A Search Fund is an investment vehicle created by one or two entrepreneurs, with the objective of raising capital from several investors to finance the search for an SME in order to acquire, manage and grow it.
Instead of creating a company from scratch, in this case entrepreneurs seek to continue the cornerstones of the acquired company’s success. Entrepreneurs build on the legacy of the company’s founder with the help and advice of their investors, seeking to realise a new phase of growth for the SME.
The target company for a Search Fund is an SME with an EBITDA of between EUR 1,000,000 and EUR 3,000,000. They are looking for solvent companies with a good financial structure. Companies with a history of profitability and growth that, for succession or other reasons, their owners want to sell. These are companies that tend to be below the natural targets of private equity funds and above private equity funds. Search Funds are therefore an alternative for many entrepreneurs who want to sell their company, and a fantastic alternative for entrepreneurs who want to acquire and manage companies with high growth potential.
Although the Search Fund model was born in the United States more than 35 years ago, we are currently seeing a proliferation of this type of entrepreneurship around the world, which has led to the emergence of specialised institutional investors such as Arada Capital Partners that focus their investment strategy on first financing the search for Search Funds, and then acquiring localised companies with them.
One of the keys to this investment model is the alignment between investors and entrepreneurs, and the collaborative nature of the Search Fund model. The entrepreneur is not only supported by his investors in the search for the business, but also during the management of the company once it has been acquired.
In the current economic climate, there are a number of advantages to acquiring an existing company. The type of companies that are acquired tend to be more resistant to sudden economic movements than newly created ones. Moreover, in an environment of rising interest rates, they are companies that, because of their track record and good position, tend to obtain more favourable financing conditions.
There is no doubt that the search fund model is here to stay. They provide a solution to a problem of generational handover or the sale of a multitude of companies, while supporting experienced entrepreneurs.
