AFTER THE GAME - Bridging the gap from winning athlete to thriving entrepreneur | by Jay Dixon

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Introduction to Search Fund Investing

Search fund investing is a niche corner of the private equity world that offers an alternative pathway to entrepreneurship through acquisition. It is a unique model where an aspiring entrepreneur, often with a background in business or consulting, establishes a search fund with the specific goal of raising capital to locate, acquire, and then manage a small to mid-sized company. This investment vehicle appeals to individuals seeking a more hands-on approach to their investments and those interested in the operational aspects of running a business.

The process of search fund investing typically unfolds in stages:

  1. Raising the Search Capital: The initial step involves the search fund entrepreneur, also known as a searcher, raising a pool of capital from investors to finance the search period, which can last from one to three years.

  2. The Search: The searcher then diligently seeks a business to acquire that fits specific criteria — profitability, stability, and growth potential. The search targets are usually established companies with a stable customer base and a history of earnings.

  3. Acquisition: Once a target is identified, the search fund secures additional funding from its investors or other financing sources to acquire the company.

  4. Value Addition and Management: After the acquisition, the searcher typically becomes the CEO, with a mission to grow the company and increase its value.

  5. Exit: The final stage involves an exit, usually after five to seven years, through a sale or recapitalization, yielding potential returns to the investors.

Search fund investing offers several advantages, such as operational control, direct influence on investment outcomes, and close interaction with the managing entrepreneur. However, the approach also carries specific risks; it requires a robust due diligence process, a deep understanding of the acquired company’s industry, and confidence in the abilities of the searcher. Despite these challenges, for those who are well-informed and strategic, search fund investing can be a lucrative addition to an investment portfolio.

Understanding the Unique Approach of Search Funds

Search funds represent an unconventional investment vehicle that pools capital from investors to finance the search and acquisition of a single small to mid-sized private company. This particular investment method was pioneered by Stanford graduates in the 1980s and has since gained traction across entrepreneurial and investment communities.

Firstly, it’s critical to grasp the two-phase structure that delineates search funds:

  1. The Search Phase: This initial stage involves the search fund entrepreneur, often an MBA graduate or an individual with considerable managerial experience, raising a modest amount of capital from investors to cover search costs. The goal during this period, which typically lasts one to two years, is to identify a viable target company that presents a promising value proposition and possesses strong growth potential.

  2. The Acquisition Phase: Upon successful identification of a suitable target, the search fund entrepreneur seeks additional funding from the initial investors to acquire the company. The entrepreneur then usually takes on a significant management role, often as CEO, with a strategic plan to grow and improve the business.

In contrast to other investment methods, search funds are highly personal endeavors. They revolve around the capabilities and dedication of the search fund entrepreneur, whose interests and incentives are typically closely aligned with those of the investors due to their significant stake in the ultimate success of the acquired company.

It’s also noteworthy that search fund investors do not only provide capital but also mentorship and strategic guidance given their vested interest in the entrepreneur’s success. This creates a symbiotic relationship where experienced investors contribute their expertise in steering the company towards growth and profitability.

Lastly, search funds, while bearing substantial risk due to their focus on a single entity, promise higher levels of control over the investment and potential for outsized returns relative to diversified portfolios. Understanding this unique approach is essential for investors considering the distinct blend of entrepreneurial drive, investment acumen, and profound operational involvement that search funds embody.

Evaluating the Search Fund Model: Advantages and Risks

The search fund model remains a compelling investment avenue, affording both significant opportunities and inherent risks to investors.


  • Access to Small Market Companies: Search funds often target small, often under-the-radar companies, presenting unique investment opportunities that are usually not accessible through traditional investment avenues.

  • Active Management: An entrepreneur-in-residence actively manages the acquired company, driven by aligned incentives to increase its value.

  • Specialized Approach: Search fund investors can leverage specialized managerial talents to steer companies towards growth, tapping into industry-specific knowledge and expertise.

  • Potential High Returns: By investing in and nurturing smaller companies, investors may achieve higher returns relative to larger, more mature investments.


  • Dependency on Individual Leadership: The success of a search fund is highly dependent on the talent and capabilities of the entrepreneur leading the charge, making it a more person-centric investment.

