Search Funds: A New Approach to Small-Cap Acquisitions.
Search funds, a concept that originated in the United States 40 years ago, represent a relatively new practice tailored for small-cap acquisitions. This model allows one or two first-time buyers to raise funds to search for a target company.
The search fund model consists of a two-phase investment scheme. The first phase involves raising between €300,000 and €500,000 from a small group of investors who mentor the searcher during their target acquisition search. During this stage, a simplified legal structure is established, allowing the searcher to independently seek out small companies with an EBITDA of at least €1 million and a company value between €10 million and €30 million, ideally with solid market positioning and growth potential.
The second phase begins once a target company has been identified and is similar to a classic Leveraged Buyout (LBO). In this stage, community support is crucial as it often attracts both existing and new investors, facilitating the raising of equity that ensures reasonable bank leverage. Investors then have options to reinvest in the chosen company, recover their initial investment with a 50% 'stet up', or engage in other search funds. The searcher benefits from a 'vesting' model, allowing them to acquire a percentage of the capital based on the performance of the identified target.
The legal documentation for investment and acquisition aligns with standard LBO practices. The search fund model has demonstrated high efficiency over the past three decades in the United States, typically providing investors with returns exceeding 3x their investments. To date, approximately thirty search funds have been established in France, leading to more than ten successful acquisitions, with managers benefiting from the support and experience provided by investors post-acquisition.
In a complex market characterized by difficulties in identifying small to mid-sized acquisition targets and a challenging financing climate for management buy-ins, the search fund model emerges as a particularly advantageous model. Its efficacy hinges on leveraging a diverse investor base and fostering a strong network for the searchers, making it a promising approach in the private equity realm.