I am interested to hear from investors on how they are approach search funds as an asset class now that the pandemic is causing unprecedented economic impacts. Most jobs lost and businesses suffering are SMEs. Are searchers that made their acquisitions prior to the pandemic in good or bad shape? Are the current searchers in better or worse situations? Are prospective searchers going to benefit from timing (cheaper deals) or will the pandemic act as a deterrent from even considering this asset class?
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Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.
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We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.
-Highly levered business are generally more risky, especially a recession or economic down-turn. I don't think there is concern with the model in general/ long-term, but high leverage in these times is very difficult for investors and lenders to agree to. Obviously it all depends on the business / deal though. Some businesses are doing better than others now, but with increased uncertainty, it's going to be harder to come to terms with investors, sellers, and lenders. There's always opportunity, but my guess is that the lending side is the hardest at the moment. You may have to get creative.
"Are searchers that made their acquisitions prior to the pandemic in good or bad shape?"
-Many will suffer and possibly go BK if they have high debt loads. Others may thrive. It's 100% dependent on the business. We run a vitamin brand and are doing well.
"Are the current searchers in better or worse situations?"
-I think it's generally better to be a searcher now compared to if you closed a deal 6 months ago. Of course, this is just on 'average' because nobody ran "pandemic scenarios" in their down-side cases. So even if your business was 'recession proof' it may not be pandemic proof. Again, some businesses are doing well, so it depends.
If you are searching, you probably need to be more conservative in managing your expenses / cash as it may take longer to close a deal because debt and equity will be harder to close.
"Are prospective searchers going to benefit from timing (cheaper deals) or will the pandemic act as a deterrent from even considering this asset class?"
-It'll probably be harder to line up investors to fund your search. Though, you can self-fund your search and find deals. Closing deals will not be easy however. If you have cash equity to close a deal, there will be opportunity. But if you need debt, it will be harder (not impossible). You may need better guarantees, more collateral, less leverage, etc. There may be fire-sales that lead to great opportunity. But, some great businesses may wait to sell if they can. My guess is that this benefits PE funds who can cash-close vs. fundless sponsors & searchers. There will likely be fewer investors willing to 'take a flier" on searchers. If you can convince a deep-pocketed investor to back an acquisition, there will be opportunities. In order to do this, you'll likely need to have a very well thought out strategy and communicate how you plan to take advantage of this 'once in a lifetime' opportunity. A standard search fund pitch may not be enough.
All this said, there's opportunity, but these times are not for the faint of heart.