  • Limited Diversification: Given that a search fund typically acquires a single company, investors’ portfolios may lack diversification, increasing exposure to sector-specific downturns.

  • Operational Challenges: Small and mid-size enterprises (SMEs) often have less institutional structure, resulting in potential operational vulnerabilities that can affect performance.

  • Illiquidity and Long-term Commitment: Investments in search funds are usually illiquid, requiring a long-term commitment that may not be suitable for all investors.

In considering the search fund model, investors must weigh these factors carefully, balancing the potential for outsized returns with the unique risks associated with this type of investment. Due diligence, along with a clear understanding of the search fund’s strategy and the target company’s market, is essential for successful engagement with this investment model.

Developing Your Investment Criteria: Key Factors to Consider

When embarking on an investment venture, such as a search fund, identifying clear investment criteria is critical for streamlining the selection process and improving the chances of success. This section highlights essential factors that should influence your investment criteria.

  • Industry Experience: Consider sectors where you or your team have expertise. Knowledge and experience can provide a competitive edge in understanding market trends, risks, and opportunities.

  • Financial Health: Look for companies with strong financials, including consistent revenue growth, profitability, and positive cash flow. These metrics are indicative of a company’s stability and potential for scalability.

  • Company Size: Define your target company size, which can range from small family-owned businesses to larger enterprises. Size will impact the complexity of the transaction, management needs, and growth potential.

  • Geographic Location: Geographic preferences should align with your operational capabilities and strategic vision. Proximity may offer management advantages and easier integration.

  • Market Position: Seek out companies with a defensible market position. A strong brand, unique technology, or high barriers to entry can protect market share and ensure long-term competitiveness.

  • Growth Potential: Evaluate the potential for growth within the company’s industry and the business itself. Consider factors such as market expansion, product development, and scalability.

  • Cultural Fit: Assess cultural compatibility, as the alignment of values and objectives between you and the existing company can be crucial for a smooth transition and continued success.

  • Exit Strategies: Lastly, consider the feasibility of future exit opportunities. Potential for IPO, strategic sale, or acquisition should align with your investment horizon and return expectations.

Remember, while no investment is without risk, careful construction of investment criteria grounded in rational and strategic thinking can minimize unnecessary exposure and position a search fund for fruitful endeavors.

The Role of Due Diligence in Search Fund Investments

Due diligence serves as the critical process through which search fund investors vet potential target companies before committing capital. This intricate and meticulous effort is foundational to mitigating investment risks and maximizing the likelihood of a successful acquisition.

In the unique model of a search fund, where inexperienced entrepreneurs are financially backed to acquire and manage a company, due diligence assumes an even more significant role. It acts as a safeguard, ensuring that the limited investment resources are deployed in opportunities with the most promise of operational success and financial returns.

The process typically encompasses various facets:

  • Financial Analysis: A deep dive into the company’s historical and projected financial performance. Investors scrutinize financial statements, tax returns, and other fiscal documents to understand revenue streams, profitability, and growth potential.

  • Operational Review: An assessment of the target’s business operations, including an examination of the customer base, supply chain, production efficiency, and the caliber of the management team.

  • Legal Examination: A thorough review of legal matters, such as contracts, intellectual property, pending litigation, and compliance with relevant regulations.

  • Market Evaluation: Understanding the industry landscape, including competitor analysis, market trends, and regulatory impacts to determine the sustainability and scalability of the business.

  • Cultural Insight: Investigating the company culture and employee relations, which can significantly impact future operations and integration post-acquisition.

Search fund entrepreneurs are often advised to seek assistance from experienced mentors, industry experts, and due diligence professionals throughout this process. This collaborative approach not only reinforces the thoroughness of the investigation but also assists in building a network of resources that can be instrumental in the post-acquisition phase.

The depth of due diligence directly correlates with the level of confidence investors can place in their investment decision. It is the cornerstone upon which the tenets of trust, transparency, and informed decision-making are built in the landscape of search fund investments.

