What are popular industries for search funds?
Searchers buy every kind of company imaginable, but healthcare has been the most popular, amounting to 35% of recent search fund acquisitions. Tech M&A is becoming more and more popular among search funds, and I'd say that the majority of our clients these days have been approached by a searcher in one form or another.
A typical example of a search fund is VRI, a company that provides remote monitoring services that help patients rest at home rather than prolonging their hospital stay. Chris Hendricksen, the co-founder of VRI, graduated from Stanford Business School in 2006.
STATS. Search funds typically target companies in the $5-30m price range, $1-5m EBITDA range, $2-30m revenue range, requiring $2-10m of equity capital, in (1) fragmented industries, with (2) sustainable market positions, (3) historically stable cash flows, and (4) long-term opportunities for growth and improvement.
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.
According to the 2022 Stanford Search Fund Study, searchers take a median salary of US$120k/year during the search period, which is a reduction of somewhere between 25% and 50% of a top-tier MBA's expected post-graduation compensation.
The main sources of funding are retained earnings, debt capital, and equity capital.
Hedge funds have existed for many decades and have become increasingly popular. They have now grown to be a substantial portion of the asset management industry, with assets totaling around $3.8 trillion as of 2021. Hedge fund managers can have several billion dollars of assets under management (AUM).
The study identifies six measures which can be used to predict the probability of a target being acquired. These are: Growth, Profitability, Leverage, Size, Liquidity and Valuation.
- Steady growth rate.
- Product portfolio diversification.
- Profitability.
- History of innovation.
- Market leadership or niche specialty.
- Management team.
- Special legal, regulatory or environmental issues.
Search funds are different from Special Purpose Acquisition Companies (SPACs) because the equity capital in a search fund is private versus publicly traded in a SPAC.
What background is best for search fund?
There is no “perfect” background.
Search fund entrepreneurs hail from a variety of backgrounds prior to business school. Most recent statistics show that the three most common backgrounds are private equity (31%), investment banking (22%), and management consulting (16%).
Search funds are generally structured as either a limited liability company or a limited partnership. A limited liability company, or LLC, is a business structure for private companies that combines the aspects of a partnership and a corporation.
Search Fund Performance
According to the Stanford Graduate School of Business, 73% of searchers that make it through the acquisition stage have successful exits with a greater than 1X return and 10% with greater than 10X return.
What are the economic outcomes for search fund entrepreneurs? While you search and operate, you will be paid a salary commensurate with your experience and location. Typically, we see searcher salary around $130,000, and CEO salary is around $180,000, which will grow as you gain experience.
As an asset class, search funds have achieved a return on invested capital (ROI) of 8.4x and an internal rate of return (IRR) of 36.7%, with top performing funds returning well over 200x the initial capital invested.
In this case, investing predominately in equity funds would be a better option than investing in debt funds, as equities have the potential to generate higher returns than debt funds.
Equity shares and retained earnings are the two important sources from where owner's funds can be obtained. Borrowed funds refer to the funds raised with the help of loans or borrowings. This is the most common type of source of funds and is used the majority of the time.
Bond funds are the most common type of fixed-income mutual funds, where (as the name suggests) investors are paid a fixed amount back on their initial investment.
You generally must be an accredited investor, which means having a minimum level of income or assets, to invest in hedge funds. Typical investors include institutional investors, such as pension funds and insurance companies, and wealthy individuals.
- TSM83.43- Taiwan Semiconductor Manufacturing Company Limited.
- BAC27.09-0.30% Bank of America Corporation.
- WFC37.49-0.84% Wells Fargo & Company.
- MCO309.710.76% Moody's Corporation.
- DG218.511.22% Dollar General Corporation.
- MGM41.97-0.55% MGM Resorts International.
- AMCR10.30-0.06% ...
- PATH14.25-0.36%
What are the 3 common hedging strategies?
There are several effective hedging strategies to reduce market risk, depending on the asset or portfolio of assets being hedged. Three popular ones are portfolio construction, options, and volatility indicators.
These are People, Philosophy, Process, and Performance. When evaluating a wealth manager, these are the key areas to think about. The 4P's can be dissected further, but for the purpose of this introduction, we'll focus on these high-level categories.
Christopher Schelling. A comprehensive manager due diligence process can be summarized via a simple heuristic we will refer to as the five Ps – performance, people, philosophy, process and portfolio.
- Risk tolerance.
- Expected returns.
- Effort required to implement the strategy.
This target handover technique must take place before the classification step of the target acquisition process continues. An acquisition report consists of three elements: alert (optional), description, and location (for example, "DRIVER REPORT--TWO MOVING PCs--LEFT FLANK").
Google, Bank of America, and Disney are all companies that have greatly benefited from mergers and acquisitions. While most companies initially grow organically from the ground up, businesses can use merger and acquisition strategies to accelerate further growth.
A target firm or target company refers to a company chosen as an attractive merger or acquisition option by a potential acquirer. A takeover attempt can take on many different flavors, depending on the attitude of the target firm toward the acquirer.
