I hope this message finds you well. I've been delving deep into the world of private equity investments and, in particular, comparing traditional private equity (P/E) models with the increasingly popular 'search fund' model. I'd love to solicit your insights and opinions on a few observations and queries that I have:
1-Traditional Private Equity (P/E) Model: From my understanding, the traditional P/E model typically follows an 80/20 structure. That is, 80% of the returns are allocated to Limited Partners (LPs) while the remaining 20% goes to the General Partners (GPs). This model seems relatively straightforward and has been the industry standard for a while.
2-Search Fund Model: According to studies from Search Invest Group (SIG), the equity structure in search funds tends to be quite distinct. It appears that the majority of the equity, ranging between 60% to 80%, is retained by the general partners who operate the company. This is a stark contrast to the traditional P/E model.
Points of Curiosity: My main question revolves around the fundamental reasons for these differences in equity structuring:
Do traditional P/Es not utilize debt in their transactions, similar to Leveraged Buy-Out (LBO) transactions? If they do, who typically assumes the liability of this debt? Are traditional P/Es primarily financed by equity rather than a combination of equity and debt? Why is it that in search funds, the majority of the equity stake goes to the operators (GPs) rather than the investors (LPs)? Is this due to the operational involvement of GPs in search funds, or are there other underlying reasons? I genuinely believe that understanding these nuances is crucial for both investors and entrepreneurs in today's dynamic investment landscape. Your insights and experiences would be invaluable in shedding light on these topics.
Thank you for taking the time to read and engage with my queries. Looking forward to our collective wisdom.