Capital Allocation Strategies for Search Fund Investors

Capital allocation is a critical aspect of search fund investing, where investors must carefully deploy their capital for maximum impact. Here are several strategies that can help search fund investors make prudent investment decisions:

  • Diversification:

    • Spread investments across multiple search funds to mitigate the risk of any single investment underperforming.
    • Consider investing in different industries, geographies, and stages of business to create a well-rounded portfolio.
  • Staged Financing:

    • Allocate capital in stages based on the search fund’s milestones and performance.
    • This approach can manage risk by only committing further resources when there’s evidence of progress and potential.
  • Alignment with Operators:

    • Structure investment terms to align interests with search fund operators.
    • This often means tying compensation to the performance of the acquired company, ensuring that operators are incentivized to maximize value.
  • Due Diligence:

    • Conduct thorough due diligence before committing capital.
    • Evaluate the search fund team’s experience, the viability of their business thesis, and the potential of their identified target markets.
  • Value-Add Contributions:

    • Beyond capital, offer support through mentorship, networking, and industry insights.
    • Active involvement can make a significant difference to the success of the acquired company and, by extension, the return on investment.
  • Monitoring and Governance:

    • Maintain oversight through regular updates, financial reports, and board involvement.
    • Good governance practices ensure that investors stay informed and can intervene if necessary.

By employing these capital allocation strategies, search fund investors can better navigate the investment landscape, manage risks, and position themselves for success in this unique corner of the private equity market.

Building and Managing the Investor-Searcher Relationship

Building and managing the investor-searcher relationship is pivotal for the success of a search fund. This dynamic partnership requires attention to several key aspects that help foster a strong and productive relationship.

  • Communication is the cornerstone of the relationship. Regular, transparent updates promote trust and confidence between the searcher and investors. This may involve structured updates on the search process, business evaluations, and the post-acquisition phase.

  • Alignment of Interests must be established early on. Investors and searchers should agree on the fund’s goals, risk tolerance, and investment horizon. This includes understanding the financial and operational benchmarks that will guide the search and eventual business operations.

  • Support and Mentorship is critical. Investors with relevant experience should be willing to provide guidance to the searcher. This mentorship can be instrumental in decision making, providing industry insights, and avoiding potential pitfalls.

  • Due Diligence from both parties is a shared responsibility. While searchers conduct thorough due diligence on potential acquisitions, investors should perform due diligence on the searcher’s background, plan, and progress.

  • Trust and Patience are essential. The search process can be lengthy and complex. Both investors and searchers should enter the relationship prepared for the long haul, maintaining a focus on the ultimate goal of a successful acquisition and operation.

  • Conflict Resolution mechanisms should be in place to address any disagreements that arise. Open and earnest discussion is often the best means to resolve disputes and should be encouraged.

Effectively managing these elements ensures that the investor-searcher relationship is positioned to thrive, paving the way for a successful investment outcome.

Exit Scenarios and Return Expectations in Search Fund Investments

Investing in search funds requires a clear understanding of potential exit scenarios and return expectations. Search funds typically follow a predefined lifecycle, from raising initial capital to acquiring a business, growing it, and eventually exiting.

Exit Scenarios

Successful exits in a search fund investment generally involve one of several pathways:

  • Strategic Sale: The acquired company is sold to a larger business within the same industry looking to expand its market share.
  • Financial Sale: A financial buyer, such as a private equity firm, acquires the company, often with plans to invest further and eventually seek another sale or IPO.
  • Management Buyout: The existing management team or the entrepreneur who raised the search fund may buy back the company.
  • Initial Public Offering (IPO): Although rarer in the search fund space, going public can provide significant returns for initial investors.
  • Recapitalization: The company can undergo a recapitalization process, allowing investors to realize partial returns while still holding an equity stake.

Return Expectations

Investor returns in search funds are influenced by the success of the acquired company and the eventual exit strategy:

  1. High-Risk, High-Reward Profile: Returns can be substantially high, reflecting the entrepreneurial risk associated with search funds. Annual returns can range from 30% to 40%.
  2. Investment Horizon: The typical holding period for a search fund investment is 5-7 years, with investors needing patience to realize full returns.
  3. Alignment of Interests: Incentive structures are often in place to align search fund entrepreneurs with investors, leading to focused efforts on growth and value creation.
  4. Return Multiples: Upon a successful exit, investors can expect return multiples ranging from 3x to 5x their initial investment or more, dependent on the particular success of the business under the search fund management.

