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Learn what truly sets the UC Riverside MBA apart and how it helps in your professional growth
10 Jan 2009, 15:32
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Most of you on the forums know me as pretty focused on getting an IB job. However, my real long-term goal has always been to be either in private equity or be an entrepeneur (i.e. run a company or companies and have equity stakes in them). I have been enlightened by egy to an investment vehicle that has been in use over the past couple of decades, but does not receive very much glamour or exposure - it is the search fund. To quote wikipedia:
Search Funds are vehicles for entrepreneurs to raise funds from investors interested in making private equity investments.
In the first stage, a small group of investors back operating manager(s) to search for a target company to acquire. A fund may or may not find a target acquisition company. Investors are able to invest a pro-rata share in the target company, subject to their individual liking.
In the second stage, the General Manager(s) of the Search Fund take operating roles in the acquired company—CEO, President and the like.
Search Funds typically target companies in the $5 million to 30 million price range, requiring $2 million to $10 million of equity capital, in fragmented industries, with sustainable market positions, histories of stable cash flows, and long term opportunities for improvement and growth. Service and light manufacturing companies outside high tech industries are popular targets. Often these companies are under-managed prior to the acquisition.
Most Search Funds are started by entrepreneurs with limited operational experience and possibly no direct experience in the target industry. The goal of the investor is to place promising, motivated managers in an environment with a high probability for success given the oversight and experience of the investors themselves.
The origins of the Search Fund are often traced back to H. Irving Grousbeck, a professor at Stanford University's Graduate School of Business, who originated the concept in 1984. Since then, it is estimated that over 70 funds have been formed, with 12 operating currently. The bulk of successful Search Funds have been raised by alumni of elite MBA programs with access to strong private equity networks (e.g., Harvard Business School, Wharton and Stanford Business School).[1]
There are obviously a lot of risks involved with this model, but the rewards are also great. It is almost like "entrepeneurship-lite" - not quite as risky, but also not quite as rewarding. If you fail to find a company to acquire within the 2 year search period, you have basically thrown away 2 prime years of your career, and you have probably also foregone the opportunity to ever be in something like investment banking or consulting (with a stable pay package and career path). Also, the pay-off for this is very long-term. You will have a below-market salary during the search period (likely $70-80K your first 2 years out of school), and probably nothing too glamorous as the CEO either. However, you would receive an equity stake in the company (likely ~30%) and could stand to profit hugely upon the sale of the company. The most prolific success story is probably Kevin Taweel and Jim Ellis (Stanford GSB graduates) who purchased an $8 million dispatch company called Road Runner in 1995. Today, it is a billion dollar revenues company named Asurion.
You may be asking - why in the world would investors trust a fresh MBA graduate to become CEO of a company? I think the prevailing thought process is this: Let's say you're a venture capitalist. Venture capital investments tend to target risky industries, products, or markets, but they have experienced management teams with industry expertise. Search fund investments are the other way around - they target stable, mature markets and industries with low chances for failure, but put in a risky manager who will likely shake things up a bit. In both cases, you have the guidance of the investors as members of the board of directors, etc. to help you keep things on track.
I plan to look into this path quite a bit once I receive my acceptance to a top MBA program. If anyone else would like to discuss it as well, feel free to shoot me a PM or post here.
A few articles related to search funds:
BusinessWeek : The CEO Fast Track
https://www.businessweek.com/magazine/co ... 989647.htm
Wikipedia definition
https://en.wikipedia.org/wiki/Search_Fund
Tuck Center for PE and Entrepeneurship Case Study
https://mba.tuck.dartmouth.edu/pecenter/ ... search.pdf
Stanford GSB resources on search funds
https://www.gsb.stanford.edu/ces/resourc ... funds.html
List of a few search funds that have been formed recently
https://www.searchfunds.net/approach.html
Search Funds are vehicles for entrepreneurs to raise funds from investors interested in making private equity investments.
In the first stage, a small group of investors back operating manager(s) to search for a target company to acquire. A fund may or may not find a target acquisition company. Investors are able to invest a pro-rata share in the target company, subject to their individual liking.
In the second stage, the General Manager(s) of the Search Fund take operating roles in the acquired company—CEO, President and the like.
Search Funds typically target companies in the $5 million to 30 million price range, requiring $2 million to $10 million of equity capital, in fragmented industries, with sustainable market positions, histories of stable cash flows, and long term opportunities for improvement and growth. Service and light manufacturing companies outside high tech industries are popular targets. Often these companies are under-managed prior to the acquisition.
