Search Funds: A High-Potential Asset Class

Entrepreneurs and investors present views at special session

14/02/2013

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Although search funds are still at an embrionic stage in Europe, they are gaining ground as a way for motivated entrepreneurs to create value for companies and investors, said panelists during a special Continuous Educations session held on IESE’s Barcelona campus this week.

Moderated by Mathieu Carenzo, Director of IESE’s Entrepreneurship & Innovation Center-EIC, the session spotlighted how search funds work and caveats for aspiring search fund entrepreneurs.

"Raising the fund is the easiest part," said panelist Marc Bartomeus, whose UK-based fund includes investors from the United States, the UK and Spain. "It doesn´t mean it’s easy. Searching for a business is much more complex."

With the search fund model, aspiring entrepreneurs raise money from investors and seek out a company to acquire. There are three key stages of the search fund model: raising the fund, finding the right company and managing to grow the company in order to provide a return for investors.

Simon Webster, president of the European Search Fund Association and an experienced search fund entrepreneur, said that leading a search fund in the U.S. is easier than in Europe because the concept is more widely-known there.

Also European investors typically prefer entrepreneurs with at least 10 years of experience in a given sector, while U.S. search fund investors – particularly serial search fund investors – are often willing to take a risk on younger entrepreneurs.

During the event, titled "The Search Fund: How to Obtain Funds through Entrepreneurship," the panelists also gave tips on how to identify potential small and medium-sized businesses for acquisition and how to approach current business owners effectively.

When looking for a small company to acquire, said Webster, "you’re looking for something quite unique. It’s saying to an owner, ‘look I´m willing to invest my career in this business that you’ve taken to this stage. I want to help take it to the next stage."

In a separate panel discussion, moderated by IESE Prof. Antonio Dávila, three seasoned investors - IESE Prof. Rob Johnson of Delta Partners, Pep Casas of Neoko Capital and Will Thorndike, Partner and General Director at Housatonic Partners - provided the investor perspective.

Thorndike, who is currently involved in 20 search funds, said that his firm continues to invest in this asset class because "the returns have been very good."

"What is remarkable about the return data is that the overall IRR is very high and that IRR has been sustained over very long holding periods," he said.
Search funds have become increasingly attractive for both entrepreneurs and investors and now make up a significant component of the U.S. investor group, he said.

Paraphrasing Hollywood film star Mae West, Thorndike said "too much of a good thing has been wonderful."