International Search Funds: Tracking the Trend of Tomorrow

IESE and Stanford GSB study on new entrepreneurial model


Rob Johnson

IESE Visiting Professor of Entrepreneurship Rob Johnson

The troubled world economy is yielding some interesting opportunities for entrepreneurs and investors. Low prices and a still-sluggish recovery from the recession make this an interesting time to be shopping for a business.

Which is where search funds come in.

Search funds are investment vehicles for entrepreneurs to acquire businesses and grow them. The entrepreneurs -- usually recent MBA graduates looking to put knowledge into practice --- locate a business, and their investors contribute the funds for them to acquire and manage it.

Still relatively unknown outside of the U.S. and Canada, this new entrepreneurial model has been the object of research by Stanford Graduate School of Business since 1996. Its 2013 study found that the internal return on sample of 134 U.S and Canadian search funds before tax was a significant 35% in 2013.

In 2011 Stanford GSB partnered with IESE to track search funds outside the United States and Canada - called "international search funds." IESE Professor Rob Johnson, together with Lenka Kolarova (MBA 2011) and Stanford GSB’s Peter Kelly, has produced a report on these international search funds – the second study so far to emerge from the collaboration.

Of the 28 international search funds tracked in the IESE-Stanford GSB study as of December 2013, four have made successful exits to date, while two have failed.

Search funds – four distinct phases

The study identifies four stages in the search fund lifecycle.

  1. Raising the search fund: the median time to raise funds --which ranged from $15,000 to $673,000 -- was two months longer than the U.S. funds in the Stanford GSB study. Recruiting potential investors was complicated by lack of familiarity with the concept, and the term “search fund,” for which there is often no local translation. 

  2. Search and acquisition: the funds studied made a total of 13 purchases – generally described by the entrepreneurs as “opportunistic.” Of these, four were sold, seven are currently operating, and two were shut down. The median company purchased had $7.9 million in revenues, an EBITDA margin of 19%, headcount of 70 and a purchase price 5.6 times greater than the EBITDA. 

  3. Operation: this is the longest stage, during which the entrepreneurs manage and grow the company purchased. Many fund operators likened their role to a combination of salaried CEO and a significant equity owner. Like a CEO, the fund operators seek approval from the Board of Directors to make major financial or strategic decisions. 

  4. Exit: the study revealed a tendency toward shorter holding periods in international search funds. While U.S. search funds have had holding periods of 10 years or more, international entrepreneurs reported pressure from investors to flip companies and redeploy funds in new high-return opportunities.

Looking to the future

IESE and Stanford GSB will continue to collaborate on tracking the opportunities and risks of search funds, with a new study planned for publication in 2016.

On April 24 2015 IESE will host the International Search Fund Conference, which will bring together entrepreneurs and investors from more than 20 international search funds. Funded searches will be showcased to aspiring entrepreneurs and investors interested in new entrepreneurial models.

More information on IESE Insight