Starting A Search Fund (Micro PE Firm)

Rank: Senior Gorilla | 995

I'm finishing up my MBA at Wharton right now and am starting a search fund right now. I've read that PE firms are starting to eat into search fund territory in terms of company type ($1-$3 million EBITDA). If that's the case, perhaps search funders can use some of the same deal sourcing techniques/platforms that PE firms use? Would love to get some advice on resources and avenues to build a pipeline. Any informal avenues are interesting as well (few PE friends of mine across firms have their own GroupMe set up).

Sidenote: totally open to having summer interns! Feel free to shoot me a PM.

Comments (27)

 
Apr 30,2017

Have you considered looking at search fund incubators? Search Fund Accelerator, is an incubator in the Boston area and they basically mentor searchers and commit equity capital. I think they are accepting applications for their Summer Searcher Cohort. Hope this is of help.

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May 31,2017

They are also getting hit with a class action law suit for not paying interns. Probably should mention that too....

Array

 
Jun 30,2017

Oh wow... I was pretty close to working as an intern for one of the searchers there. Any links to where I can read more about this lawsuit?

 
Jul 31,2017

Were you able to find more information about this? I am interested in working there, and got to the final round of interviews.

 
Jul 31,2017

Hey man, any personal experiences about SFA? I'm a rising sophomore and interested in working for them as an intern, reached the final round.

 
Best Response
Apr 30,2017

I got my feet wet in finance interning for a searcher from H/S/W and ended up spending a few months hiring and training a team of interns and effectively running the daily ops while he handled some higher level items. We tried a number of different sourcing methods, including some of the PE platforms like Axial. Ultimately, we found that the two most effective avenues were thematic proprietary sourcing from public industry directories and data aggregators, and sourcing via business brokers. I'd imagine that one of your friends in IB/PE could also run a CapIQ screen and pull an extensive list of businesses in your target industries, as well as business brokerages and micro-boutiques. Not sure if this directly answers your question, just my experience with the matter at hand.

Good luck with your search! I started my path to finance late in the game (post-UG), and would NEVER have made it in so quickly if it wasn't for my search fund experience. I have a lot of respect for searchers, and wish you all the best.

Thanks, let me know if you ever need an introduction in the industry.

 
Apr 30,2017
Prescott Moncrief lll:

I got my feet wet in finance interning for a searcher from H/S/W and ended up spending a few months hiring and training a team of interns and effectively running the daily ops while he handled some higher level items. We tried a number of different sourcing methods, including some of the PE platforms like Axial. Ultimately, we found that the two most effective avenues were thematic proprietary sourcing from public industry directories and data aggregators, and sourcing via business brokers. I'd imagine that one of your friends in IB/PE could also run a CapIQ screen and pull an extensive list of businesses in your target industries, as well as business brokerages and micro-boutiques. Not sure if this directly answers your question, just my experience with the matter at hand.

Good luck with your search! I started my path to finance late in the game (post-UG), and would NEVER have made it in so quickly if it wasn't for my search fund experience. I have a lot of respect for searchers, and wish you all the best.

Dude this is gold. You're the man. Sending you a PM now hahaha.

 
Apr 30,2017

Thanks man! Glad it was helpful.

Thanks, let me know if you ever need an introduction in the industry.

Learn More

9 LBO Modeling Tests, 10+ hours of PE Cases and 2,447+ interview insights across 203 private equity funds. The WSO Private Equity Interview Prep Course has everything you'll ever need to break into the competitive PE industry. Learn more.

 
 
Jun 30,2017
mtnmmnn:

I shared some thoughts on this thread
https://www.wallstreetoasis.com/forums/search-funds-0

Hey I sent you a PM awhile back. Would love to chat with you more. Can you message me? Thanks :)

 
Jun 30,2017
Xepa:
mtnmmnn:

I shared some thoughts on this thread
https://www.wallstreetoasis.com/forums/search-funds-0

Hey I sent you a PM awhile back. Would love to chat with you more. Can you message me? Thanks :)

sorry dude, I missed it (I blame too many messages in my inbox telling me I have 25 more bananas...). will PM you

 
Apr 30,2017

I am with Prescott in that I also got my start in finance with an internship at a search fund.

We led the search process by first analyzing industries through some qualitative and quantitative analyses that the searcher had designed to narrow down the process. After that, we utilized CapIQ, Bloomberg, etc to pinpoint brokerages, potential targets, and develop networks within the industries that we were looking at.

One of the things that worked well for me, and actually ended up leading to my full time gig was reaching out to regional boutique ibanks that specialized in the industries that we were targeting. They tended to work with companies that fit within the lower revenue/ebitda ranges of the investment criteria.

I still have my notes from back then somewhere on my laptop. PM me and I can dig them up to see if I can find anything else that can help.

Hilariously enough, the only other time that I have posted on WSO is about whether I should do that search fund internship.

 
Apr 30,2017

Thanks for the post, very interesting. I learnt a little, at b-school, about Search Funds & ETA (Entrepreneurship Through Acquisition) but upon my own research found that many search funds fail to generate the returns to meet typical PE targets (20-25% IRR).

