What is a Search Fund?

Jim B.

A search fund is a group of investors who look for distressed companies in the hope of buying those companies out and running them. The average type of this fund gathers initial investments from about a dozen investors to pay the salaries of those individuals who started the fund. These fund managers then seek out the ideal company with which to form a buyout arrangement. Investors in a search fund hope that the company that they take over improves its fortunes so that they can cash out their investment for a profit.

Man climbing a rope
Man climbing a rope

Many people wish to be involved in private equity or business ownership, but they lack the significant capital necessary for such an investment. As a result, they need to find alternative investment models to satisfy their entrepreneurial spirit. By gathering investments from friends, associates, or interested investors, they can get the money they need to target companies for possible ownership opportunities. A search fund is a way that the average entrepreneur can climb the business ladder quickly while also satisfying the goals of the investors within the fund.

The typical search fund is generally started by a small group of entrepreneurs, maybe even just one or two individuals. Their initial goal is to secure enough investors to fund their search for a company in need of capital. Initial funds are used to pay the salaries of the fund managers for a year or two while they do the research necessary to find the proper company.

Once a company is targeted, the search fund entrepreneurs will go back to their investors for another round of investing to get enough capital to buy out the company's current ownership. This amount is typically significantly more than the initial round, but investors at this level are usually guaranteed a greater share of equity in the purchased business than those who stay out of this round. Companies on the radar of search funds are usually mid-market companies that are struggling but have the potential to improve.

After the search fund buys out the previous ownership, the new owners begin to implement changes in the business. The founders of the fund essentially become the new leadership of the company, and their goal is to grow the business so that investors are rewarded for their capital contribution. If the fund can turn around the business and push the company to a higher level, the shares of equity owned by investors in the fund become exponentially more valuable.

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