The Search Fund Concept
Conceived in 1984, the search fund is an investment vehicle in which investors financially support a manager’s efforts to locate, acquire and manage an existing private company. Over 250 search funds have been raised in the US to date, predominantly by recent graduates of Harvard Business School and Stanford Graduate School of Business.
In a search fund model, capital is raised in two distinct rounds of financing. In the first round, funds are invested into the search fund entity (e.g., Rising Venture) to cover operating expenses and allow the Principal to draw a modest salary while conducting a professional search to acquire an existing private company. In return, search fund investors obtain the right, but not the obligation, to invest in the second round of financing, the acquisition round. All funds invested in the first round will automatically be converted to securities in the acquired company and stepped-up by 50%, structured as a combination of equity and subordinated debt (i.e., for every $1.00 invested in Rising Venture the investor will receive $1.50 of securities of the acquired company).
A 2016 study of 258 “first time” search funds (funds raised by management teams without prior search fund experience) by the Stanford Center for Entrepreneurial Studies shows average IRR of 36.7% per year. A similar study by IESE concluded for international search funds an IRR of 33.40%.
At a minimum, companies must possess the following characteristics:
- A niche manufacturing or service business
- The company must be in a management transition or have an absentee owner: The current owner(s) must be motivated to sell for personal reasons (i.e. retirement) or because he/they want to do something else
- A privately held company based in Brazil
- At least 3 years history of profitable operations
- Revenues between R$ 30 Mio. and R$ 100 Mio. (US$ 8 Mio. and US$ 30 Mio.) and EBITDA Margin of at least 10%
- The company needs to operate in a growing market
- The industry must be fragmented with no strong consolidator evolving yet
Each company which fulfills the above criteria shall be evaluated using a specific set of criteria before a decision on the follow-on steps is being made. Intermediaries and company owners can contact us here.
What we offer to an acquired business
We offer the owner of a company we acquire:
- Immediate Liquidity through our network of investors
- Professional management to take care of business continuity
- A possibility to transition out of the business while keeping your reputation with customers, suppliers, etc.
- A growth strategy that will let you business thrive over the years following on the acquisition
- Flexibility on the deal-side (i.e. the current owner can partially remain in the equity if this is of interest)
What we offer our Investors
- A successful track-record of entrepreneurial endeavors (please look here to learn more about the history of Rising Venture and here for the personal profile of the fund's principal)
- Access to an asset class that has an outstanding performance. Learn more about Search Fund asset-class characteristics here.
- The ability to take part in an exciting entrepreneurial endeavor and in the decision which company to acquire, plus to support the entrepreneur with pre- and post-acquisition advice
- Access to the biggest economy in LATAM, which after a recent recession is supposed to get back on track over the next years
Rising Venture represents a compelling investment opportunity for the following reasons:
Extremely well performing and proven Asset Class
Proven Concept and tested Investment Vehicle. Search funds have been in existence since 1984 and have been used by over 250 entrepreneur teams from top business schools to support efforts to locate, acquire and manage an existing private company. A 2016 study of 258 “first time” search funds by the Stanford Center for Entrepreneurial Studies shows an average IRR of 36.7%. An IESE study has confirmed that this does not need to be an isolated US phenomenon and concluded an IRR of 33.4% for a sample of all of first-time search funds that were started outside the US.
SMB are an underserved acquisition niche. Virtually all closely-held and family-owned businesses will lose their primary owner to death or retirement. Opportunities to acquire lower middle market businesses are always greater than demand, as these businesses typically fall below the investment parameters of most buyout firms and are often too large for private buyers. Furthermore, direct sourcing of these opportunities requires a significant time investment that is oftentimes not feasible for private equity firms due to their limited professional staffs. As a result, acquisition multiples in the lower middle market are lower than those found up-market. This scenario, which finds its confirmation in the financial return track-record generated by search funds, has lead to a strong increase in search fund activity over the last 25 years. This increase in search fund numbers became even steeper over the last 9 years, one reason probably being the fact that the asset class is performing exceptionally well in comparison to investments in PE or VC funds.