My questions mainly is how likely is one to raise funds to starta search fund. One's likely to target a company which is scalable, so will likely end up being a technology offshoot catering a certain industry. I'd think you're likely committing close to $15M for a $1.5 - 2M EBITDA company, and not much debt (although I'm not sure if you can lever a company during its "growth" phase). Likely this means you're probably looking to raise $15MM-ish capital and to me, that sounds like a lot of money for someone without any relevant background. Who're these backers typically?

I'm also curious to get thoughts of WSOers who've gone through a search fund and see how many successful SFers you've seen and if there was a pattern you recognized in the ones which were.

 
Apr 30,2017

The Stanford search primer is a great read and will help answer many questions - https://www.gsb.stanford.edu/sites/gsb/files/files...
TLDR, not all search funds achieve 20-25% IRR (but neither do all PE funds), however the average IRR since inception is 35%+. Raising a search fund is relatively easy if you come from a Top 7-10 MBA as investors view the search investment as a cheap call option (with the option to invest pro-rata in the acquisition). Also, most companies of this size end up levering up around 50% of the cap structure through a combination of senior, sub, and/or seller debt. The backers are a combination of institutional funds (Pacific Lake, Anacapa Partners) and HNW individuals, mostly who have been successful in search funds and/or private equity.

 
May 31,2017

Approaching the tail end of a search currently (my flame-out date, as one advisor put it). It's true that PE firms are starting to nudge into the typical search fund territory, hence I set my EBITDA range to top out at $1.5M. One of the sources that helped very much was using Mergent Intellect. My interns and I had already used Reference USA to some degree of success. Good luck, and feel free to PM me for more info.

Array

 
May 31,2017

I have been at the other side of the table - at a FoF looking to invest in SF investment funds - so I could give you some info about potential investors. Feel free to PM me.

 
May 31,2017

Hey OP,

I interned for a prominent Canadian Search Fund that has already completed three major transactions (two buyouts to grow the original portfolio company) in my sophomore year before jumping to IB. Along with most of the already recommended methods on this thread, my fund formed an extensive partnership with a local chamber to identify businesses w/ retiring management. Obviously, the valuations/financials they send are quite inflated but you'd be surprised at how many attractive companies (stable FCF, great client base, etc) exist in unattractive industries (manufacturing, industrial).

Another word of advice would be to reach out to already-existing search funds. Within North America, there are only a handful of truly successful ones that demonstrate the ability to last in the next 3-5 years. Because they come from similar background like you (H/S/W & Banking/Consulting Experience), they tend to be very open about providing new searchers with advice.

Best of luck!

 
Nov 30,2017

Just wanted to add a comment to the OP's original question about mid-market PE firms encroaching on the micro market space/financial profile that Search Funds traditionally have played in. While there have been some traditional PE firms doing deals in this space, I believe their sheer size and existing partner structure severely limit their ability and desire to play in the Search Fund space. The major reasons being that 1) smaller target companies typically despise the methods used by traditional PE firms to improve margin with such a short investment horizon and 2) the Managing Partners at PE firms have operated companies many times larger than any of those found in the micro space, so there is natural "push back" from them when asked to operate a smaller company than they're accustomed to. As with other areas within Finance, ego gets in the way.

MKballer

 
Nov 30,2017

I disagree, I interned at a search fund and we lost deals to big players because they used the lower middle market companies as bolt on/follow on acquisitions to their established platforms. Yes there may be different industries where big PE is not playing in but from my experiences search funds follow the PE trends and invest in similar areas.

 
Nov 30,2017

Yep, correct. Speak to anyone in MM PEs. They are desperate for good quality deals under 10x times and most of those exist in lower MM, same space as SFs.

 
Nov 30,2017

One additional comment to OP -- mtnmmnn's original post was spot on. I am a post-mba banker who considered a SF (happy to discuss thought process). I can tell you that SFs or ETA are NOT "micro PEs". Quite the opposite of it. These are for folks that want to be Entrepreneurs.. CEOs, Operators.

If your true intention is to do PE, perhaps rethink your approach. Perhaps you can try getting a job in Business Development at a fund, which are now in high demand (again, due to the lack of prop deals).

At the end, I decided to launch an Independent Sponsor firm, mainly because I am self-sponsored and gives me the flexibility to partner up with other capital providers to get a deal done.

 
 
Nov 30,2017

That's close, but not quite all of what a search fund does. Yes, the fund receives money to go "search" for a suitable acquisition target, but it is usually followed by the placement of the fund managers in executive-level roles at the target company. Thus, it can be thought of more as a roving band of executives, rather than a true PE fund.

What does exist though are fund-less PE shops. In my Junior year of undergrad, I interned at one of these places - they basically have a very committed set of LPs to whom they go each time they have a suitable target instead of raising a committed fund. In terms of firm economics, this model is beneficial since carry is paid on a per-deal basis (upon exit) instead of averaged over the life of the fund.

But hey, if you know anyone interested in funding either of these, let me know and I'd love to start one with you...

 
Nov 30,2017
sparticus:

...What does exist though are fund-less PE shops. In my Junior year of undergrad, I interned at one of these places - they basically have a very committed set of LPs to whom they go each time they have a suitable target instead of raising a committed fund. In terms of firm economics, this model is beneficial since carry is paid on a per-deal basis (upon exit) instead of averaged over the life of the fund...

This is sometimes referred to as a "pledge fund".

Regards

"The trouble with our liberal friends is not that they're ignorant, it's just that they know so much that isn't so."
- Ronald Reagan

 
Nov 30,2017