
The name is actually HoriZen Capital. I can't add a link but if you put a .com at the end of it, you can check it out.
Just letting you know the #’s for your “core values” are out of order on your website-you have 3 coming before 2
lol i feel like I joined a Grammar school forum (no offense), instead of a finance group. It could also be read top to bottom -but thanks for the feedback.
Why not continue paying the bills and saving up as much cash as possible through consulting while you find a larger deal you can work as an independent sponsor, and then negotiate an ongoing management fee as part of the deal structure.
Then you can focus 100% on growing the company and work towards a successful liquidity event, at which point you'll have some runway while you work to raise a fund down the road.
I guess i'm trying to understand what the downside of going the search fund route now vs riding it out and waiting for a deal to close(let's say 6-12 months). From my understanding so far is you would have to pay back the investors first and give some preferential fee structure on the deal? Anything else to consider?
I'm not sure going to a search fund model solves what I'm guessing is your "true" pain point, which I suspect is you and your partners personal cash flow situation. You have 3 partners, and that's a tough compensation hurdle to jump over if you want to do the search fund model for the size of deals you are currently doing. Most search funds are a single individual who takes relatively small pay while under the "Search" phase before hopefully find the Company they want to acquire and run, Furthermore, I think there is definitely some potential, but significant, differences when eventually trying to raise your own fund. Going from a fundless sponsor to a PE fund is probably easier than from a search fund. PE funds aren't nearly as involved in a port co like in a search fund where you ultimatley hope in your "search" you find the Company and become the CEO. Not to mention PE funds have to deal with portfolio management, potential investment/industry concentraction, etc.
Your issue of soliciating capital from multiple people can likely be mitigated with getting more diligence pre-LOI and floating info to your investor group and then keep feeding them more info as you diligence.
I think your intentions of looking at search fund to solve your pain points as a fundless sponsor isn't the correct mindset. You can argubally make more current cash flow as a fundless sponsor if you and your partners either do more deals or larger deals - assuming you are charging relatively market management fees. Additionally, if you move higher on deal-sizes you get the benefit of hopefully more information, and also access to debt markets so you can get potentially higher returns and rely less on soliciting a bunch of potential investors for equity checks.
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