INVESTING IN EACH OTHER'S DEALS = DIVERSIFICATION

April 23, 2018

by an investor from University of Virginia in Tampa, FL, USA

My brother (co-searcher) and I regularly talk about how searchers are extremely concentrated (from a financial diversification perspective) in their own acquisitions. That's great when the outcome is great, but many of us would be a bit more comfortable with some diversification. So, if searchers could invest in other searchers' deals, it would help us all "de-risk" our financial outcomes. Plus, we've really enjoyed interacting with the search fund community, and this would be another way to do that.

Are there any platforms for doing this? Anyone interested?

(we recognize this might be tougher for traditionally-financed searchers)

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Reply by a lender
from University of Missouri in St. Louis, MO, USA

Great idea Sam. Adding a wrinkle here that would be relevant for those on the forum who are pursuing SBA loans to fund their acquisition. The SBA came out with their new SOP a few months ago and one change could impact how you invest in other businesses and it potentially impacting your $5M max loan amount. They added some language on affiliation, not just those with >20% ownership (i.e. guarantors). The wording is a little vague, but essentially if you have any voting interest on the other business(es) then their debt obligation would/could be counted against your $5M SBA CAP. We are still getting a legal opinion on this language (even the SBA itself contradicted itself on a deal we are currently working on) but you would want to be careful investing in other SBA backed businesses if you intend to pursue an SBA loan for your fund. Feel free to reach out with any questions.

Reply by a searcher
from Harvard University in Austin, TX, USA

I think its an interesting idea for the small number of searchers that could participate. Consider the searcher's financial situation and where they are in the search. They'd have a certain level of assets to begin with. Then, during the search, I'd think that most searchers would want to stay cash rich (or at least liquid). After an acquisition it could make sense to diversify to some extent, but investing in another ~5 SMBs isn't exactly diversified. Also, if things do go awry with one's acquisition, wouldn't s/he value liquidity over a diversified portfolio of illiquid assets? As an observation, I see a lot of searchers invest in other search funds or acquisitions once they have a little more liquidity from an exit. Just one self-funded searcher's opinion. All the best!

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