Diligent analysis of both exit scenarios and return expectations is integral to strategic investment in search funds, helping investors navigate risks while aiming for lucrative outcomes.

When search fund investors engage in the pursuit of a company to acquire and operate, understanding and adhering to the regulatory landscape is critical. Regulatory requirements can vary significantly depending on the industry, the size and structure of the transaction, and the jurisdictions involved.

Due Diligence

Before committing any capital, investors must conduct thorough due diligence to ensure compliance with applicable regulations. This process should address:

  • Financial compliance, such as adherence to the Generally Accepted Accounting Principles (GAAP)
  • Relevant securities laws, especially if raising additional capital
  • Industry-specific regulations that could affect the operational aspects of the target company

Understanding Securities Laws

Securities laws are particularly nuanced in the context of search funds due to their unique structure. Key considerations include:

  • Federal and state securities regulations, which govern the solicitation of investors and the sale of securities
  • Compliance with the Securities Exchange Act of 1934, especially when dealing with a large number of investors or considering a public offering

Employment and Labor Compliance

It is imperative that search funds comply with both federal and state employment laws. This encompasses:

  • Proper classification of employees vs. independent contractors
  • Adherence to workers’ compensation, unemployment insurance, and employee benefits laws
  • Ensuring non-discriminatory practices in hiring, compensation, and promotion

Environmental, Health, and Safety Regulations

Adequate attention must be given to environmental regulations, which can vary greatly by location and industry. Search funds should:

  • Ensure the target company complies with the Occupational Safety and Health Act (OSHA)
  • Verify adherence to environmental regulations like the Environmental Protection Agency (EPA) standards

Anti-Trust and Competition Laws

Finally, the investment must not violate anti-trust and competition statutes. This involves:

  • Reviewing the Hart-Scott-Rodino Antitrust Improvements Act for certain large transactions
  • Understanding the competitive landscape and ensuring that the acquisition does not create monopolistic scenarios

Navigating the regulatory environment is a complex task requiring expert legal and financial guidance. Search fund investors must prioritize compliance to secure their investment and facilitate a smooth operational transition post-acquisition.

Case Studies: Successes and Learnings from Experienced Search Fund Investors

Search fund investment, while unique, brings with it numerous anecdotes of success and practical learning experiences. Below are insights gleaned from seasoned investors.

One notable case is that of Pacific Lake Partners, a prominent search fund investor. Their successful acquisition of Ascent Behavioral Health showcased the power of meticulous due diligence and operator-investor alignment. Through hands-on operational support and strategic leadership, this investment realized significant growth, underlining the importance of active engagement post-acquisition.

An instructive tale comes from Alpine Investors. By prioritizing founder compatibility and organizational culture, they ensured a smooth leadership transition in their investment in a software company. This approach prevented the disruption often associated with new management, reinforcing the need for cultural fit assessments in the search fund process.

Another success story was exhibited by Anacapa Partners. They targeted a highly fragmented industry with their investment in a niche service provider. Anacapa’s strategy of focusing on industries with low market concentration and potential for consolidation led to outperformance, highlighting the benefits of industry selection based on fragmentation levels.

Conversely, there are lessons too. A search fund investor experienced setbacks due to overestimating the scalability of a small business. The outcome emphasized the necessity of robust scalability assessments before investing, directing future investors to scrutinize this aspect vigilantly.

In sum, experienced search fund investors have demonstrated that thorough due diligence, strategic alignment, cultural assessment, and industry analysis are critical for success. But, missteps in scalability evaluations serve as cautionary tales for those navigating this niche investment landscape.

Leveraging Expert Advisory and Networking in the Search Fund Ecosystem

In the intricate world of search funds, where investors aim to identify, acquire, and operate a single promising company, expert advisory and networking play critical roles. It is not simply about having the capital to invest but equipping oneself with the right guidance and connections to make astute decisions throughout the investment journey.