Fair market value of target businesses in the business combination must exceed 80% of the SPAC's net assets held in the trust. The SPAC can use a combination of its shares, cash and debt to complete the business combination.
The SPAC sponsor always has a strong incentive to complete an acquisition even if the post-acquisition share value is far below $10. Without the acquisition, the sponsor's “promote” is worthless; with the acquisition, the sponsor's promote will be worth something (on average over $100 million in recent years).
Private equity funds want managers who will stay on and operate the company post-transaction, but search funds look for companies where the leadership team wants to leave – so the search fund entrepreneur can step in to run the business.
Do search funds use debt?
Most search funds acquire companies for around $10m in value. The acquisition capital can come from a variety of sources. Bank debt is an obvious source, as are other specialized providers of financing such as mezzanine debt funds.
Some advantages of selling your business to a search fund include: They want to step into your shoes and operate the business as the owner. They are more forgiving when owners are heavily involved. They have the knowledge and skills to grow the company.
Search funds offer numerous benefits to both investors and searchers. Investor returns have indeed been in excess of 30%. Compared with other similar asset classes in private equity, such as venture capital and buyout funds, search fund returns are often superior by 10-15%.
The generally accepted accounting principles (GAAP) basis classification divides funds into three broad fund categories: Governmental, Proprietary, and Fiduciary.
What types of mutual funds are there? Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds.
How are search funds different from SPACs? One way search funds are different from SPACs is the equity capital raised by a search fund is private versus publicly traded in a SPAC. Plus, since the SPAC raises funds via an IPO, the underwriting investment bank will receive a commission of the gross proceeds.
- Google — 86.99%
- Bing — 7.02%
- Yahoo — 3.11%
- DuckDuckGo — 2.42%
- Yandex — 0.12%
- Ecosia — 0.10%
- Others — 0.24%
A number of top executives in large businesses and governments have worked for a one-dollar salary. One-dollar salaries are used in situations where an executive wishes to work without direct compensation, but for legal reasons must receive a payment above zero, so as to distinguish them from a volunteer.
In 2018, Bernard Tyson, then-CEO of nonprofit health care giant Kaiser Permanente, made nearly $18 million, making him the highest-paid nonprofit CEO in the nation. The previous year, the top 10 highest paid nonprofit health system executives each made $7 million or more.
The basic economics for entrepreneurs and investors in search funds are determined primarily by two major factors: the structure of the investor capital and the amount of the entrepreneur's earned equity (referred to as “Manager Equity” in this Primer; also often called “Carried Interest”).
How big is a search fund deal?
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.
There are 413 United States Search Funds included in Axial's lower middle market Directory. The United States Search Funds listed in this Directory include data about the firm's M&A activities in the lower middle market.
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average.
A typical example of a search fund is VRI, a company that provides remote monitoring services that help patients rest at home rather than prolonging their hospital stay. Chris Hendricksen, the co-founder of VRI, graduated from Stanford Business School in 2006.
A 'stepped-up' interest in the acquisition for the target company. Investors who take the risk of investing in the initial round of financing usually receive a carried interest in the acquired company equal to their pro rata share of distributed search funds plus a step-up in value.
Fixed assets, equity (equity investments, equity-linked savings schemes), real estate, commodities (gold, silver, bronze), cash and cash equivalents, derivatives (equity, bonds, debt), and alternative investments such as hedge funds and bitcoins are examples.
Search funds are technically a form of private equity, as they exist to acquire and operate private companies. But, unlike conventional private equity, search funds look for companies in which the searcher will also take an active role in operating the business post-acquisition.
There are five main types of government funds, which includes the general fund, the capital projects fund, the permanent fund, the special revenue fund, and the debt service fund.
Hedge funds are alternative investments that use pooled money and a variety of tactics to earn returns for their investors. Private equity funds invest directly in companies, by either purchasing private firms or buying a controlling interest in publicly traded companies.
How many companies are in a PE fund?
The industry is the most popular when stock prices are high and investment costs are low. In 2020, there were approximately 4,500 private equity firms in the U.S. with 16,000 private equity-backed companies.
Legally, the search fund almost always gets structured as a Limited Liability Company (LLC). This means that investors buy units of the LLC (as opposed to shares/securities as is the case with a C-Corp) when they choose to invest in the search fund.
The search fund acquisition is often structured as a participating preferred equity investment. This means that the investors receive a return of their initial capital, often with a modest preferred return, before the searcher begins to participate in equity appreciation.
Cost: Unlike traditional IPOs that are very expensive to execute, SPACs typically pay for most of the costs, saving a significant amount of money for the company. Certainty: SPAC deals are identified ahead of time, and the valuation is agreed upon by both parties.
Stage 2 - Search and Acquisition
Searching for a target company is the most time and energy-intensive portion of the search fund process. While most funds acquire their first business within twenty-three months of their search, one in three funds fails to find a suitable investment.
When a founder starts a startup, they own 100% of the business until they raise outside capital. But a search fund, by its very nature, requires that the outside capital will own part of the business right after the acquisition - often the majority of the business.
