Search fund

A search fund is an investment vehicle through which an entrepreneur raises funds from investors in order to acquire a company in which they wish to take an active, day-to-day leadership role. Search funds can also be financed through self-funding. In this scenario, the entrepreneur leading the acquisition will use their own resources to purchase and take ownership of the business, rather than relying on funding from external private investors.

In the first stage, a small group of investors back operating managers to search for a target company to acquire. A fund may or may not find a target acquisition company. Investors are able to invest a pro-rata share in the target company, subject to their individual liking. In the second stage, the general managers of the search fund take operating roles in the acquired company, such as CEO and President.

Traditional Search funds typically target companies in the $5 million to $50 million price range, requiring $2 million to $10 million of equity capital, in fragmented industries, with sustainable market positions, histories of stable cash flows, and long term opportunities for improvement and growth. Self funded search funds generally target businesses less than $5 million. Service and light manufacturing companies outside high tech industries are popular targets. Often these companies are under-managed prior to the acquisition.

Most search funds are started by entrepreneurs with limited operational experience and possibly no direct experience in the target industry. The goal of the investor is to place promising, motivated managers in an environment with a high probability for success given the oversight and experience of the investors themselves.

The origins of the search fund are often traced back to H. Irving Grousbeck, a professor at Stanford University's Graduate School of Business, who originated the concept in 1984. Since then, it is estimated that 627 traditional funds have been or are currently being formed, with 198 operating currently. The bulk of successful search funds have been raised by alumni of elite MBA programs with access to strong private equity networks. Stanford University has documented more than 177 search funds.

Search Fund Japan Inc. is a newly established company in Japan aimed at addressing the problem of the lack of successors for small and medium-sized businesses. Founded by DBJ, Nihon M&A Center, Inc., Career Incubation Inc., and others, it aims to promote generational changes in management and foster renewed corporate growth. Modeled after a mechanism that originated in U.S. business schools in the 1980s, search funds have seen success in the U.S. and are gaining traction globally. By establishing search funds in Japan, the initiative seeks to provide a solution to the growing issue of business succession and cultivate a pool of talented future managers.