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Mid-ranking bankers are leaving for something new: search funds

You might have already heard of search funds. Vehicles that back junior entrepreneurs (or “searchers”) to find high-potential small firms, acquire them, and run them to success.

They've actually been around for decades - Stanford University says they were conceived in 1984 for "relatively inexperienced entrepeneurs" to quickly control their own company with a "meaningful ownership position".

"Investors financially support an entrepreneur’s efforts to locate, acquire, manage, and grow a privately held company," according to the University.

Sounds more or less like a micro private equity (PE) firm, right? Well, yes – that’s the basic idea. But the difference is huge when the scale is small.

Ömer Güven, cofounder of fintalent.io, a platform for bankers who want to ply their trade on a freelance basis, says more people are going into search funds. And they're not MDs. 

“The ones that we have seen are quite junior. Starting from the senior associate, VP level… We’re not talking MDs here. We are talking really young people,” he said.

Generally, their backgrounds are “investment banks, or from a mid-market [bank], or a larger PE firm – investment professional or investment manager level -   still, maybe 10 years of experience.”

Younger bankers have an advantage with starting a search fund, Güven says. Deals are usually soured via software, or via the CRM system. The aspiring fund manager therefore “has to be quite tech savvy." MDs are not, says Güven:  "They go via the traditional way – via letter or something. These guys do it like a sales approach.”

The benefits of a search fund are self-evident, Güven says. “If you're really a good investment analyst, or portfolio manager, why would you work for a big asset manager, when you could just go for it yourself? You have so much money available, and your origination and dry powder [creates] the ideal environment to create your own search fund.”

Search funds generally receive backing from non-institutional investors. Güven lists wealthy family offices as the main backers of search funds, as well, as private individuals, depending on the type of deal in question.

Posters on Wall Street Oasis have also shared their perspectives, advising prospective search fund starters that "it's not going to be glamorous," and that "it's quite a change from a big banking environment." Another poster said that they were "seriously considering changing course after next bonus season," for a search fund.

Connections are the name of the game for finding funding – although not critical. “You cannot do freelancing while you do sell-side. But you can already create connections with investors, while you're doing M&A," Güven says. 

Some industries are particularly targetable for search funds. Some software companies, for instance, are outside the scope of “the typical investment criteria of PE funds, or strategic investors. There’s so much potential. Those are smaller, digital businesses.”

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AUTHORZeno Toulon
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  • Se
    Searcher
    4 November 2022

    You do a great job in delivering high-quality news that I really admire, but this article about Search Funds is too superficial. Another name for SFs is Entrepreneurship through Acquisition - it is for someone who wants to run a company as a CEO / co-owner; not a fund. Single acquisition - not a portfolio - that should deliver IRR of >35% for Searcher to make real money. Think of a list of PEVCs who consistently do that on a 10+ year basis (they do on a portfolio). This is a unique asset class for those who are both really passionate and thoughtful to search for a couple of years and then run a company for a decade or more. Historically the model was very successful - mainly because of unique and very supportive ecosystem where investors play very active role in guiding young entrepreneurs, who are usually post-MBAs, with Ops/IB/PE/Consulting experience in their 25+ (32 median).
    SF is about finding a single strong, cash generative business (most often retirement) and creating value through managing operations (not leverage/multiple - ops) in a way your EBITDA grows 5-7x, and it is damn hard. If you like the challenge (not money) - welcome, you'll find the rest online.

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