What Does Search Fund Mean?
A search fund is a pool of capital raised by a management team with entrepreneurial aspirations. Its purpose is to search and acquire a private company with an enterprise value (EV) between $5 and $30 million. The funds are usually raised from high net worth individuals that believe in the skill set and abilities of the management team that will run the fund and the investee company. The concept of the search fund was originated in 1984 by H. Irving Grousbeck, a professor at Stanford University's Graduate School of Business.
Divestopedia Explains Search Fund
Search funds are another potential type of buyer for business owners seeking an exit. Search funds are different from traditional private equity because the managers of the fund will also have a significant part in operating the business once the acquisition is complete. It is similar to a management buy-in.
Some search funds currently in existence have been started by business graduates with an entrepreneurial bent, but limited operational experience. The investors of the fund will provide mentorship and guidance to the managers to create an environment for success. Owners should be weary of selling their business to a search fund because of the limited operational experience of the managers. Although they may bring lots of book smarts to the table, the inherent risk is high since the managers may lack the industry or business acumen needed to succeed.