How to scale the search fund model?

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May 24, 2022

by an member from Universidad Nacional de Educación a Distancia in 11100 San Fernando, Cádiz, España

Lately, I've been thinking about how to scale the search fund model. That is, putting a management team in place -like regular PE funds do- to run the company for you so that you can go out and pursue other acquisitions. But unlike PE funds, the goal would be targeting companies with the size most Search Fund focus on, and having a more search-fund like approach.

The main reason why PE funds don't get into this company size is because operational costs make it unprofitable (unless it's an add-on or strategic buy). So I guess that, if one is able to solve the problem of being functional while keeping a very lean structure, it could be possible.

Also, another concern would be management compensation. If the company is very small, management compensation could significantly lower the profitability of the company. That is why in a search fund, the GP and the management role is merged into one single person.

What are your thoughts on the matter? Do you know someone already doing this?
This may also be a good strategy for brokers to transition to becoming buyside/GP's and sponsor their own deals, leveraging on the deal flow they already have access to.

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Reply by a searcher
from Georgetown University in Minneapolis, MN, USA
Great question, and one I have been thinking about a lot lately. I think the model has to scale, particularly if you agree that the skillset/knowledge required to successfully execute an acquisition, is not necessarily the same skillset/knowledge it takes to successfully run and grow a small business. Separating those two jobs could actually make the model more successful, regardless of scale. This is something I have been thinking about a lot in the home health care space in particular. I'd be happy to chat and brainstorm some ideas. Thanks for the reference to Chenmark, I will check them out. I also came across Teamshares which seems to be scaling small business acquisition in the way you are suggesting.
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Reply by a searcher
from London Business School in Johannesburg, South Africa
This is very similar to the thesis behind the "Hold Co" model that is all the rage in Searchfund land right now. Check out Chenmark who are probably the most high profile people doing this right now. They have an especially interesting model around training their future portfolio company leaders at the Hold Co level before placing them in the portfolio companies, which helps solve the management gap (and compensation) you brought up.

They have some great material on their website and appear in lots of other peoples podcasts.
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