The Four Ps of Search Funds

My name is Max Byer, and I am a rising junior undergraduate student at Brandeis University. Throughout this summer, I am lucky to have the opportunity to intern at Exit Plan under the sterling leadership of Principal Mike McGlade. Coming from a background in the social sciences, I delved into the foundations of search funds in order to best help push Exit Plan Capital toward acquisition.  

 

Breaking it all down

More and more search funds are popping up within the private equity industry. A search fund is an investment vehicle, through which an entrepreneur raises capital to locate, acquire, and grow an existing company. Any successful search fund depends on the four P-principles: People, Process, Preference, and Performance. By understanding and concentrating on these factors, entrepreneurs, regardless of experience, can find themselves completing a successful search fund and thriving at their newly acquired company.

 

People

While financial data and advanced metrics often receive a lion’s share of attention, it is often people, not data, that dictate a successful search process. The successfulness of quantitative analysis largely depends on the searchers themselves and the people they bring into the fold. Search funds largely operate without the institutional infrastructure that many searchers are accustomed to or have benefited from, so it is essential for searchers to surround themselves with advisors and teams who can provide a firm level of support during the search fund stages. Like many businesses, a search fund is much a people’s business. Regardless of background, successful searchers recognize their strengths and align themselves with business leaders who advise them on their weaknesses. Finding mentors and investors to advise throughout the life of a search fund is integral for searchers to achieve their mission. So too is putting the spreadsheet down, picking up the phone or getting in the car, and talking to countless business owners, brokers, private equity leaders, and others operating in the space. The importance of data is not discounted by any means, but thorough quantitative analysis is only valuable and useful when it’s paired with constant networking and a team of advisors and support.

 

Process

Search funds are not short projects like flipping businesses like real estate—a search fund is a process. Understanding the different stages independently, and understanding that the stages are simultaneously independent and interconnected is integral to execute the search fund process. Every step of a search fund’s lifespan can be boiled down to processes connected like a chain. Treating every step of a search fund into a process enables searchers to maximize efficiency through automation and helps searchers allocate time most appropriately. From sourcing potential deals and lead scoring, to understanding industries and analyzing companies’ financials, treating the various stages of search funds as a process encourages a search fund to operate within a long-term view and complete a diligent, focused, and efficient process.   

 

Preference

Just like a private equity or venture capital portfolio, the functioning and direction of a search fund operates on a basis of preference. At the onset, searchers must determine a myriad of views on what they prefer, all of which should dictate their search process. Searchers must establish a preference for investments and investor pool size, business geographic location, industry, business models, financial ranges, growth strategies, role of the acquired company’s existing management, and beyond. By establishing preferences across a multitude of categories and conditions, searchers focus their search, which helps facilitate the search process toward and through acquisition.

 

Performance

A search fund is off the beaten path, but it is still a business, and like all forms of business, performance rules. Putting performance first is mandatory, and by prioritizing performance, searchers can minimize the time it takes to acquire a suitable company and maximize the success levels of the search’s results. All aspects of the search fund process should be conducted in order to increase performance. Searchers focus not only on how much an investor can contribute by investing, but also on how much said investor’s experience, knowledge, and network can contribute to the search fund’s goals. It is this focus on performance that should push searchers to concentrate on not just finding a company with solid financial growth, but finding a company that has ideal performance levels and more importantly, a capacity to perform at an even higher levels.

 

Putting it all together:

Search funds are new, and there are substantially fewer resources for searchers than for startup executives and other entrepreneurs. Following standard plans and understandings is not enough to maximize chances for a successful search. It is this reason that adhering to the above four P-principles is so essential and helpful. By being surrounded by complementary people and networking extensively, searchers can facilitate a quick, strong process. In focusing the scope on certain established preferences, it becomes more likely that searchers can operate a successful search that results in the ultimate goal: acquiring a strongly performing company and building it to perform even better.