Local Market Opportunity
The Search Fund model is still new in Brazil and will work great here. Brazil, being the world's 6th largest economy, has a similar structure in terms of company sizes as the US economy. Similar to the US, there are Private Equity funds operating which do acquire business in the > R$ 150 Mio. annual revenue range (> US$ 50 Mio.), but there are no institutional financial acquirers to acquire smaller businesses. For individuals, it is even harder to finance an acquisition on their own than it is in the US, as access to bank debt and investor capital is more difficult than in the US or in Europe and there is no culture of pursuing this kind of entrepreneurial activity.
The opportunity to buy a business with revenues below R$ 100 Mio. and develop it over a time of 4 to 10 years into a business that is suitable to be bought by a Private Equity acquirer is therefore an almost completely untapped opportunity in Brazil.
Opportunity for Value Creation. The Principal’s experience investing in and building companies in Brazil has convinced him of the opportunity that exists to create value through the purchase and management of a small business. As a first step, the Principal anticipates to assemble an experienced Board of Directors and management team who embrace his traditional values of discipline, hard work, organisation, teamwork, humbleness and integrity. Second, the Principal and management team will work to add rigor to existing business processes and upgrade especially the digital information systems at the acquired company to serve as a foundation for future growth. Finally, the team will look to prudently pursue underexploited growth initiatives organically as well as potentially through select “tuck-in” acquisitions. Many SMB in Brazil have not yet been catching up with today's digital reality. In fact, many industries in Brazil are far behind in terms of automatization of internal processes but also when it comes to leveraging digital for their customer acquisition efforts. This provides an opportunity to introduce new technologies in order to improve customer-acquisition and/or create operational efficiencies for the business. The recent economic crisis resulted in lot of startups that nevertheless produced great technology and that in the above mentioned "tuck-in" approach could be acquired to help modernizing a traditional business.
Brazil is likely just at the end of its biggest economic crisis ever. The Brazilian economy is going through a recession since 2014. There are signs for improvement, but we believe in a slow recovery, not in a quick V-curve return. We think that this scenario will provide us with an window of opportunity during the next 24 months in order to acquire a business in Brazil at an EBITDA Multiple around 4; and to sell it in a future not only with better economics, but also benefiting from a multiple increase.
Principal related Highlights
Relevant Personal Experience of the Principal.Jan Riehle combines deal experience in Brazil and Europe with 5 years of top-level Management experience as CEO of a leading eCommerce vertical in Brazil. In addition, his expertise with leveraging technology in order to turn business processes digital will allow to aggressively create value.
Proven fund-raising, team-building and selling experience as well as unmatched tenacity and perseverance. Jan Riehle has shown a strong track record carrying through the things he started. Especially in his last station as CEO of Itaro, he made the company develop to a R$ 25 Mio. business giving work to up to 50 employees and survive against all odds of the local economy and financial crisis, until he managed to sell the company to a local distribution business. The company is today still operating and the country's most successful e-commerce in the tire-vertical. The same applies to a company in the optical vertical space, which Jan co-founded in 2011 and got acquired by Essilor in 2016, eOtica. Jan's efforts in e commerce were amongst all odds, as a lot of foreigners started digital business in brazil in the 2009 to 2012 phase, and the vast majority of them either closed down or left the country in the years thereafter. Jan remained in Brazil, developed his portfolio start-up and also opened law-practice. He continues to see huge potential in the south-american country, especially from now going forward.
Five Stages of the Search Fund
The search fund model is executed over four distinct stages, the entirety of which can last anywhere from four to ten years.
|Stage 1||Raise the Search Fund||2 - 4 months|
|Stage 2||Source & Evaluate Opportunities||1 - 24 months|
|Stage 3||Finance & Close a Transaction||2 – 6 months|
|Stage 4||Operate the Business||4 - 8 years|
|Stage 5||Exit the Business||4 – 6 months|
Please find further information on the asset class of Search Funds in our posts section.