What is the difference between a search fund and a SPAC?
Search Fund vs SPAC: Key Differences
Search funds can be started by almost anyone; SPACs are typically sponsored by seasoned professionals who are well-known to the public. Search fund capital comes through private investors; capital for a SPAC, on the other hand, comes through an IPO and traded publicly.
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.
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.
In an IPO, a private company issues new shares and, with the help of an underwriter, sells them on a public exchange. In a SPAC transaction, the private company becomes publicly traded by merging with a listed shell company—the special-purpose acquisition company (SPAC).
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.
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 search fund is an investment vehicle established to house a captive pool of capital raised to support one or a pair of entrepreneurs in their search for, acquisition of, and operation through to exit of a single, privately held business.
Stage One: Forming a Search Fund
These investors will each provide a portion of the initial search capital, typically between $400,000 and $500,000. This capital will be used to pay your salary, travel expenses, and any administrative expenses during your search.
- An established SME is acquired. ...
- The business is run by a talented entrepreneur. ...
- The entrepreneur is supported by experienced investors. ...
- Entrepreneurs can raise debt from banks. ...
- Investing in Search Funds allows for greater diversification.
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.
Who is the CEO of search fund?
Timothy Bovard - Founder, CEO - Search Fund Accelerator | LinkedIn.
- Initial Capital Raise to Fund the Search - 6 months.
- Search for and Close an Acquisition - 12 to 24 months.
- Operate and Grow the Business - 4 to 7 years.
- Exit / Sell the Business - 6 months.
What is a SPAC? Special purpose acquisition companies (SPACs) have become a preferred way for many experienced management teams and sponsors to take companies public. A SPAC raises capital through an initial public offering (IPO) for the purpose of acquiring an existing operating company.
By going public via a SPAC, companies can have more certainty as to the amount raised, potentially a shorter timeframe than the traditional IPO process, access to liquidity that might not otherwise be available to them, and a strategic partnership with an experienced management team that the SPAC's sponsors put ...
The Advantages
Compared with traditional IPOs, SPACs often offer targets higher valuations, less dilution, greater speed to capital, more certainty and transparency, lower fees, and fewer regulatory demands.
SPAC shares are structured as trust units with a par value of $10 per share. Investors in SPACs range from prominent private equity funds and celebrities to the general public. SPACs have two years to complete an acquisition or they must return funding to investors.
Search funds are technically also a form of private equity, because they are in the business of acquiring and operating private companies.
Most of the Committee members were of the view that shares issued by the SPAC are financial liabilities given that the SPAC has a limited life (even though the life can be extended, it is never unlimited) and the shares are puttable to the SPAC, which demonstrates that the SPAC has no unconditional right not to deliver ...
Summary. The main sources of funding are retained earnings, debt capital, and equity capital.
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.
What are popular industries for search funds?
International search-fund activity reached new peaks last year, with 44 new funds formed and 23 acquisitions made. For the searchers, who tend to recent MBA graduates, the four most popular sectors for acquisition-hunting were technology, healthcare, transportation and logistics, and manufacturing.
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.
There are 433 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.
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.
The average search fund entrepreneur currently operating a business has earned US$6.38 million of equity, or US$2 million per year of operation. The average exited search fund entrepreneur has earned US$7.57 million of equity, or US$1.45 million per year of operation.
The 80% rule states that managers cannot use misleading names for their funds and that 80% of the fund must be invested in the types of investments by the name.
Disadvantages of Selling to a search fund
While search funds have their advantages, they also have their disadvantages: They are sophisticated and will ask tough questions. They are less emotional about the business. They aren't always transparent about who their investors are.
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%.
- Adjusting net loss from operations.
- Buying non-current assets.
- Repayment of short term debt (bank loans) or long-term debt (debentures or bonds)
- Redemption of redeemable preference shares.
- Payment of cash dividends.
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%).
What is search fund lending?
A search fund is an investment vehicle used by one or two individuals to finance the process of finding and acquiring a company. The initial investors in the search fund are guaranteed the right to invest at attractive terms in the acquisition financing round.
Search Fund Accelerator (SFA) is an innovative venture designed to optimize an alternative private equity model known as the search fund. SFA provides unparalleled support and committed capital to a handpicked cohort of search fund entrepreneurs, each seeking a single company to acquire, actively manage, and grow.
Self-funded searchers use their own money or go to friends and family to cover their expenses during the search process. When the search is ready to make an acquisition, the traditional searcher tends to make larger acquisitions but take a smaller equity stake in his/her business, the rest being owned by the investors.
Due to regulations on who can invest and the unregistered nature of private equity investments, the government says that only institutional investors and accredited investors can provide capital to these funds.
SPACs can fail to merge, even after announcing a target. Be sure that the blank-check company and its target have an official DA (definitive agreement) before investing to mitigate risk. Additionally, make sure the deal has passed SEC regulation before jumping in.
SPAC investing has been less profitable for individual investors. Most SPACs underperform the stock market and eventually fall below the IPO price. Given SPAC's poor track record, most investors should be wary of investing in them.
If the SPAC is successful in acquiring a target company, the founders will profit from their stake in the new company, usually 20% of the common stock, while the investors receive an equity position according to their capital contribution.
- Potential for Capital Shortfall. When more public shareholders redeem shares than expected, sponsors may be forced to turn to the debt markets or raise more PIPE financing to make up for the shortfall.
- Compressed Timeline. ...
- Light Diligence Requirements.
- No. 1: Lucid Motors. Electric vehicle-maker Lucid went public in July through a merger with the SPAC Churchill Capital Corp. ...
- No. 2: Enovix. ...
- No. 3: Matterport. ...
- No. 4: ChargePoint.
| LCID | Lucid | $20 |
|---|---|---|
| DKNG | DraftKings | $12.65 |
| SOFI | SoFi | $6.20 |
Why do people invest in SPACs?
SPACs allow their IPO investors to benefit from the expertise of a sponsor, with some downside protection as a result of their option to redeem shares prior to any acquisition for the IPO price plus any interest accumulated in the trust account.
The most successful transactions are the result of leadership that has extensive knowledge of their particular industry. Companies that are led by a Chief Executive Officer, Chief Financial Officer and a strong legal team with prior public company experience will be more attractive SPAC targets.
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.
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.
A special purpose acquisition company (SPAC) is formed to raise money through an initial public offering (IPO) to buy another company. At the IPO, SPACs do not have business operations or stated targets for acquisition.
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.
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.
Generally, a SPAC is formed by an experienced management team or a sponsor with nominal invested capital, typically translating into a ~20% interest in the SPAC (commonly known as founder shares). The remaining ~80% interest is held by public shareholders through “units” offered in an IPO of the SPAC's shares.
If the SPAC is successful in acquiring a target company, the founders will profit from their stake in the new company, usually 20% of the common stock, while the investors receive an equity position according to their capital contribution.
SPAC IPO investors are usually savvy hedge funds. However, investors in SPACs can also include any entity from private equity fundsto the general public.
What happens if a SPAC does not merge?
If a SPAC fails to complete an acquisition within the specified time period, it must dissolve and return to investors their pro rata share of the assets in escrow. During this two-year timeframe, the SPAC must not only negotiate a deal, but also complete the deal and comply with all reporting requirements.