Most Search Funds are started by entrepreneurs with limited operational experience and possibly no direct experience in the target industry. The goal of the investor is to place promising, motivated managers in an environment with a high probability for success given the oversight and experience of the investors themselves.
The origins of the Search Fund are often traced back to H. Irving Grousbeck, a professor at Stanford University's Graduate School of Business, who originated the concept in 1984. Since then, it is estimated that over 70 funds have been formed, with 12 operating currently. The bulk of successful Search Funds have been raised by alumni of elite MBA programs with access to strong private equity networks (e.g., Harvard Business School, Wharton and Stanford Business School).[1]
There are obviously a lot of risks involved with this model, but the rewards are also great. It is almost like "entrepeneurship-lite" - not quite as risky, but also not quite as rewarding. If you fail to find a company to acquire within the 2 year search period, you have basically thrown away 2 prime years of your career, and you have probably also foregone the opportunity to ever be in something like investment banking or consulting (with a stable pay package and career path). Also, the pay-off for this is very long-term. You will have a below-market salary during the search period (likely $70-80K your first 2 years out of school), and probably nothing too glamorous as the CEO either. However, you would receive an equity stake in the company (likely ~30%) and could stand to profit hugely upon the sale of the company. The most prolific success story is probably Kevin Taweel and Jim Ellis (Stanford GSB graduates) who purchased an $8 million dispatch company called Road Runner in 1995. Today, it is a billion dollar revenues company named Asurion.
You may be asking - why in the world would investors trust a fresh MBA graduate to become CEO of a company? I think the prevailing thought process is this: Let's say you're a venture capitalist. Venture capital investments tend to target risky industries, products, or markets, but they have experienced management teams with industry expertise. Search fund investments are the other way around - they target stable, mature markets and industries with low chances for failure, but put in a risky manager who will likely shake things up a bit. In both cases, you have the guidance of the investors as members of the board of directors, etc. to help you keep things on track.
I plan to look into this path quite a bit once I receive my acceptance to a top MBA program. If anyone else would like to discuss it as well, feel free to shoot me a PM or post here.
A few articles related to search funds:
BusinessWeek : The CEO Fast Track
https://www.businessweek.com/magazine/co ... 989647.htm
Wikipedia definition
https://en.wikipedia.org/wiki/Search_Fund
Tuck Center for PE and Entrepeneurship Case Study
https://mba.tuck.dartmouth.edu/pecenter/ ... search.pdf
Stanford GSB resources on search funds
https://www.gsb.stanford.edu/ces/resourc ... funds.html
List of a few search funds that have been formed recently
https://www.searchfunds.net/approach.html
12 Jan 2009, 01:48
Kudos
Bookmarks
Wonderful contribution agold!
12 Jan 2009, 20:11
Kudos
Bookmarks
You're welcome.
As I think about this model a bit more, I believe it hits on 2 things that MBAs are criticized for:
1) MBAs are generally risk-averse, and this is a risky proposition
2) MBAs generally fly like birds to whatever industry is "sexy" and whatever industry everyone else is flocking to. Look at the formation of all of the alternative energy clubs on various business school campuses over the past year or two for evidence of that. This model looks to exploit industries that are extremely unsexy and often poorly managed (think document management companies, liquid waste disposal companies, etc.)
Below are a couple of financial models that I have found that illustrate the search fund model. Obviously, these are based on the past few years, where cheap debt was readily available and everyone was trying to get their hands on as much leverage as possible. Still, it is pretty shocking that in the pessimistic case scenario, the new MBAs are essentially slightly damaging the company (flat revenue growth, not keeping up with inflation), and they still stand to profit from it and generate a nice return for their investors.
As I think about this model a bit more, I believe it hits on 2 things that MBAs are criticized for:
1) MBAs are generally risk-averse, and this is a risky proposition
2) MBAs generally fly like birds to whatever industry is "sexy" and whatever industry everyone else is flocking to. Look at the formation of all of the alternative energy clubs on various business school campuses over the past year or two for evidence of that. This model looks to exploit industries that are extremely unsexy and often poorly managed (think document management companies, liquid waste disposal companies, etc.)
Below are a couple of financial models that I have found that illustrate the search fund model. Obviously, these are based on the past few years, where cheap debt was readily available and everyone was trying to get their hands on as much leverage as possible. Still, it is pretty shocking that in the pessimistic case scenario, the new MBAs are essentially slightly damaging the company (flat revenue growth, not keeping up with inflation), and they still stand to profit from it and generate a nice return for their investors.
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