The advantages to the entrepreneur are obvious. From their perspective, it is relatively low risk for potentially substantial reward as, typically, the entrepreneur will retain at least 30 per cent equity in the search fund and may be asked to contribute very little in terms of a cash contribution.
But why are investors jumping on board the search fund bandwagon? A 2022 study by Stanford Business School showed, since 1986, aggregate pre-tax returns on search fund investments of 35.3 per cent internal rate of return and 5.2x return on investment, according to the Stanford Graduate School of Business.
And, yes, investment into privately owned businesses is often high risk high reward, but with an experienced entrepreneur at the helm of what is (usually) an already profitable business at the time of acquisition, investors seem optimistic that search funds present an opportunity for high reward with lower risk.
Alex O’Leary is a corporate partner at law firm JMW Solicitors in London