First, expert advisors can provide mentoring on due diligence processes, deal structuring, and post-acquisition strategy. Tapping into their knowledge can be the difference between a mediocre investment and a highly successful one. These experts generally come from backgrounds such as:

  • Private equity veterans
  • Successful entrepreneurs
  • Industry-specific consultants
  • Academic professionals with specialized research

Investors should actively seek out advisors who complement their skill set, providing a well-rounded perspective on potential deals.

Secondly, networking is the lifeblood of the search fund ecosystem. Interactions within a robust network can lead to:

  • Sharing of best practices
  • Guidance on investment opportunities
  • Access to potential deals
  • Potential partnerships or co-investments

Strategic networking involves participating in conferences, joining search fund specific forums, and engaging in associations that champion search fund endeavors.

Moreover, an often underplayed aspect is the alumni network of established search fund entrepreneurs. Former search fund investors often provide:

  1. Insights into the nuances of operating a search fund
  2. Anecdotal evidence on navigating challenges
  3. Introductions to key industry players

Search fund investors can leverage such alumni wisdom to avoid common pitfalls and accelerate the learning curve associated with running a successful search fund.

In essence, the collaborative synergy between expert advice and networking is a force multiplier in the search fund ecosystem, helping investors to navigate the complex terrain with enhanced clarity and confidence.

The search fund landscape is poised to experience significant evolution in the coming years, guided by emerging trends and thoughtful predictions. One prominent forecast is the increase in international search funds. As search funds gain popularity, more entrepreneurs outside of the traditional North American and Western European markets will embrace this investment model, expanding its geographic footprint.

Advancements in technology will also reshape the search fund process. Data analytics and artificial intelligence will streamline target identification, due diligence, and operational improvements post-acquisition. This will potentially lead to better-aligned investments and operations, enhancing overall fund performance.

Another anticipated trend is the diversification of industry focus. While traditional search funds have honed in on sectors like manufacturing and services, the future will likely see a wider range of industries, including tech startups, sustainable energy, and health tech companies, becoming appealing targets.

Furthermore, there is an expectation of increased institutional involvement. As the asset class matures, more institutional investors and family offices are likely to back search funds, drawn by their potential for high returns and personalized management. This could lead to larger fund sizes and more competitive deal sourcing environments.

Lastly, a key prediction is the growth of search fund accelerators and educational programs. These resources are designed to support prospective searchers through training and mentorship, which will standardize best practices and improve success rates.

The search fund arena, driven by these trends and others, stands on the brink of significant transformation, promising a dynamic future for investors and entrepreneurs alike.

Conclusion: Integrating Insights for Search Fund Investment Success

In the pursuit of investment success through search funds, integrating key insights is crucial. It is the synthesis of careful due diligence, astute market understanding, and strategic execution that creates a solid foundation for investment success in this unique asset class. The following are essential elements that investors should consider:

  • Due Diligence: Rigorous evaluation of the target company is a given, but due diligence should also extend to the search fund manager. The investors must ensure that the manager possesses not only the relevant experience and skill set but also the temperament to steer a company towards growth.

  • Value Alignment: It is important for the search fund investors to establish a clear alignment of values and objectives with the search fund managers. This alignment helps in mitigating conflicts and fostering a collaborative environment focused on the long-term success of the investment.

  • Market Dynamics: Understanding both macro and microeconomic factors that could influence the target company’s industry is imperative. Investors need to be well-versed in industry trends, competitive landscapes, and potential regulatory implications that could impact the investment.

  • Collaboration: Ongoing collaboration between the search fund manager and investors is necessary. This includes regular communication, transparent reporting, and strategic discussions to pivot or adapt the business strategy in response to market changes.

  • Exit Strategy: Having a clear exit strategy is critical. Whether the intention is for a strategic sale, a merger, or taking the company public, a well-thought-out exit plan can significantly affect investment returns.

By integrating these insights, search fund investors can enhance their prospects for success, aligning with competent fund managers and promising enterprises capable of yielding significant returns. Through such collaboration and strategic foresight, the intricacies of search fund investments can be navigated effectively, culminating in favorable outcomes for all parties involved.